After 9 long months of negotiations, the UK and the EU managed to finally reach an agreement on their future relationship early in the morning of Christmas Eve. The ‘UK-EU Trade and Cooperation Agreement’ will define the UK’s relationship with its biggest partner for the foreseeable future, but what does it say?
What’s in the deal?
The implementation, development and oversight of the new deal will be done primarily by a new Partnership Council chaired by a UK government minister and European Commissioner and made of representatives of both the UK and the EU.
A number of specialised committees will support the Partnership Council, focusing on a number of specific of the agreement and their implementation. Along with the specialised committees, the Partnership Council has the power to make decisions in areas that impact both parties.
The Parliamentary Partnership Assembly, made up of MPs and MEPs, has also been set up to recommend actions to the Partnership Council.
Movement of Goods
The cornerstone of the deal is the continuation of full tariff and quota free trade on goods, with some new rules of origin requirements meaning that some goods may well no longer be tariff-free.
Tariff-free goods trade with the European Union moving forward is a relief for the North East, as the region of Britain which exports the highest % of its goods into Europe (59.8% vs 48.20% nationally) and therefore finds itself disproportionately vulnerable to any barriers, such as tariffs, to UK-EU goods trade.
The agreement has chapters on the joint protection of intellectual property, copyright, patents and trademarks. Existing geographical indications (a name for a product indicating its origin – e.g. Champagne or Feta) have been preserved, but there has not been any agreement on introducing new indications.
Rules of Origin
While the agreement does legislate for tariff and quota-free trade in goods between the two parties, new regulations around Rules of Origin may mean that for some businesses the end of the transition period is less simple than it seems.
Rules of Origin are the rules which determine whether a good qualifies for ‘preferential access’ to a market and can be traded tariff and quota free. To qualify for preferential access, a good will need to be wholly obtained in the UK or ‘sufficiently processed’ in the UK. This can include rules around how much non-UK content is in a product. If the percentage of content sourced in the UK does not meet a minimum requirement, then the good may fail to qualify for preferential access and tariffs will be applied.
Example – Currently to export a car to the EU under preferential terms, without tariffs or quotas, 55% of the content needs to be from the UK. If a company sourced 90% of the parts and assembled a car within the UK, the car would be able to be exported to the EU without tariffs, no problem. If, on the other hand, the company sourced the bodywork from the United States, the engine from Japan, the brakes from Russia, the suspension from South Korea and only 20% of the content from the UK then it would not qualify for zero tariffs. Ensuring that the supply chain for a good is built in a way that allows the good to qualify for preferential access to markets is a difficult and delicate balance.
The agreement between the UK and EU also allows for ‘bilateral cumulation’, meaning that content from the EU can be counted as the same as content from the UK and vice versa. This is good news for supply chains that source goods from Germany, France, Spain or any other European Union nation. The deal does not however have any agreement for counting goods from ‘third countries’ (neither Britain nor a European Union member) such as Japan. If a good is sourced from Japan, put into a product in the UK, and then re-exported to Europe, the content sourced from Japan will not be included in the ‘domestic content’ needed to qualify for preferential access.
It is therefore vitally important that businesses are aware of the composition of their supply chains, how much non-domestic content is involved and whether any non-qualifying goods can be sourced elsewhere. It is also important to be able to verify and document the origin of goods, to prove that they qualify for preferential terms. This can be made easier by becoming an Approved Exporter – there is more information available on this here.
Fortunately for businesses, in the first year of the agreement, both sides have agreed to offer a degree of flexibility in documenting the origin of goods. This will be good news for businesses and will ease one of the most difficult aspects of the transition.
The Trade and Cooperation agreement includes several chapters aiming to maintain international trade in services but the majority of the criticism of the deal has been focused on the shortcomings in this area.
While there are commitments to maintain market access for each side and commitments to treat each other’s companies identically as they would their own, the lack of mutual recognition for professional qualifications and the lack of passporting rights means that certain sectors, such as financial services, will not currently be able to operate as easily as they have done previously. It is possible that these issues can be addressed by amending the deal in the future but the beginning of 2021 will provide a significant challenge for firms operating in services trade between the UK and the EU.
The North East region has the smallest services sector as a portion of the overall economy in the country. But at approximately 72% of the regional economy, it is still predominant, so barriers to services trade between the UK and the EU will offer significant challenges for the North East economy.
The commitment to treating each other’s businesses the same as their own is mirrored in the chapters on public procurement. UK firms will be viewed exactly the same as European companies when providing services or goods for European public bodies, and vice versa.
The agreement allows for the free flow of personal data between the UK and the EU until an adequacy decision is reached, for up to six months.
As the UK has brought the EU’s data protection legislation (General Data Protection Regulation – GDPR) into UK law, it is expected that this adequacy decision will be granted at some in the near future. This would mean that data can flow between the UK and the EU freely unless the adequacy decision is withdrawn. This also means that the requirements for personal data protection will remain unchanged going forward.
The result of this is that UK businesses and public bodies will be free to send and receive information to and from the EU. The deal has also prohibited any requirements for data to be stored or processed in a particular country.
Movement of People
As of January 1st 2021, the Freedom of Movement between mainland Europe and the UK has ended and UK migration policy is determined entirely by the new Points Based Immigration System.
The agreement contains clauses on short-term business travel which are similar to those laid out in the EU-Japan Economic Partnership Agreement. UK short-term business visitors will be able to travel to the EU for 90 days in any 180-day period without any work permits or visas.
Standards and the Level Playing Field
The single biggest stumbling block in the negotiations throughout 2020 has been how both sides set their respective standards in areas such as worker’s rights, environmental standards, taxation and state aid. This is the so-called ‘levelling playing field’ provisions that the European Union were keen to have in the deal, to ensure that Britain couldn’t leave the EU and then drop its standards significantly in order to attract investment away from Europe.
The trade and cooperation agreement includes provisions for how these standards will be set by the UK going forward.
In the areas of labour and environmental protections, the UK and EU have agreed to follow ‘non-regression’ which prevents either side from reducing standards from their current level in a way ‘affecting trade or investment’ in the future. The Institute for Public Policy Research (IPPR) have made the point however that it is notoriously difficult to prove definitively that something has had an impact on trade flows, meaning that changes in these standards may well come in the future.
Both parties have agreed a set of principles on the future management of state aid and UK government subsidies. The UK now has a new level of flexibility in how it administers state aid.The Johnson government set this as one of their main priorities, rather than pursuing the highest level of market access as the May government did and therefore, we may see a reform in how government subsidies operate in the UK.
As a region that has benefitted greatly from European Structural Investment Funding (ESIF), the North East will need to see those funds replaced by the UK government through both ESIF’s replacement, the UK Shared Prosperity Fund (UKSPF), or through government business subsidies.
Both sides finally came to an agreement on access to each other’s waters for fishing, after it seemed that disagreement in this area risked bringing down the entire deal. The agreement supposedly will result in an increase in the quota that UK fishers can catch, equal to 25% of the value the EU catch in UK waters. This increases the share of the total catch taken in UK waters by UK fishers to around two thirds. The new quota system will be phased in over the next five years to allow fisheries businesses to adjust.
There will be annual negotiations moving forward to decide Total Allowable Catches for shared stock to ensure responsible stock management.
In the case that there are any disagreements on the interpretation or application of the agreement, a comprehensive dispute settlement process has been agreed.
Firstly, if either party believes the other has breached the agreement then they should enter consultations. If the consultation does not rectify the issue, then an independent arbitration process will begin. At this stage an arbitration panel of experts in the area in question will decide whether or not a breach of the agreement has taken place.
If it is decided that one side has breached the agreement and the offending party does not correct itself, the benefits of the agreement can be suspended, and the offending party will be expected to offer compensation. This means that if, for example, the UK lowered its labour standards in a way that could be proven to have distorted trade or investment, then the tariff and quota free trade that the agreement provides can be suspended.
The agreement can also be reviewed after a minimum of four years if either side believes that there have been multiple offenses impacting trade and investment. If a reformed agreement cannot be found following a year of negotiation time, the trade elements of the agreement can be terminated altogether.
The UK will still be participating in some European Union programmes and paying to do so. Any statements saying that the UK will no longer be contributing to the EU budget are therefore false.
The UK hopes to participate in the following:
This means that the UK will no longer participate in the Erasmus programme. This allowed students across UK and EU universities to spend a year in another university across Europe.
The UK will also no longer be participating fully in the single electricity market which may well mean less efficient distribution between the two parties in the future.
There is also nothing in the agreement to suggest that Britain will retain access to the Schengen Information System (SIS II), a Europe-wide database on persons of interest to law enforcement agencies.
Unlike his predecessor, Prime Minister Johnson and his government have sacrificed a level of market access in order to retain a greater level of parliamentary sovereignty. This now means that the government has a greater degree of flexibility in setting standards than before, as well as new range of policy levers available to them such as a more flexible state aid regime and an independent trade policy, that was not available to them as EU members.
It is yet to be seen how the government plans to use this new freedom and it is too early to make a real judgement on how this deal will impact business. It is possible to say, however, that this deal does mean that there are significant new barriers to trade between our region and our largest economic partners. Having sacrificed some level of European market access in order to regain some parliamentary sovereignty, Government would be wise to use the new tools available to them to prioritise levelling up regions such as the North East and ensuring that our region does not bear the brunt of any new barriers.