Brexit: The Trade and Cooperation Agreement

The post-Brexit Trade and Cooperation Agreement (TCA) between the UK and the EU is a welcome development in the ongoing relationship between the UK and EU. However, it is a long, complex and apparently misunderstood agreement. As the TCA comes into force on 1 January 2021, unless the EU and UK agree a short "grace period", we will all have a lot of reading and analysis to do in a very short space of time. This note gives an overview of the TCA placing it in the context of the wider arrangements between the UK and EU.

As background, the UK left the EU on 31 January 2020, but via the Withdrawal Agreement with the EU continued to be subject to and benefit from substantially all obligations and rights of an EU Member State for a transition period, which ends at 11:00pm on 31 December 2020. From that time, the UK and EU will be two distinct regulatory, legal and customs territories. Without the TCA, the UK and EU would be trading on so-called “WTO terms”. While many countries trade with the EU on these terms, the difference between being part of the EU Single Market and Customs Union on one day, and trading on WTO terms the next, would have been dramatic. Therefore, fortunately, the TCA sits somewhere between the Single Market and the WTO treatment.

Not just about traditional trade

Turning to the TCA, the first, and probably most important point, is that the TCA does not just relate to trade: it covers a whole host of subjects that cover relations between the UK and EU. These are vital and fundamental issues that up to this point we have taken for granted as members of the Single Market. As we leave the Single Market, and lose the benefit of the transition period/implementation period, and will be treated as a third country by the EU, we will all have to acquaint ourselves with these new provisions.

In addition to the “traditional” trade issues of trade in goods, trade in services and investment, the TCA has detailed new provisions on:

What about trade in services and investment?

While the TCA was reported to cover only trade in goods, the UK and EU have also entered into “thin” agreements on certain services and investment that appear to go beyond so-called WTO treatment, but in no way replicate the Single Market treatment UK service providers were used to. There are specific provisions on Express Delivery Services, Telecommunications Services, Financial Services, International Maritime Services, and Legal Services and specific Chapters on Aviation and Road Transport. However, the fundamental point in services is that with the loss of Single Market treatment, most services that are provided into the EU by UK service providers will face 27 Member State rules, as opposed to one Single Market requirement, and many professional qualifications will no longer be automatically recognised by the other party, complicating cross-border service provision.

Rules of origin and other customs and regulatory procedures

In relation to trade in goods, the TCA creates a “free trade area” that has to comply with Article XXIV of the General Agreement on Tariffs and Trade (GATT) in order to permit “free trade”. This requirement has at least two important consequences. First, it is widely considered that the TCA provides “tariff free, and quota free access to the EU”. This is partly right, but mostly wrong. Goods going from the UK to the EU, and goods coming from the EU to the UK only receive duty-free access if they “originate” in respectively the UK or EU. To work out whether goods do in fact “originate”, one needs to look at the detailed rules of origin buried in the Annexes of the TCA (the "Annexes"). If goods do not meet these Rules of Origin ("ROO"), import duties will have to be paid, some of which are significant. Looking at the Annexes, the ROO are strict and many UK and EU goods will not meet them, or at least won’t meet them on 1^st January 2021. Therefore, we can expect a significant amount of change in supply chains for goods to avoid tariffs. Second, whether or not the goods meet the ROO, importers and exporters will have to comply with new customs and regulatory procedures that simply were not there when the UK was a member of the EU. The cost and effort associated with these procedures will be significant, and it is highly likely that traders will need some time to come to terms with the new rules.

Cross Cutting and other redressive measures

As widely trailed in the media, the TCA contains complicated provisions under which a party may take counterbalancing redressive measures if the regulatory environment in the other causes certain distortions. These redressive measures may be “cross-cutting” i.e., not necessarily placing restrictions on the goods or services of the industries benefitting from the distortions. This is a new system, and we have little or no insight into how it will work or how and how frequently redressive measures might be taken. However, it has injected an unwelcome degree of uncertainty into the relationship, and business will need to be vigilant over these measures. 

New UK laws will be required

Both the UK and EU will need to pass measures to implement the TCA. The UK has already passed many new primary and secondary measures anticipating a “no deal “ Brexit. There will be a new corpus of UK law which will regulate all aspects of UK business now the transition period has expired. It is important for businesses to understand this, and to understand how these new measures might affect business, and what can be done if those measures are not fit for purpose.

On Thursday 7 January 2021, we are hosting our 'Brexit: Week One' webinar. Where we will discuss:

1. The Trade Deal - what is it (and what is is not).

2. Financial services - deal or no deal and what comes next? 

3. Some more jurisdictional specific transitional reliefs.

We will continue to share content and hold webinars on the detail of the TCA and guidance on its implementation. To sign-up to receive updates please click here