Brexit briefing | 05 Jan 2021 |

The UK-EU Brexit trade agreement: a good deal for business?

The Trade and Cooperation Agreement (TCA) between the UK and the EU agreed just before Christmas was hailed by the Prime Minister as a deal which offers significant new freedoms for the UK (as compared with EU membership), whilst at the same time providing certainty and substantial economic benefits for business. But how far do those claims match what the agreement actually says?

Removing trade barriers

The TCA is broadly similar to free trade agreements that the EU has entered into with countries such as Canada and Japan, the main difference being that it allows for zero tariffs on all qualifying trade in goods, including agricultural products. This is a significant economic benefit, especially given that no other EU agreement with a third country seeks to lower tariffs to the same extent. For example, although tariffs on most goods under the EEA Agreement with Norway, Iceland and Liechtenstein are zero, a small number of mostly agricultural products remain subject to tariffs.

That said, in order to benefit from tariff-free treatment, UK exporters and their customers in the EU will need to show that their goods meet the origin requirements under the TCA; for example, goods imported from China which have only undergone minimal additional processing in the UK are unlikely to qualify for tariff-free treatment on re-export to the EU (whereas previously, this was not an issue for UK exporters).

Non-tariff barriers

When it comes to non-tariff barriers, the TCA is substantially less beneficial from a business perspective. Compared with EU membership, UK businesses will face additional barriers to trade across a wide range of areas and in some cases, these will be significant (for example, the TCA does very little to ease the burden of additional red tape on goods trade – see this briefing for detail). As widely noted, the deal delivers relatively little in terms of removing barriers to trade or preserving current levels of access for services providers, even though this is an area where the UK has a trade surplus with the EU.

Providing certainty and stability

The TCA is undoubtedly preferable to "no deal", which would have given rise to considerable uncertainty. However, a key "ask" from the business community was that the TCA should also provide additional implementation or grace periods in order to provide more time to adapt to new trading conditions. Here, the TCA only partially delivers. It includes grace periods in some important areas, notably compliance with rules of origin for goods (see above) and transfer of personal data from the EU to the UK (see textbox). However, beyond these measures, the TCA makes few other concessions to business' desire for a longer adaptation period (for example many of the issues highlighted in this CBI document are not addressed by the TCA).

Grace period for EU to UK data flows

Under the TCA, transfers of personal data from the EU to the UK can continue without further action on the part of EU based controllers or their UK based counterparts for at least 4 months, with a possible extension by a further 2 months (i.e. until the end of June 2021). This is designed to give the European Commission sufficient time to reach a decision on whether the UK regulatory framework is "adequate". If it declines to do so, then UK-based businesses and their EU counterparts will need to make changes to their current arrangements for the transfer of personal data – see this briefing for more detail. The grace period is conditional on the UK not changing its data protection legislation without the EU's consent.

A stable framework for the longer term?

Whilst the TCA provides a degree of certainty in the short term, it remains to be seen whether it will prove stable over time. In particular, given that the UK appears to be planning to diverge from the EU in future, the chances of one of the parties invoking the dispute resolution and level playing field provisions (discussed below) would appear to be higher than in the case of most free trade agreements. In addition, as explained below, a dispute on fish could potentially lead to termination of the trade, aviation and road transport aspects of the agreement.

On the other hand, it is also possible that the UK will seek to build on the TCA to facilitate closer cooperation in some areas. The institutional framework of the TCA, with numerous joint technical committees overseeing its implementation, could provide a helpful mechanism for pursuing such initiatives in a more technocratic manner, potentially avoiding the political controversy which has dogged the Brexit negotiations.

Duration, review and termination

The TCA is of indefinite duration but is subject to review every 5 years. The next scheduled review will therefore be in 2026, although the institutional framework described above would potentially provide a forum for certain issues to be discussed earlier (provided both sides are willing to do so). It is also possible for either party to seek a review of certain aspects of the agreement from the beginning of 2025 if it believes that the other party has made changes to its own laws which justify a "rebalancing" of the TCA (see below).

The TCA can be terminated by either party without cause on 12 months' notice. Whilst this relatively short notice period might raise eyebrows in a commercial agreement covering issues of similar complexity and importance to the parties, such provisions are common in trade agreements (indeed the EU's trade agreements with Japan and Canada can be terminated on a mere 6 months' notice). In practice, it is more common for trade agreements to be renegotiated and replaced than it is for them to be terminated outright. For example, although President Trump threatened termination in relation to the trade agreement between Canada, the US and Mexico, this ultimately resulted in a renegotiation rather than a complete cessation of the arrangements.

In addition, some sections of the TCA are time-limited (e.g. the energy chapter is scheduled to terminate on 30 June 2026), whilst others can be terminated based on shorter notice periods (e.g. the chapters on aviation, road transport and fish can be terminated on 9 months' notice). Of particular note is that termination of the chapter on fish leads to automatic termination of the trade, aviation and road transport chapters.

New freedoms

The UK Government has prioritised freedom to diverge from EU regulation over access to EU markets. In our view, the TCA would allow the UK a reasonably wide scope to pursue a different approach and, on this issue, the UK should be regarded as having achieved a qualified success. We say "qualified" because, whilst the UK is free to diverge from the detail of EU regulation, it makes extensive commitments in the TCA to respect key regulatory principles across a wide range of areas, including state aid, labour and social standards, environment and sustainable development, taxation, consumer protection, intellectual property, public procurement, competition law and merger control. Most (although not all) of these provisions are subject to enforcement mechanisms provided for in the agreement. As such, they are likely to constrain the UK from pursuing a radically deregulatory approach, involving a material lowering of existing standards or dilution of existing protections.

Although there is no express obligation to increase standards in line with future changes in EU law, UK policy makers will need to consider carefully how they respond to such developments in areas subject to rebalancing measures i.e. labour, social standards, environment and sustainable development. In these areas, a failure to keep pace with major changes in EU regulation could enable the EU to argue that a significant divergence has arisen, entitling it to impose rebalancing measures (which could include tariffs and withdrawal of other benefits under the TCA).

Rebalancing mechanism

The level playing field chapter of the TCA includes a rebalancing mechanism, which is intended to apply where one party believes that there are "significant divergences…impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this agreement." As noted above, it is limited to divergences in the areas covered by the chapters of the TCA on labour, social standards, environment and sustainable development.

The aggrieved party can seek a review of the whole agreement (but may only do so from 2025 onwards) or it can convene a panel of experts to consider the specific matter complained of. It can also take unilateral measures to remedy any alleged imbalance arising from a divergence in regulation. Such measures could, however, be challenged before a panel of arbitrators, where the party invoking them would need to show that (i) a significant imbalance had arisen; and (ii) its unilateral measures represented a proportionate response to that imbalance.

Will the new freedoms compensate for the loss of access to EU markets?

Much has been made of the UK's freedom to enter into trade deals with third countries – and the Department for International Trade has been highly effective in negotiating continuity agreements with a view to replicating the benefits of EU-negotiated trade deals. However, to a very large extent, those agreements merely prevent the UK being in a worse position than it was in before the end of the transition period. Whilst the UK may be able to negotiate new trade agreements more quickly than the EU, it will inevitably be some years before any positive economic benefit from these is felt - and it is not clear that they will make up for the loss of access to EU markets (with which the UK has far more trade).

A decisive advantage through regulatory reform?

As noted above, there will be many areas where it is likely to be difficult for the UK to take a radically different approach from EU regulation. On the other hand, there is a view that the UK's strategy should be similar to that of the British Olympic Cycling team i.e. it should look to make a raft of incremental improvements – marginal gains - which, taken as a whole, have the potential to give it a decisive edge over the EU and other countries as an attractive place for businesses to invest. In our view, the TCA is likely to give UK policy makers the control over the detail that they would need to make small but potentially significant changes of this nature. It could also allow the UK to achieve "first mover advantage" in newly emerging sectors of activity, where it may be able to act more nimbly than the EU.

Whether these freedoms will be enough to enable the UK to outperform EU economies in the long term remains to be seen. If the UK is to do so successfully, it will probably also need to tackle long-standing structural problems such as low productivity and skills shortages (which have arguably been disguised to some extent by the ease with which UK employers have, until now, been able to recruit EEA nationals with relevant skills). Meanwhile, the EU is also unlikely to stand idly by if it appears to be losing out to the UK as a regulatory competitor; it is likely to make changes to its own laws and use the size of its market to persuade third countries to fall in line with its approach.

Guidance on Brexit-related changes

For detailed guidance on what is changing as a result of Brexit and what businesses need to do in order to adapt to new trading conditions, see our Brexit Readiness Portal, which has recently been updated to reflect the provisions of the TCA.