On December 24, 2020 the EU and the UK reached, following difficult negotiations characterized by a lengthy stand-off over a limited number of issues, an agreement in principle on a Trade and Cooperation Agreement ("TCA"). In general, the TCA consists of a free trade agreement ("FTA"), a partnership for citizens' security and a governance framework that set the terms for EU-UK relations after the end, on 31 December 2020, of the Brexit transition period during which the full body of EU law continued to apply in the UK. This newsletter provides a selective overview of the key trade and regulatory takeaways from the TCA, which are of particular relevance to all business in or between the EU and the UK.
Described as going "well beyond traditional free trade agreements," the TCA covers trade in goods and services as well as a broad range of other areas such as air and road transportation, competition and State aid, data protection, energy and sustainability, fisheries, investment, social security coordination and tax transparency. One notable trade-related issue that the TCA does not address, however, is cooperation and coordination on the imposition of economic sanctions.
2. Trade in Goods
Market access: the TCA provides for tariff- and quota-free trade for all goods that meet the relevant rules of origin-requirements. To accommodate compliance with those requirements, traders are allowed self-certification of origin as well as "full" cumulation-accounting of both materials and processing. The EU and the UK may still unilaterally impose tariffs in case of a breach of the TCA or as a result of trade defence investigations into unfair competition from the other party.
Customs: the TCA did not change the fact that all future EU-UK trade in goods will have to comply with customs formalities such as, for example, the requirements that traders submit import and export declarations or activate an EU Economic Operator Registration and Identification ("EORI") number. The TCA does provide for customs facilitation through the mutual recognition of the Parties' Authorised Economic Operator ("AEO")-programmes and through cooperation mechanisms for the recovery of customs duties and the fight against VAT and other indirect taxes fraud.
Product regulation: the TCA explicitly recognizes the Parties' rights to regulate, and exports will consequently have to comply, and be subject to assessment of conformity, with the other Party's technical requirements and sanitary and phytosanitary ("SPS") standards. The TCA hereby aims to limit any increase in non-tariff barriers ("NTBs") to trade through, for example, the continued acceptance of self-declaration of conformity for low-risk products, the right of each Party to unilaterally reduce border controls of SPS compliance, and commitments to good practices such as information sharing and alignment with international standards. Furthermore, product-specific annexes set out additional compliance facilitations for automotive, chemical, organic, medicinal, and wine products.
3. Trade in Services
As a general matter, the free movement of services between the EU and the UK has now ended and the TCA regulates the Parties' future treatment of, and market access for, each other's service suppliers. In this regard, the TCA goes beyond WTO-commitments and includes the following notable features:
- Scope: the TCA locks in market access across substantially all sectors including, amongst others, digital, environmental, financial, business, and telecommunications services. Similar to other EU FTAs, audiovisual, public, general interest and certain transport services are excluded.
- Non-discrimination: in areas covered, the EU and the UK must accord each other's suppliers "national treatment", i.e., no less favorable than their domestic suppliers. In addition, the Parties must in most areas covered accord each other's suppliers "most favored nation treatment", i.e., no less favorable than third country suppliers.
- Local presence: neither Party may require the other Party's service suppliers to establish, maintain an enterprise, or be resident within its territory as a condition for the provision of a cross-border service supply.
- Visa-free entry: although visa requirements will henceforth apply, visa-free entry from the EU and the UK is allowed, albeit with certain restrictions, for up to 90 days in a 180-day period for short-term business visitors conducting certain specific activities.
Notwithstanding the above, it must be emphasized that the future movement of services between the EU and the UK will face considerable restrictions. For example, EU- and UK-established suppliers will no longer benefit from the country-of-origin principle1 and will consequently have to comply with the distinct rules of, respectively, the UK or the specific EU Member States in which the services would be provided. In addition, the TCA does not provide for general mutual recognition of professional qualifications and the Parties' suppliers will therefore, with some exceptions such as for legal services, similarly have to comply with EU Member State or UK recognition-requirements. Last, the TCA does not cover equivalence decisions for financial services and EU- and UK-established suppliers can as a result no longer exercise passporting rights to operate in the other Party's market.
4. Level Playing Field
On one of the most contentious issues during the negotiations, the TCA does not require a dynamic regulatory alignment but does commit both Parties to upholding common standards in the areas of climate change, competition, environmental protection, labor and social rights, State aid, and tax transparency. On competition and State aid, the TCA hereby adds the following, amongst other things:
- Competition: the EU and the UK shall maintain and enforce competition laws in accordance with certain principles, shall maintain their independent competition authorities, and may ensure cooperation and information exchange between those respective authorities.
- State aid: each Party shall have in place an effective system of subsidy control and shall comply with certain disciplines and principles for the granting of subsidies in general, for certain particularly trade-distortive subsidies, and for State-owned enterprises, designated monopolies and enterprises granted special rights or privileges.
In addition to the above commitment to ensuring a level playing field, the TCA includes provisions on domestic enforcement, dispute settlement, and the possibility for the EU and the UK to take remedial measures against variations in standards or subsidies that affect bilateral trade. Moreover, either Party may, as of 1 January 2025, periodically request a review of the operation of the TCA's "Trade"-section to ensure its efficiency in terms of maintaining a level playing field.
Following both Parties' signature and the UK's ratification of the agreement on 30 December 2020, the TCA will apply on a provisional basis from 1 January 2021 until 28 February 2021 pending the completion of the EU's internal ratification procedure. In this regard, the main outstanding step is that the European Parliament must give its consent, after which the Council of the European Union will adopt a decision on the TCA's conclusion that will clear the way for its formal entry into force.
In terms of significance, the TCA provided businesses with more clarity and legal certainty and reduced the risk of supply chain disruptions, cost increases and other negative effects of a no-deal scenario. That said, it is important to reiterate that the TCA does not remove all trade barriers resulting from Brexit and does not cover certain issues such as, for example, equivalence decisions for financial services. The TCA itself hereby acknowledges that additional items may have to be addressed in future negotiations by providing that the Parties shall jointly review its implementation, supplementing agreements, and related matters five years after its entry into force, i.e., in 2026 and every five years thereafter.
Pierstone will continue to monitor relevant developments as they arise and can assist all businesses with each legal issue that they encounter in respect of specific aspects of the TCA and the wider framework of EU-UK trade including unavoidable changes resulting from Brexit.
1. The country-of-origin principle stipulates that service suppliers are subject to the laws of their own country rather than of the country where the service is provided.
Originally published 14 January 2021
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