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Brexit Trade Deal Brings Temporary, If Not Lasting, Relief

The trade deal signed by the United Kingdom and the European Union means short-term relief but longer-term uncertainty for business.
Paul Hardy, Daniel Jones, DLA Piper, Brexit trade deal, UK EU trade deal, EU-UK Trade and Cooperation Agreement news, UK EU trade deal goods, UK EU trade deal services, UK EU trade deal agri-food, UK EU trade deal details

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January 13, 2021 09:23 EDT

“What we call the beginning is often the end / And to make an end is to make a beginning.” So said Ursula van der Leyen, the president of the European Commission, announcing the completion of Brexit negotiations on Christmas Eve, quoting from T.S. Eliot’s “Little Gidding,” the final quartet of his last great poem. Van der Leyen’s words perfectly capture the defining trait of the EU-UK Trade and Cooperation Agreement (TCA): It is a platform for further ambition in cross-border partnership between the UK and EU rather than a ceiling on current ambitions.

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Relief was the predominant emotion amongst the business community on both sides of the Channel before the New Year. Now that the dust has settled and attention has turned to the detail of the deal reached, there should be no illusions that the TCA ends EU-UK negotiations. We set out below what, in high-level terms, the TCA means for EU-UK trade in goods and services, and where there are gaps to fill and questions to still be answered over the coming months and years.

What Does the TCA Mean for Trade in Goods?

Firstly, the good news. Under the TCA, there are no tariffs or quotas on cross-border trade in qualifying goods between the United Kingdom and the European Union. In this regard, the TCA goes further than any EU trade agreement negotiated with a third country. This is a hugely positive outcome for businesses with UK and EU supply chains, particularly in sectors such as the automotive and agri-food industries, where tariffs imposed on so-called World Trade Organization terms under a no-deal Brexit would have been high.  

However, it is crucial for those involved in cross-border trade to appreciate that only goods that are of EU or UK origin benefit from zero tariffs and zero quotas under the TCA. Rules of origin are a key component of every trade agreement and determine the “economic nationality” of products. Under the TCA, a product will attract a tariff if a certain percentage (beyond a “tolerance level”) of its pre-finished value or components are not of either UK or EU origin. The tolerance levels vary from product to product and require careful analysis. Therefore, businesses will need to understand the originating status of all the goods they trade between the UK and the EU to ensure they benefit from the zero tariffs and quotas under the agreement. Businesses will also need to ensure that their supply chains understand the new self-certification procedures to prove the origin of goods.

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Beyond the qualified good news on tariffs and quotas, the deal is less helpful in that full regulatory approvals are required for goods being imported into the EU from the UK and vice versa. While in certain important sectors (automotive, chemicals and pharmaceuticals) the UK and the EU agreed on specific rules to reduce technical barriers to trade, the UK government did not achieve its longstanding negotiating objective of securing broad mutual recognition on product standards.

Therefore, from January 1, 2021, all products exported from the EU to the UK will have to comply with the UK’s technical regulations and will be subject to any applicable regulatory compliance checks and controls. Similarly, all products imported from the UK to the EU will need to comply with EU technical regulations and will be subject to all applicable regulatory compliance obligations, checks and controls.

There will also be specific changes to food and plant safety standards under the TCA. UK agri-food exporters will have to meet all EU sanitary and phytosanitary (SPS) import requirements with immediate effect. In this sector, UK exports will be subject to official controls carried out by member state authorities at border control posts. Similarly, EU agri-food exporters will have to meet all UK SPS import requirements, following certain phase-in periods the UK government has provided.

Far from being a “bonfire of red tape” promised by certain advocates of Brexit before the 2016 referendum, the TCA introduces a “bonanza of new red tape” for businesses who wish to sell their products in both UK and EU markets. On January 8, UK Cabinet Office minister, Michael Gove, acknowledged that there would be “significant additional disruption” at UK borders over the coming weeks as a result of customs changes and regulatory checks.

What Does the TCA Mean for Trade in Services?

As has been widely noted by commentators, the deal on services is far thinner than on goods. More than 40% of the UK’s exports to the EU are services, and the sector accounts for around 80% of the UK’s economic activity. As an inevitable consequence of leaving the EU single market, UK service suppliers will lose their automatic right to offer services across the union. UK business will have to comply with a patchwork of complex host-country rules which vary from country to country and may need to establish themselves in the EU to continue operating. Many have already done so.

The level of market access will also depend on the way the service is supplied. There are four “modes” for this. Services can be supplied on a cross-border basis from the home country of the supplier, for example over the internet; to the consumer in the country of the supplier, such as a tourist traveling abroad and purchasing services; via a locally-established enterprise owned by the foreign service supplier; or through the temporary presence in the territory of another country by a service supplier who is a natural person.

All of this means that UK-established businesses will need to look at domestic regulations on service access in each EU member state in which they seek to operate, and vice versa for EU-established businesses seeking market access in the UK.

A Basis for Ongoing Negotiations

The TCA does not mark the end of EU-UK negotiations, and in some areas these discussions start immediately. For example, the agreement has provided an end to so-called passporting of financial services under which banks, insurers and other financial service firms authorized in the UK had automatic right to access EU markets and vice versa.

The EU and the UK have committed to agree on a memorandum of understanding that will establish a framework of regulatory cooperation in financial services by March this year. With an end to passporting, it is likely that there will be more friction in cross-border financial services, but the extent of that friction depends on the outcome of future negotiations between EU and UK governments and regulators.

To take another example of importance to the UK economy, the TCA does not provide for the automatic mutual recognition of professional qualifications. As of January 1, UK nationals, irrespective of where they acquired their qualifications, and EU citizens with qualifications acquired in the UK, will need to have their qualifications recognized in the relevant EU member state on the basis of that state’s domestic rules. However, the TCA leaves the door open for the EU and the UK to agree on additional arrangements in the future for the mutual recognition of qualifications, something that professional bodies will be pushing for immediately.

Whilst there has been understandable relief from politicians, businesses and populations on both sides of the Channel suffering from Brexit fatigue that a deal — any deal — has been reached, the sheer extent to which the TCA envisages ongoing negotiations between the UK and the EU on issues both large and small over the months and years ahead has not been widely appreciated.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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