After countless deadlines have come and gone, with a deal 90% done but three intransigent sticking points, on 24 December 2020 the UK and EU finally announced "agreement in principle" had been reached on their future relationship. While the EU-UK Trade and Cooperation Agreement must still be formally approved and ratified by both sides, it will go into effect on 1 January and apply provisionally until 28 February 2021, to give the European Parliament time to scrutinise it. The deal secures zero tariffs and quotas for trade in goods between the EU and UK. Although some customs facilitation measures are included, border formalities will kick in on 1 January 2021, so the possibility of disruption of logistics chains in the coming weeks is not removed. Due to the use of third country materials, some previously tariff free UK or EU goods will become subject to tariffs from 1 January. There is some mutual recognition of conformity with product standards in some sectors but most products will need approvals in the UK and the EU separately. While mainly a trade deal, and thin in other respects, it does cover services, investment, competition, State aid, tax transparency, air and road transport, energy and sustainability, fisheries, data protection, and social security coordination. But important issues remain unresolved, particularly financial services and data protection.
Summary and timing
In the afternoon of 24 December 2020, the EU and UK announced1 agreement in principle on the "EU-UK Trade and Cooperation Agreement". Charles Michel, the President of the European Council, issued a brief statement that "[f]or our citizens and businesses a comprehensive agreement with our neighbour, friend and ally is the best outcome" and underlining the unity shown by the EU in the negotiations.2 Von der Leyen's statement echoed the views of many: "Finally, we can leave Brexit behind us and look to the future. Europe is now moving on." On the UK side, Prime Minister Boris Johnson made a long statement, emphasising the UK "[has] taken back control of laws and our destiny" and that "the jurisdiction of the European Court of Justice will come to an end."
The European Commission has described the Agreement as resting on three main pillars: a Free Trade Agreement (FTA), a new Partnership for Security and a horizontal agreement on Governance. The Agreement and associated documents have been published on the UK and EU websites.3
On the three previously intractable elements – level playing field (LPF), governance and fisheries: sufficiently robust yet flexible LPF standards and processes have been agreed. A unitary governance structure has been adopted with binding dispute settlement covering most areas of the Agreement, including the LPF commitments. These will allow the EU or UK to take unilateral measures to safeguard their economies against unfair competition from the other party. The retaliation provisions include scope for "cross-retaliation" by which a violation in one area can be countered by withdrawing rights in a different, more sensitive area, in the event of a Panel Ruling that a Party has violated the Agreement. For example, a violation by the UK against imports of French wine might be met with additional restrictions on UK access to legal services markets. A breach of certain "essential elements" (such as climate change and provisions on fundamental rights) of the Agreement may trigger suspension or termination of (part of) the Agreement. A byzantine web of EU-UK committees and working groups underpins the governance arrangements. A compromise was reached on fisheries as predicted.
The late resolution of negotiations brings with it institutional challenges: the Agreement must still be approved by the Council and by the European Parliament (EP) for the EU, and by the UK Parliament. The Transition Period agreed under the Withdrawal Agreement ends on 31 December 2020. Ratification on the EU side will not be completed by then, but the EU has agreed to the provisional application of the Agreement until 28 February 2021, so that the EP is given time to scrutinize and give its consent (hopefully) as early as possible in January.4 The UK Parliament is expected to approve the deal by the end of 2020.
Even with the provisional application of the Agreement, important changes and some logistical disruption will remain inevitable from 1 January 2021 when the EU and the UK embark on a new relationship, with no customs union and the UK being outside the single market. Crucially, the agreement does not cover certain important areas in the EU/UK bilateral relationship, noted below.
The key elements of the Agreement on trade in goods
Tariffs and origin rules – Trade in goods between the EU and the UK will be duty and quota free, provided the goods "originate" in the FTA area. The technically complex and vitally important question of cumulation has been resolved as foreseen by permitting "bilateral" and not the more generous "diagonal" cumulation. This means that EU materials used in UK production, and UK materials used in EU production, will help satisfy the preferential origin rules under the new agreement. Materials originating in third countries will not count to satisfy the origin rules in the FTA, as (like all FTAs) it seeks to encourage maximum sourcing within the FTA area. Special rules have been agreed to allow use of certain parts for electric cars from third countries without this leading to the imposition of tariffs in bilateral trade. An important practical point is that proof of origin can be provided through self-declarations of origin, so there is no need to obtain origin certificates from the authorities.
Customs formalities – Customs formalities will start to apply from 1 January 2021 when the UK leaves the EU customs union, covering bilateral imports and exports, and goods in transit. The agreement provides for mutual recognition of Authorised Economic Operator (AEO) status, which means certain simplified procedures will be available for AEOs. AEO status can give access to simpler customs procedures and important waivers of certain obligations, provided the fairly onerous requirements on traders are met. Mechanisms are included for cooperation on the recovery of customs duties and in the fight against VAT, excise duty and import duty fraud.
Level Playing Field – commitments have been agreed in the areas of climate change, including carbon pricing, environment, labour and social standards, competition and tax transparency. There are also "detailed principles" on State aid. There is a commitment to human rights, in that the UK's continued adherence to the European Convention on Human Rights is backed up by a right for the EU to suspend cooperation on law enforcement and judicial matters in the event of non-compliance by the UK. Provisions for retaliation against any variation in standards or application of subsidies affecting trade between the UK and EU are included in the Agreement.
Product conformity – UK goods entering the EU will have to meet the EU's standards, but the Agreement will allow self-declaration of conformity with EU product rules for low-risk products. Some mechanisms should make regulatory compliance easier, especially for pharmaceuticals, autos, wine, chemicals and organic products. Mutual recognition has been agreed for some pharmaceuticals and for automobile approvals.
Connectivity/transport – The Agreement will ensure continued air, road and maritime connectivity, but UK service providers will lose certain rights:
- Air – UK carriers will lose traffic rights within the EU (so-called "cabotage" rights). This means that UK carriers will be able to perform unlimited carriage of passengers and cargo between points in the EU and the UK, but not between two points in the EU. Onward carriage will only be possible for the carriage of cargo to/from a third country (e.g., Paris-London-New York) if agreed bilaterally between the UK and the relevant EU Member State.
- Road – Only basic cabotage will be permitted. This means that EU and UK hauliers can carry cargo to and from any point in the other party's territory, but UK hauliers can then perform only one cabotage operation (to avoid travel back to the UK without a load). Full transit rights are given by both sides, which allow the right for Irish hauliers to cross the UK to reach the rest of the EU.
What's not covered?
Free movement of services ends on 31 December 2020, when the UK leaves the EU Single Market. The agreement has agreed "openness beyond international agreements" on services, and "national treatment" will apply to all services (the WTO Services Agreement is more limited). Importantly, no so-called "equivalence" decisions have yet been adopted by the EU. Access for UK service providers to the EU financial services market is therefore no longer possible under EU passporting rights, and UK service providers can only provide such services in the EU if they have relocated relevant businesses to the EU.
The agreement does not foresee generalised mutual recognition of professional qualifications for service providers, but some provisions cover specific sectors such as the legal sector. Short-term business travel is permitted, but visa requirements will apply from 1 January.
Likewise, the EU has not yet adopted "adequacy" decisions in the area of data protection. This means that the flow of data from the EU to the UK is subject to restrictions and will require compliance with different obligations.
In line with the UK's wish to "take back control" cooperation on foreign policy, external security and defence is not covered by the deal. This means for example there is now no formal cooperation on, and alignment of, economic sanctions.
As under other EU FTAs, public services, services of general interest, some transport services and audio-visual services are excluded from the agreement.
In all trade deals, the devil is in the detail, and the detail in this deal between the EU and the UK is only just going under the microscope. Nevertheless, the announcement of a deal has been met with fairly universal relief. The pre-Christmas chaos of closed borders, gridlocked lines of trucks and disrupted supply chains, partly COVID-related and partly due to stockpiling in preparation for 1 January, perhaps concentrated minds.
For the manufacturing industry sector at least, the Agreement will bring much-needed clarity, though for other sectors this cannot be said. This is just the first step, but a key step, in what will be a continuing series of bilateral negotiations between the UK and the EU.
1 See here for the European Commission's press statement. See here for UK Prime Minister Boris Johnson's statement.
2 See here.
3 Agreements reached between the United Kingdom of Great Britain and Northern Ireland and the European Union. See here for a 6-page "brochure" explaining the big changes, issued by the European Commission on 24 December 2020.
4 David Sassoli, President of the EP in a statement of 24 December 2020, available here, welcomed the agreement and explicitly praised the "intense dialogue and unprecedented exchanges and unity between the EU institutions throughout the process".
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