On Dec. 24, 2020, leaders of the European Union and the United Kingdom announced that they had agreed on a trade deal called the Trade and Cooperation Agreement (TCA). The deal came more than four years after the 2016 Brexit referendum and eleven months after the U.K.’s legal departure from the EU, but only one week before the Dec. 31, 2020 deadline for reaching an accord.
The ambassadors of the 27 EU member states voted unanimously to approve the agreement on Dec. 28, and the U.K. Parliament voted to approved it on Dec. 30. These actions permit the agreement to take effect provisionally on Jan. 1, 2021, until the EU Parliament ratifies it later in January 2021.
- Tariff- and quota-free trade in goods will continue but other non-tariff barriers will apply and increase trading costs.
- Professional service providers, such as doctors and lawyers, won’t have their credentials automatically recognized by each side anymore.
- The deal does not address financial services regulation.
- Many provisions need further negotiation, interpretation, and clarification.
Trade in goods
The deal provides that trade between the U.K. and EU will not be subject to tariffs or quotas. Goods must originate in the EU or U.K. in order to benefit from the free trade regime. However, regulatory red-tape and border controls will affect the more than $590 billion in annual trade in goods between the U.K. and EU member states. These other non-tariff barriers are estimated to increase costs for British businesses by approximately £17 billion (about $23 billion) and for EU businesses by about £14 billion each year.
The parties did not reach agreement on recognizing each other’s standards for products. This could mean that some products must obtain two certifications, i.e. under both the exporting and the importing regimes. These requirements will entail additional costs and cause border delays that will be challenging for agriculture and animal products as well as for industries with just-in-time supply chains.
However, the TCA at least avoids the worst-case scenario, a no-deal Brexit. If no deal had been reached by midnight on Dec. 31, 2020, then all EU-U.K. trade would have suddenly been subject to the rules and tariffs of the World Trade Organization (WTO). This would have significantly increased the cost of agricultural products, cars, and other manufactured goods.
Level Playing Field
The EU insisted upon the adoption of common standards for goods and services to ensure a level playing field for fair and open competition and to prevent businesses in one market from undercutting businesses in the other. EU standards involve regulations concerning workers’ rights, social and environmental protection, taxation, and state business subsidies. The parties are not obligated to adopt identical rules, and the U.K. does not have to follow EU law. However, the U.K.’s standards must protect fair competition.
The agreement also requires that there be only reasonable levels of state aid or government subsidies for business, a rule that needs clarification. The parties need not adopt identical rules and can employ different internal processes for evaluating what constitutes unfair competition.
Fishing rights have been an enormous point of contention between the EU and U.K. Despite accounting for only 0.1% of U.K. gross domestic product (GDP), the fishing industry is very politically important to the U.K., and is similarly important in the EU. This means the issue held a place of importance in negotiations far larger than one might expect. The deal reduced EU fishing rights in U.K. waters by 25%, and will implement the reduction over a five-and-a-half year transition period with an allowance for annual negotiations thereafter. The fishing transition period is far shorter than the 14 years originally proposed by the EU, but longer than the three years that U.K. fishermen wanted. The reduction in the EU fish quota is much smaller than the original 60% reduction that the U.K. proposed.
Professional and Financial Services
The agreement fails to address issues critical to the U.K. services sector, which accounts for more than 80% of the U.K.’s GDP. The deal contains no commitments on market access for services. Professional service providers will not be able to automatically cross between EU nations and the U.K., because the deal does not require each jurisdiction to recognize the other’s professional qualifications. Similarly, U.K.-based financial services also will immediately lose their “passporting” rights which enabled them to conduct business throughout the EU without registering in each country individually.
The EU will have to determine if financial services organizations that are qualified and registered to operate under U.K. regulations are operating under equivalent standards and regulations to those in the EU. If the EU determines the standards are not equivalent, the financial service organizations will have to establish, qualify, and register separate entities on the continent. The process for doing this has not yet been established, and has been left to further discussion. The European Commission reported that it had no plans to issue more such decisions at the time that the agreement was signed. Prime Minister Boris Johnson has acknowledged the deal’s omissions with respect to financial services.
Although British regulators have indicated that they will allow some EU organizations to extend their U.K. operations for a temporary period, the EU has not issued similar assurances. The parties have stated that they support cooperation on financial oversight and are working to issue a memorandum of understanding on such regulation by March 2021.
Already many U.K. banks, investment firms, and insurers have established companies in major EU cities and transferred employees and capital to the continent and the Republic of Ireland, which continues to be an EU member.
Impact on Individuals
For individuals, the loss of automatic professional access and free movement throughout the EU and U.K. will complicate their professional licensing, add visa requirements for some, impose new obligations for travel and relocation between the U.K. and EU member states, and affect many ordinary experiences and activities. U.K. passport holders will no longer have access to the EU entry lines at EU airports and borders. Visas will be required for long-term stays abroad, generally for periods in excess of six or 12 months. Immigration rules will apply to individuals moving between the EU and U.K., although EU individuals currently residing in the U.K., and vice versa, will likely be allowed a transition period for obtaining necessary authorizations and papers.
The agreement incorporates a system to resolve disputes via arbitration involving officials from both sides. If the arbitration panel finds that one side violated the agreement, then the other side needs to compensate the complaining party. If they refuse or fail to do so, the complaining party is permitted to undertake unilateral “rebalancing” steps, such as imposing tariffs. The tariffs don’t have to be imposed on the same kind of goods or service that caused the breach of the agreement. For example, a breach by the U.K. with respect to French wine might be addressed by restricting U.K. access to the French legal services markets.
Notably, the European Court of Justice (ECJ) will have no role in dispute resolutions except with regards to North Ireland, which is a special case. Arbitration rather than resolution by the ECJ was a key demand of U.K. negotiators.
Reaction to the Deal
Generally, reaction to the deal’s announcement indicated relief but not enthusiasm. Prime Minister Johnson has touted the deal as strengthening U.K. independence, but commentators generally consider the U.K. to have been forced to make more concessions than the EU, which notably demonstrated impressive unity throughout the negotiations. It is estimated that in the long run the U.K. will experience a 4% loss in GDP compared to if it had remained in the EU. Although the impact on the EU is expected to be less severe, the deal imposes new, non-tariff burdens on the EU as well.
While leaders of EU members generally were satisfied with the agreement, reaction within the U.K. was less enthusiastic. Labour Party Leader Sir Keir Starmer called the agreement a “thin deal,” but said that he will support it because it is better than no deal. Scotland’s First Minister, Nicola Sturgeon noted that Brexit happened “against Scotland’s will” and that the exit and trade deal strengthened the call for an independent Scotland. The Scottish Parliament voted 92-30 against the trade deal, however multiple pieces of Brexit-related legislation have gone ahead against the wishes of the Scottish parliament so this is unlikely to block the deal.
The leaders of Northern Ireland, which had voted against leaving the EU, were pleased to avoid a no-deal Brexit. The deal preserves the open border between Northern Ireland and the Republic of Ireland and effectively creates a customs “border” between Northern Ireland and the U.K. in the Irish Sea. On Twitter, Taoiseach Micheál Martin of the Irish Republic expressed gratitude to the EU negotiators for reaching an accord and preserving the open border with Northern Ireland, but noted regret at the U.K. exit from the EU.