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The UK-EU trade deal: how did those sticking points get resolved – and what’s not included?

News of a UK-EU trade deal on 24 December brought a sigh of relief for many businesses. It marked the culmination of four years of negotiations - the last 12 months of which were spent on this trade and cooperation agreement.

But what happened to those final sticking points that plagued negotiations in recent months? And what didn’t make it into the final deal? Here’s a summary of the end position:

The sticking points

  • Level Playing Field: The UK has successfully avoided dynamic alignment to EU state aid and competition rules, instead being able to establish an independent subsidy regime (albeit one that conforms to terms of reference within the FTA). On state aid the two sides have agreed a series of principles to which their subsidy approach should conform, as well as having a suitable domestic enforcement regime. If either party believes there has been unfair subsidies used to distort trade and cause serious harm to their industries, they can take action (such as imposing tariffs) after a notice period. The other side retains the right to challenge these tariffs at arbitration and take measures to offset them if they themselves are found to be unfair.

    The EU and the UK have also agreed to non-regression from current standards in areas such as environment and social employment law, as well as suitable domestic enforcement in these areas. The two sides have agreed a ‘rebalancing clause’ which allows either party to take action against the other if they believe significant divergence has opened up between the two sides on these issues and is distorting trade. A new arbitration panel will determine whether such action was indeed warranted/proportionate.

    The exact shape of the UK’s new subsidy regime is still unknown. But the agreement sets out the broad principles, which won’t look too different from what is currently in place. However, the UK has suggested it could go for an ‘ex post’ rather than ‘ex ante’ regime and change the way in which subsidies are assessed as well as the threshold under which they trigger an assessment. More details on this are expected over the course of 2021.

  • Fishing: A transition period of five and a half years of fixed access to UK waters has been agreed, with EU fishing quotas reducing by 25% from current levels over the transition, followed by a permanent quota system negotiated annually. The agreement gives each side options for retaliation in the event of disputes, including introducing tariffs in other areas equal to the economic and societal impact of the loss of fishing rights. A new specialised committee on fisheries will manage relevant issues.

    Both sides moved from their initial positions, with the EU originally seeking the status quo, while the UK wanted an 80% reduction in EU quotas over three years. There is a sizeable increase in quota share from day one for UK fishers, while the agreement also secures their quota in EU waters and tariff free trade in fish and related products. However, there will be continued uncertainty over how this will look in the long term, with annual negotiations and the potential for retaliatory tariffs.

  • Governance: The UK conceded on having a suite of separate agreements. The deal is codified in one single text with annexes and supplementary agreements only on civil nuclear cooperation and information security. The agreement establishes a new Partnership Council to arbitrate on disputes with no role for the European Court of Justice (ECJ).

    The direct impact for business here is relatively limited, but it will be important to keep an eye on any disputes. Given the cross retaliation included in the agreement, it could be that a dispute in one sector results in tariffs in another. There will of course be changes as to how businesses seek to enforce their rights under the agreement compared to enforcing rights when in the EU, via the ECJ.

What’s not included?

There are a number of substantial trade provisions not included within the deal, either because negotiators couldn’t reach agreement on them, or because there was insufficient ambition on one or both sides.

  • The FTA does not include a phase-in or implementation period across the board. Many of the new provisions will come into effect a matter of days after they have been announced, although there is phasing in many areas for the UK, such as under the Border Operating Model, which means full customs declarations are not required on trade into the UK for the first six months.
  • Despite the conclusion of FTA negotiations, a data adequacy decision has not been granted; a bridging agreement lasting four to six months has been put in place while the equivalence process is undertaken, but the route to a decision is not certain because of the UK’s use of personal data for security reasons.
  • The deal is very thin on financial services. To date the EU has only taken two equivalence decisions, while the rest are expected next year. As such, in many areas UK financial services firms will need to have a subsidiary in the EU to continue to serve clients there.
  • The UK sought specific commitments on mutual recognition of conformity assessment, so that UK product testing standards are automatically recognised within the EU. This was not agreed. However there are provisions for manufacturers to self-declare the conformity of low-risk products and there are some facilitations on medicinal products, motor vehicles and chemicals. A new Technical Barriers to Trade specialised committee will facilitate future cooperation.
  • There is no mutual recognition of professional qualifications, although it does allow authorised bodies on either side to agree mutual recognition in specific sectors/qualifications. This differs considerably to the automatic recognition arrangement the UK proposed and represents a new trade barrier for services suppliers. Professionals in regulated industries will now need to have their qualifications recognised in each EU member state.
  • There is no agreement on geographical indicators (GI), only a review clause to potentially negotiate a separate agreement in the future. But the Withdrawal Agreement ensured that existing GIs on both sides are protected.
  • The audio-visual sector has been carved out of the deal in its entirety, as is the normal approach taken by the EU in trade agreements. Businesses in this sector will need to comply with two sets of regulators from 1 January, and if they wish to broadcast across the EU and the UK for instance, operate dual establishments.
  • Diagonal cumulation is not included, despite being in the UK’s negotiating mandate – meaning goods from countries like Japan, which has trade agreements with both the UK and EU, will not count as qualifying content when eligibility for EU preferential tariffs are assessed.
  • Although business trips are permitted, working in another EU country is subject to many Member State specific carve outs. To physically perform services will generally require work permits. This presents particular challenges to actors, artists, and the fashion industry for instance.

The UK-EU trade and cooperation agreement is the basis of the future relationship, but one that will continue to evolve. We can expect substantial detailed guidance notices to be issued by the UK, the EU and each EU Member State, as well as further negotiations over the coming months and years. The transition period may end on 31 December, but Brexit is far from done.

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