Opinions and insights from Roythornes' corporate and commercial law team.
The Impact of the Trade and Cooperation Agreement for UK Businesses and Trade
- AuthorJulia Seary
Following ten rounds of intense negotiations in the run up to Christmas, the EU-UK Trade and Co-operation Agreement (the TCA) came into provisional effect at 11pm on 31 December 2020 when the European (Future Relationship) Act 2020 (the 2020 Act) came into force. The TCA contains the provisions relating to trade in goods and services, both in general terms and as applicable to individual sectors. Specific chapters are devoted to aviation, road transport, social security co-ordination and short term visits, fisheries and UK participation in EU programmes. In addition to the trade-related provisions, the TCA also covers security, documenting the basis of the parties’ co-operation in relation to criminal matters. The 2020 Act provides for the application of the TCA in English law and contains powers to make secondary legislation for the purpose of implementing its detailed provisions.
The 2020 Act provides that domestic law shall take effect with such modifications as are required to implement the TCA, pending the relevant legislation being amended. The practical implication is that in areas where amendments have not yet been made to reflect the agreed deal, the provisions of the TCA will be considered as the prevailing law in the UK, to the extent they conflict with or supplement existing law. EU law and the EU Court of Justice no longer have supremacy over English law or the Supreme Court, albeit relevant EU law is retained in the UK as domestic law, unless and until amended or repealed.
From a European perspective, it is currently anticipated that the final steps, being the formal approval of the European Parliament and the adoption of the decision on the conclusion of the TCA by the Council, will be completed by the end of February.
Whilst much progress has been made, it is fair to say that the TCA makes much more limited provision for businesses trading in services than those trading in goods. In relation to services, and in a number of other areas, the TCA has been accurately described as “thin”, requiring the EU-UK relationship to evolve and develop over time and the Joint Declarations (or “action steps”) published alongside the TCA underline a number of aspects of the deal that remain incomplete, with discussions to be progressed during 2021.
Set out below is a summary of the key points to note for UK businesses:
1. Tariff Free Goods
One key point to note is the absence of any import tariffs or other customs duties or quotas on the movement of goods between the EU and the UK. It should be noted, however, that this is subject to detailed rules of origin requirements, to ensure that only goods originating from the EU/UK are able to benefit from this tariff-free regime. In essence the goods must be either ‘wholly produced or obtained’ in the UK or EU, or there must be ‘sufficient production’ such that the finished product is deemed to be an UK or EU originating product. There must be more than just ‘minimal processes’ applied to the goods and/or at least an agreed percentage of the materials making up the product (ie. 55% for a car) must originate from the UK or EU for it to be imported tariff-free.
Businesses can self-certify compliance with the agreed rules of origin but those dependent on international supply chains will need to assess the impact for them of the rules of origin and potential tariff charges.
Incoterms remain very important and will determine who will be the importer and responsible for duty and VAT.
2. Trade in Goods and Non-Tariff Technical Barriers
The main focus of the TCA is on trade in goods, technical barriers to trade and market access. The TCA largely reflects the WTO position in terms of sanitary and phytosanitary measures for goods (requirements imposed to protect humans, animals and plants from diseases, pests or contaminants) in that there is no general provision for mutual recognition. Businesses will, therefore, need to comply with relevant EU and UK rules in relation to, for example, tolerance limits for residues, restricted use of substances, labelling requirements related to food safety, hygienic requirements and quarantine requirements. Specific provision has, however, been made to reduce non-tariff barriers in heavily regulated sectors such as motor vehicles and equipment/parts, medicinal products, chemicals, organic products and wine. It should be noted that the TCA also contains mutual recognition of AEO “trusted trader” schemes, which simplify customs procedures for those who have obtained that status.
In road transport, mutual market access is generally limited to point-to-point cross-border transports, with up to two extra movements in the other party's territory.
The UK leaves the EU Common Fisheries Policy and during a transitional period of five and a half years, EU fishing quotas in UK waters will gradually be reduced to 75% of their pre-Brexit extent. The shares of fish the parties are allowed to catch in each other's waters will then be negotiated annually.
As the UK has left the EU's Customs Union there will be customs paperwork and checks for goods crossing the UK-EU border, even if no tariff is payable. These are required from 1 January 2021 on both sides of the border, although the UK has provided a transitional period until 1 July 2021 with extended deadlines for paperwork to be filed on imports to the UK. Businesses importing or exporting goods across the border will need to register, or instruct a customs agent on their behalf. Although the TCA permits food imports and exports to continue, they will be subject to checks and controls at the border, because the EU and UK have not agreed to recognise one another's standards and safeguards. The increased friction at the border will cause delays and increase costs for supply chains. Businesses will need to adapt, particularly where they are reliant on speed of delivery. The delays are likely to be a long term feature of trade, with peaks in January-February 2021 as the new arrangements bed in, and in July 2021 when the UK's transitional arrangements end.
The TCA contains limited provisions for the UK and EU authorities to cooperate on the regulation of goods and product standards. However, for the most part businesses will now need to comply with two different regulatory systems in the UK and EU, including conformity assessments, if trading in both. A notable exception is in relation to medicinal products. An annexure to the TCA establishes mutual recognition of inspections and goods manufacturing practice, removing much of the duplicate regulation.
Incoterms are key in determining importer and exporter responsibilities:
The Importer is responsible for Customs Import Declaration, Common Veterinary Entry Document and, possibly, Import Licence
The Exporter is responsible for Customs Export Declaration, Commercial Invoice, Packing List, and possibly, Export Licence and Statement of Origin
3. Trade in Services Barriers and Facilitation
The sections of the TCA relating to the trade in services, are significantly less accommodating than those applicable to goods. The TCA goes some way in prohibiting trade barriers such as economic needs tests, restrictions on corporate form, foreign equity caps, establishment requirements and nationality requirements at board level, but the liberalisation provisions apply only unless otherwise stated and the TCA annexures set out lists of individual member state requirements applicable to all services sectors and individual sectors. It should be noted, however, that there remains significant uncertainty in many important sectors such as financial services; the TCA does not provide for the continued access of UK financial services providers to EU markets, which remains subject to discussions that will continue in 2021 on potential EU decisions on the equivalence of UK financial services regulation.
Businesses will need to review the specific TCA annexure which is relevant to their sector in order to establish what and how services can be provided across relevant borders. UK providers operating in the EU need to verify if their service is subject to one of the exceptions and, if it is, whether there are national restrictions they are subject to in particular EU member states. Professional qualifications are no longer automatically mutually recognised.
4. Digital Trade
The main objective of the TCA in relation to digital trade is to facilitate digital trade while addressing unjustified barriers and ensuring “an open, secure and trustworthy online environment for businesses and consumers”. It is fair to say that it has been described by the UK Government as containing some of the most liberalising and modern digital trade provisions in the world which will promote digital trade in goods and services and ensure co-operation on future digital issues, including emerging technologies. The TCA covers issues such as prohibiting data localisation, recognising electronic signatures, allowing electronic contracting, regulatory co-operation, preventing parties from requiring the transfer of source code, open government data and direct marketing.
From a practical perspective, UK businesses are likely to already be operating in line with the agreed principles and can take comfort in the positive confirmation as to the intended alignment between the EU and the UK.
5. Transfer of Data
The UK has already declared all EEA member states to be ‘adequate’ to enable UK to EEA personal data transfers. The TCA addresses the transfer of data from the EEA to the UK and from a timing perspective, such transfers can continue for an interim period of four to six months (on the assumption that the UK’s current data privacy legislation, the Data Protection Act 2018, remains in place with only amendments as approved by the EU). During this period one hopes that the EU Commission will adopt the same ‘adequacy’ decision in respect of the UK to enable the continued unfettered two-way flow of personal data between the EEA and the UK.
As a precaution, the Information Commissioner’s Office has recommended that all UK businesses should still put in place alternative transfer mechanisms (such as the EU standard contractual clauses for international transfers) to safeguard against any future disruption to data flows. Privacy notices, internal policies, contracts and other documents may need to be updated to reflect the applicable regime(s) and organisations may have to appoint a new data protection representative in the UK or the EU where they do not have establishments in both.
6. Movement of People
UK and EU citizens who established EU free movement rights before 31 December 2020 retain them under the UK-EU Withdrawal Agreement concluded in November 2019, if they have registered their settled status under the schemes set up by the UK or EU by 30 June 2021. For others, visas may be required for travel between the UK and EU. However, the TCA provides for visa-free short-term business trips of up to 90 days in any 180 period, if they fall within a limited list of permitted activities. For UK and EU citizens travelling and residing in the EU and UK respectively, the TCA provides for the continuation of reciprocal social security and healthcare arrangements between the UK and EU.
To determine if a visa is required, businesses will need to check the list, which includes tourism, meetings, research, training, sales, commercial transactions, and after-sales services.
7. The UK/EU Level Playing Field
The EU and UK have agreed a number of principles intended to provide a 'level playing field' in the way that UK and EU businesses are regulated in order to ensure that no party gains an unfair competitive advantage if it fails to match another’s increasing regulatory standards.
Businesses should note the following:
- Competition law regulation will be based on principles very similar to EU competition law;
- State subsidy regulation will be based on principles very similar to EU state aid law;
- Employment rights will not be reduced from current levels in a way that impacts on trade; and
- Environmental protection will not be reduced from current levels in a way that impacts on trade.
It will take some months or even years for the impacts of Brexit and the TCA to manifest but, suffice to say, there will be change in the commercial world and businesses will need to adapt and adopt new practices in order to avoid or mitigate adverse operational and/or financial consequences.