Like a disappointing episode of Maigret where, despite a convoluted plot the culprit turns out to be your original suspect, the tortuous UK/EU free trade negotiations ended in the 11th hour signing of the Trade and Cooperation Agreement (TCA). Given the stakes for the politicians involved – personal and economic – it was perhaps inevitable that the negotiations would end in a deal of some description. That said, the consensus indicates that the TCA was little more than a successful pilot with a number of seasons ahead of it.
Structure
The TCA governs the UK/EU future trading and security relationship and came into effect at 11pm on 31st December 2020. In essence it represents a limited free trade agreement meaning tariff and quota-free trade in goods. For businesses not involved in the manufacture or trading of goods the effects of the TCA are marginal. Indeed the TCA has been described universally as “thin” and in many key areas provides little more than a platform for future negotiations albeit in a hopefully more constructive context. It is clear that the EU and UK are likely to be in negotiations of some description for years to come.
The agrrangements comprising the deal are the TCA and two separate agreements covering nuclear co-operation and the exchange and protection of classified information. The TCA contains provisions relating to trade in goods and services and specific chapters on aviation, road transport, social security co-ordination and short term visits, fisheries and UK participation in EU programmes. Security is also covered as the TCA sets out the proposed arrangements for EU/UK cooperation on criminal matters.
The TCA is capable of termination by the EU or UK on 12 months’ notice and is subject to automatic review at 5 yearly intervals.
Implementation
The treaties are implemented in the UK by the European (Future Relationship) Act 2020 (the Brexit Act), which received Royal Assent on 31 December. The implementation of these arrangements will require adjustments to UK law and the Brexit Act provides that, pending the relevant legislation being amended, domestic law will take effect with such modifications as are required to implement the treaties.
Consequently in areas where amendments have not yet been made to reflect the deal, the provisions of the TCA should be read as the prevailing law in the UK, to the extent they conflict with or supplement existing law.
From the EU’s perspective its implementation process was curtailed albeit the EU27 member states authorised the provisional application of the TCA. Formal approval of the European Parliament is expected by the end of February.
TCA Summary
Goods
Generally perceived as its principal achievement, the TCA provides that there will not be any import tariffs or other customs duties or quotas on the movement of goods between the EU and the UK.
However this is subject to detailed rules of origin (RoO) requirements. This is a common feature of free trade agreements which generally only reduce tariffs on goods originating from the counterparty. This could have been problematic where goods or products move back and for between the EU/UK in the manufacturing process. In meeting the relevant local content value thresholds, both UK and EU contributions count towards the %. However these RoO requirements will require business to keep records and review their supply chains.
Services
The sections of the TCA relating to trade in services are significantly less permissive than those applicable to goods. The TCA is structured so that all services are liberalised but the principle is subject to lengthy exceptions contained in annexures whereby member states can elect to apply restrictions. The consequence is that those Annexes will need to be scrutinised by businesses looking to provide services across relevant borders.
Financial Services
As anticipated The TCA does not provide access to the EU single market for UK financial services firms. In the absence of passporting rights UK firms must comply with individual member states requirements to service their EU customers. In a non-binding joint declaration the EU and UK have agreed in principle to establish a non-binding Memorandum of Understanding framework of financial services regulatory co-operation by March 2021. Yes, you read that correctly.
Transport
Goods lorries will continue to be allowed to operate between the EU and UK without requiring new permits or certificates. However, new restrictions will apply – e.g. once they have crossed the border UK/ EU hauliers will be permitted to make no more than 2 additional pickup and drop-offs within the other party’s territory.
Business Travel
Short term EU/UK business trips are allowed on a visa-free basis for specific purposes such as attending meetings, training seminars, conferences and trade fairs as well as visits for the purpose of taking orders or negotiating the supply of services or goods. Such trips are limited to 90 days in any 6 month period.
It should be borne in mind that different member states have different restrictions and requirements depending on the nature of the business activity. Businesses will need to check the rules in each member state to establish permitted activities during business visits.
Data
The TCA provides for a 4 months’ window (capable of extension to 6 months) during which the UK will still not be treated as a ‘third country’ for GDPR purposes. This allows for the continued seamless transfer of personal data from the EU to the UK during the interim period. The UK had already separately deemed all relevant EU member states to be adequate for UK to EU transfers and the expectation is that the interim period will allow the EU Commission to reciprocate. However, the Information Commissioner’s Office has cautioned businesses to implement alternative transfer mechanisms to safeguard against any disruption to data flows.
Competition
The TCA contains little detail on competition law or merger control. The UK/EU commit to maintain effective antitrust and merger control regimes, and to maintain/establish independent authorities to enforce those rules. In so doing the parties hope to prevent trade distortions.
It follows that both EU and UK merger control regimes will run in parallel. The likelihood therefore is more parallel investigations these areas with an increased risk of inconsistent or conflicting decisions.
State Aid
The TCA contains provisions by way of set of common principles governing the grant of subsidies. A mechanism to deal with “significant differences” in standards that affect trade between the parties (which allows unilateral rebalancing measures) also applies to the area of subsidy control.
With the exception of Northern Ireland EU state aid rules no longer apply to the UK. However the UK must establish its own subsidy control regime with “an appropriate role” for an independent authority and recourse through UK courts by interested parties.
Employment laws
As a result of the “non-regression” commitments in the TCA neither the EU nor UK is permitted to reduce protections for workers. While the UK government is on the hunt for areas where it may diverge these commitments will restrict its options though the provisions are sufficiently flexible to allow some changes to aspects of EU-derived employment law. Examples are thought to include overtime and allowances in holiday pay and restrictions on buyers changing employees’ terms and conditions following a TUPE transfer.
Climate Change/ Environment
The EU and UK affirm their ambitions to achieve “economywide climate neutrality by 2050”. Encouragingly climate change is positioned as a central plank of the TCA meaning attendant consequences for the parties if they fail in their commitments.
Level playing field
These provisions were among the most fraught aspects of the negotiations and derive from the Political Declaration accompanying the EU-UK Withdrawal Agreement. In a bid to prevent any post-Brexit UK bonfire of regulations, the EU insisted that the UK commit to alignment with EU laws across a number of areas. These range from competition, state aid and employment to taxation, climate and environmental policy. The UK government initially regarded this as fundamentally undermining its reclaimed sovereignty – the raison d’etre of the Brexiteers’ Brexit.
Ultimately the TCA represents a compromise with the parties being allowed a limited amount of “taking back of control” subject to various conditions. In short the UK and EU can operate different regulatory regimes but not without the other having the right to take protective measures if significant divergences emerge. Whilst the position does not give the UK carte blanche in terms of setting its future policies and legislation, nevertheless the restrictions are looser than originally anticipated.
The TCA describes the principles on which the parties will legislate in the relevant areas as part of the conditions of market access. More importantly it also specifies the consequences of any failure to comply - which vary according to the area. In particular the TCA contains “non-regression” commitments in the spheres of employment and environmental/ climate change laws.
Establishing whether a party has diverged will be problematic and the absence of a dispute mechanism means the parties will likely resort to unilateral remedial action – and ask questions later.
In Conclusion
Most free trade agreements are an exercise in managed convergence where the protagonists look to promote trade by eliminating tariffs and reducing nontariff barriers. In contrast the TCA was an exercise in controlled divergence by two parties who commenced negotiations with 45 years’ worth of extensively harmonised regulations and deeply integrated markets. The TCA controls the way in which the UK/ EU will diverge in the future.
The relief that most commentators and businesses felt at the signing of the deal is tempered by the knowledge that in many material aspects the can has been truly hoofed down the road. Ultimately the TCA is best viewed as a work in progress and the start of a long process which will see the EU and UK in near constant negotiations over a decade or more. However if nothing else the TCA provides a platform for those discussions to take place in a calmer context.
The UK government will be under increasing pressure from Brexiteers to demonstrate to the UK public that it was all worth it. However identifying areas where the UK can diverge will not be straight forward and certainly not without consequences.
The timing of the UK government’s recent National Security and lnvestment legislation is increasingly ironic as the government will seek to encourage international investment and promote its “Global Britain” agenda. It is not difficult to foresee that legislation being the subject of review.
There are significant loose ends from equivalence for financial services to the temporary regimes implemented for data protection, fisheries, energy and R&D. Things to watch out for in the near future are the resolution of the financial services MoU and data protection framework.
Notwithstanding all this, given the timeline for negotiations, the complexity of the issues, the novelty of the arrangements (managed divergence) and the often diametrically opposed objectives of the parties, that a deal was concluded at all is a relief and minor mercy.
