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Monday, Mar 01, 2021

10 key details in the UK-EU trade deal

10 key details in the UK-EU trade deal

What the agreement says about financial services, state aid and more.

Habemus deal. In full.

Now comes the scramble to work out what it means for individuals and businesses — and, inevitably, lawyers — across 28 countries. The deal itself is 1,246 pages long, but there are summaries, side agreements and additional political declarations on a range of sensitive issues to consider, too.

Shorthand comparisons are of little use. It’s not that helpful, experts say, to compare to deals struck between the European Union and Canada, for example, because the EU-U.K. agreement is unlike any other trade deal the bloc has struck with another country.

The U.K., meanwhile, has only so far agreed to two trade deals that it has said materially differ from those it was a party to as a member of the EU: the economic agreement with Japan, and this one.

Overall, however, as expected, it is a deal that cleaves one market into two. The agreement will make trade between the U.K. and the EU more complicated than it has been while Britain was a member of the bloc, as explained in this at-a-glance view of the agreement, but it does go some way to smoothing the cliff-edge that would have been inevitable if no trade deal had been struck at all. The agreement on paper will also likely evolve during its implementation, making the consequences harder to judge for some areas than for others.

Here are 10 areas to watch out for that are likely to prove important in the coming weeks and months and are worth keeping in mind in any assessment of the agreement.

1. Mind the gap(s)


Let’s start with what isn’t in the full agreement: The political declarations, which one trade expert described as “an overflow graveyard of ambition." These make it clear that the U.K. and EU will be locked in trade talks for the foreseeable future.

The declarations do not have the same legal clout as the main full-fat treaty, but they are important as they help define a shared understanding of what some terms within the treaty mean.

For example, the political declarations published on December 26 cover subsidy controls, offering specific examples of instances where state aid might be acceptable. They also touch on tax regimes; a sensitive issue because EU officials were concerned about the U.K. slashing corporate taxes, for instance. There is also a declaration on haulers.

The declarations don't cover everything, however. A case in point: Tax is mentioned in the deal, and in a declaration, but the definition is fairly vague. There's a clause that’s known as a standstill clause, supposedly noting parties' standards at this present time as a sort of watermark. But there doesn’t seem to be a particular dispute settlement arrangement for this area. Both sides wanted a degree of flexibility in this area, particularly as they grapple with issues such as taxing digital companies.

2. Financial services


As for financial services, the first area detailed in the declarations, this is not covered comprehensively in the full trade agreement.

Instead, the declarations include an agreement to try and reach a memorandum of understanding by March 2021 that might mean the two sides agree to recognize each other's rules, a process known as "equivalence," which would allow the finance industry to trade across the U.K. and EU border. There will be “transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions."

"This is obviously very important,” a senior member of the U.K. negotiating team said on Saturday. “I would imagine the Treasury will want to pick that up pretty early in the new year.”

This has long been a contentious issue. Financial services is a rare area where the U.K. has a clear competitive advantage over the EU. Meanwhile, the EU is seeking to onshore far more of its financial services activity, particularly in terms of bond trading and with contracts tied to the euro.

So far, equivalence decisions granted by the EU can be withdrawn at short notice, as Switzerland has discovered. This is off-putting for investors who will want legal certainty about the status of cross-border contracts. It’s also somewhat impractical or at least challenging for financial stability, given the volume of outstanding contracts between the two parties.

What little detail there is on financial services in the full trade agreement shows that there will be a great deal of segmentation and complexity for this sector: If a U.K.-based company wants to serve customers in an EU member country by setting up an office there, for example, its market access and regulation will vary from country to country.

3. Country-specific rules


As with lots of trade deals, there are frequent references to so-called "reservations" — areas with so-called mixed competencies, where some power lies with member states and some with the European Commission. Market access and regulation therefore need to be determined member state by member state.

For instance, anyone who doesn’t speak German will need a legal translation on implications for financial services from national reservations there. The same principle also applies in fields such as criminal records.

4. Professional services


One area that does merit comparison with other trade deals is professional services. The deal offers no more than the EU-Canada agreement in terms of Mutual Recognition of Professional Qualifications (MRPQs), which allow workers such as doctors, engineers and architects to work in member states other than where they qualified. So far, industry experts say, there have been no successful MRPQs arising from the Canada agreement.

"What [the deal] does is establish a process in which regulators and industry bodies can work with each other to establish MRPQs in the future," said a senior member of the U.K. negotiating team.

Like other parts of this deal, the scope on paper may end up differing from the nature of the implementation — having a trade mechanism written into a deal is very different from having something that industries can readily enact.

This was an area, the U.K. negotiator added, where EU chief negotiator Michel Barnier “always said we were trying to look for something like the single market.” However, “this is not like the single market,” they explained. Barnier would agree with that, one EU official said.

Access in the real world will depend largely on member states’ industry bodies and additional constraints on labor mobility. Architects are less protectionist than other industries, for instance, while accountancy can prove more thorny.

5. State aid


State aid proved very contentious during the negotiations, with the EU keen to ensure the U.K. couldn't use subsides to allow British business to undercut the bloc and the U.K. determined to set its own rules.

The resulting compromise is just one area where this isn't the end of the story — rapid work now needs to be done in order to make the agreement operational. Specifically, the U.K. needs to create a body to oversee its own subsidy control regime.

“David Frost has done well to negotiate broad overarching commitments on state aid, which give the U.K. discretion on how it wants to set up its own subsidy control regime,” said Alexander Rose, lawyer and director at law firm DWF. “However, the government urgently needs to publish details of this new U.K. regime, because it has already legislated to remove EU state aid law with effect from 11 p.m., 31 December 2020.”

There’s also a carve-out within the deal that allows for exceptions to state aid rules, Rose noted, provided the U.K. parliament or the Council of the European Union approves the money. It’s rarely been used as an existing power for the Council, but it’s important that the U.K. has a power that mirrors it.

This kind of arrangement is new and one where historical examples won't prove very insightful. The outcomes of the first few fights will set the direction, a person familiar with the legal advice the U.K. government received during the trade talks said.

That appears to tally with the view of the U.K. negotiating team: "The state aid provisions are quite specific. They enable two completely different systems to operate but designed to accomplish rather similar things in the sense that there's a set of broad principles that are agreed between us,” they said. “Some bits of the subsidy policy arrangements are subject to arbitration in a particular way others are not. It's one of the tailored bits given the sensitivity of it."

6. Friction for flexibility


In some areas, the U.K. has accepted great friction for trade with the EU in order to allow itself the flexibility to strike deals with other parts of the world. Agriculture is a good example, according to a person familiar with Britain's other trade negotiations.

The issue of so-called "geographical indications," rules designed to protect the quality and reputation of foodstuffs produced in a particular region, appears to have been pushed to the side for a later date. Beyond provisions included within the Withdrawal Agreement, the divorce deal Britain struck with the EU last year which stated both sides could take "reasonable endeavors" to protect these rules, how this will work in practice has been left very vague in the final trade deal.

The two sides also won't recognize each other's system of rules designed to protect humans, animals and plants from diseases and pests. This means British farmers wanting to export to the EU would need things like vet certifications which weren't needed when the U.K. was an EU member. The same goes for EU farmers exporting into Britain. The checks for Great Britain will not include Northern Ireland, which will continue to follow EU rules.

Some British farming lobbyists said this meant they faced greater barriers than traders from New Zealand.

"Both sides can decide their own rules, that was sort of fundamental for us, but there are sort of two autonomous processes in which we can look at each others' rules and if we wish sort of unilaterally relax barriers to them or [do this] in a coordinated way," a senior member of the U.K. negotiating team said.

7. Standards


There are some substantial points in the deal covering mutual recognition of standards, rules that allow one regulator’s rubber-stamp to carry clout in the other’s jurisdiction. But while this deal goes beyond World Trade Organization rules on standards in some areas, there will be considerable non-tariff barriers for many industries.

An annex on medicinal products, for instance, sets out an agreement on mutual recognition of inspections and good manufacturing practice — a key demand of the pharmaceutical industry. This avoids doubling up on processes for the two markets.

The annex also states that with regard to medicinal products, the U.K. and EU will “endeavour to consult one another, as permitted by their respective law, on proposals to introduce significant changes to technical regulations or inspection procedures.” It goes on to say that the two will “endeavor to cooperate with a view to strengthening, developing and promoting the adoption and implementation of internationally agreed scientific or technical guidelines.”

The text also agrees to share information on health risks, such as pandemics, and allows for ad hoc access to the EU’s Early Warning and Response System, a tool that allows member countries to share information on public health threats.

Aviation also recognizes some certificates issued by each parties’ agencies.

But there are areas, such as chemical regulation and data sharing, where the deal falls far short of such collaboration. As an EU member, the U.K. invested in the bloc's REACH database for chemicals, but it will lose its access from 2021.

Consumer goods standards may also have less coverage than the EU-Canada deal, however. There doesn’t appear to be recognition of one another’s many testing bodies.

8. Phasing in rules


There is at least one win for the car industry: a six-year phase-in period for rules-of-origin requirements covering electric cars.

Carmakers such as Toyota and Nissan wanted to avoid a cliff-edge on rules of origin. These are rules which determine how much of a product must come from a particular nation. Manufacturers wanted a transition period to adjust to any new system.

"That's what they wanted and that's what we have secured,” said a senior member of the U.K. negotiating team.

Under the deal, a maximum of 60 percent of the content in finished electric vehicles, plug-in hybrid models and conventional hybrid models can come from outside the EU or U.K. by the end of 2023 to qualify for tariff-free trade. That should then be reduced to 55 percent by the end of 2026.

From 2027, that should be reduced again to 45 percent, although both sides agreed to review the final level in four years’ time. Those talks will cover the availability of “sufficient and suitable originating materials” along with the “balance between supply and demand,” according to the text.

9. Visas and labor mobility


Ending freedom of movement was a key issue for Brexiteers in the U.K.'s 2016 EU referendum and that has been achieved by this deal.

For some professions, however, the ability to work in another country temporarily is important, something recognized in the deal with a list that allows specified occupations visa-free travel for 90 days.

But a wide range of industries, including sports professionals, artists and musicians, do not appear on the list and this is likely to be tested by lawyers before too long.

"Somebody is going to be caught, most likely in rugby teams who will be traveling just two weeks after this starts," said Tim O'Connor, a lawyer and rugby writer.

Temporary "passports for goods" — known as carnets — used by those such as musicians and sportspeople moving their gear will be costly and demand extensive paperwork.

10. What if the two sides disagree on implementation?


For a start, many bodies will need to be set up to oversee collaboration on the agreement between the two sides.

Some sections of the deal have their own dispute resolution mechanisms, but some don't. There are hosts of exceptions that trade lawyers are presently puzzling over. A rough guide would be to assume a row in many instances would trigger a consultation process, if that fails an arbitration panel, and should that also fail the imposition of some tariffs. That's not unusual in trade agreements.

Arbitration panels are made up of lawyers, subjects specialists, and often judges.

The deal allows for rebalancing measures in some instances, and like all trade for WTO members, both sides can resort to that as a forum for resolving some rows.

For instance, should all the steps of a dispute on fish fail, each party can lock the other out of their waters. It's helpful, one trade expert said, to think of each area as a potential crime with a bespoke punishment. As is standard in such deals, there's a 12-month termination clause that either side can trigger.

Overall, as it is digested, it is important to realize this is a deal that can be chopped up. That's partly why different areas follow different dispute mechanisms. The whole is not meant to be subject to its parts.

While that's true of other deals, it must be remembered this agreement is unlike any other, as much in breadth as in depth. So it's understandable that parties would want to preserve some of the arrangements if they cannot sustain all of them. This construction will get close examination by British and EU lawmakers as the deal goes through the process of provisional application and then ratification.

That's also why until some fields are implemented, no one will truly know if the deal is a win or not. Not every area will likely stand the test of time. Some areas may disintegrate further while some niche areas are likely to integrate more than the text alone presently enables.

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