On 30 December 2020, the European Union and the United Kingdom signed the “EU-UK Trade and Cooperation Agreement” (EU-UK TCA or the Agreement) setting out the terms for their future economic and commercial relations after the UK definitively leaves the EU Single Market and Customs Union on January 1, 2021.
The British Parliament approved the deal by a large majority on the same day. The EU will provisionally apply the Agreement until the European Parliament delivers its approval sometime in February or March.
The Agreement comes after a year of fractious and often acrimonious negotiations. Unsurprisingly, given the context and the premises for the negotiations set down by the UK from the start, the deal is more a divorce agreement than a springboard for closer economic ties.
The latter ambition would be typical in any other trade negotiation: the usual point of trade deals is to facilitate greater fluidity of exchange, and therefore greater economic integration, between two hitherto relatively separate economic spaces.
Yet here, the parties took as a starting point 45 years of deep economic, legal and social integration between the UK and the rest of the EU. Political events in the UK having precipitated its withdrawal from the EU, the EU-UK TCA is the trade equivalent of a separation agreement between an old married couple. The legacy of economic, social and security arrangements going back decades dictate that the “leaving” party cannot make an entirely clean break with its former partner. For its part, the other party seeks to protect its interests, including putting in place mechanisms to manage relations with its former partner going forward. All of these elements are reflected in the terms of this Great Divorce. And, as is typical of divorce, the immediate effect is likely to leave both parties worse off.
1. The Starting Point
The premises of the Great Divorce, as ultimately expressed in the EU-UK TCA, were in effect set down before negotiations even kicked off in January 2020.
First, the EU successfully prefaced any discussions about future relations with a preliminary Withdrawal Agreement, concluded at the end of 2019. Prior to any forward-looking deal, the Withdrawal Agreement resolved three crucial issues: the UK’s existing financial obligations as a longstanding EU Member State; the rights of existing EU residents in the UK and of UK residents in the EU; and conditions for management of the Northern Ireland / Republic of Ireland border. In essence, the Withdrawal Agreement was a preliminary agreement on the terms of separation, pending resolving a full divorce agreement and relations going forward. It was on this basis that the UK formally left the EU on January 31, 2020, even though transitional arrangements ensured that nothing would really change until January 1, 2021.
Second, the UK Government announced from the start that it was seeking no more than a “Canada-style” Free Trade Agreement (FTA) with the EU, rather than any closer relations such as a customs union or any commitment to dynamic regulatory alignment. Moreover, the UK asserted from the start that it would be seeking no extensions to the dramatically compressed one-year negotiation timetable. From the start, the UK therefore was asserting its ideological intention to make a “clean break” from the EU, and to do so as quickly as possible.
Third, the EU for its part had consistently asserted – even from the beginning of the Brexit saga in 2016 – that any deal with the UK would need to respect the basic premises upon which the EU Single Market functioned: the UK could not come out of these negotiations “having its cake and eating it.” Over the course of negotiations in 2020, the EU formulated this as ensuring a “level playing field”, i.e., the UK would not be granted preferential access to the EU Single Market without committing to terms of fair competition.
Finally, in accordance with the terms of the Withdrawal Agreement, the scope of discussions included some areas for future cooperation going beyond the typical provisions of an FTA, including transport, security and judicial recognition arrangements, befitting the deeply intertwined starting position of the negotiating parties.
Overall, these preconditions meant that certain aspects of the deal just agreed were laid down from the start: it would be a relatively thin FTA, rather than an agreement modeled on the arrangements other EU neighbors such as the European Economic Area. This meant, in practice, a dramatic step back from conditions of access previously available to the UK as a member of the EU Single Market. It would contain safeguards against unfair competition between the UK and the EU more robust than those found in typical FTAs. Finally, it would provide for going-forward coordination on a broader range of issues than would be typical in an FTA.
2. What the Deal Does
While negotiations for the EU-UK TCA went down to the wire, the risk of a “no-deal” outcome always was low. The UK economy could not afford the sudden erection of WTO-level tariff barriers between itself and the market with which it trades well over half of its goods, particularly in circumstances of a global pandemic. Moreover, UK Prime Minister Boris Johnson had made successful completion of an FTA with the EU a measuring-stick of his government’s success. He had announced in the late 2019 election campaign that the EU-UK TCA was “over ready,” in essence a “done deal,” before the negotiations even started. The reality of those negotiations was different, but the ultimate outcome not seriously in doubt.
As with any established long-term relationship, part of the terms of “divorce” was to recognize the ongoing economic interdependency of the parties.
- Trade in goods
The EU-UK TCA therefore achieves the baseline requirement of continued tariff-free trade between the two former partners. This will provide some level of continuity to key UK manufacturing sectors, notably automobiles, which are both deeply integrated with EU supply chains and dependent upon the EU as an export market. Having opted for the UK as a trusted platform for assembly and onward sales of automobiles to the EU, Japanese investors signaled that tariff barriers would fundamentally undermine the premise of their investments in the UK. Moreover, political support for Brexit in industrial communities in Northern England dictated that at least this barrier would not be thrown up in early 2021.
The EU-UK TCA also reflects the reality of current deep integration of cross-border supply chains by allowing cross-cumulation of UK and EU inputs in order to meet Rules of Origin requirements. In essence, this means that UK goods imported into the EU will meet requirements for tariff-free entry into the EU where UK and EU inputs when combined meet the designated threshold. What this cannot address is the potential cross-cumulation of inputs between the UK and third-party States to meet Rules of Origins entry requirements into the EU. This will be a matter of negotiation on a case-by-case basis going forward.
- Trade in services
The Agreement largely reproduces WTO rules and does not seek any ambitious level of access in services. The Agreement sets out rules to facilitate cross-border provision of services in certain fields, such as digital services (including as regards data protection rules), public procurement (extending the coverage of the WTO GPA somewhat), business trips and secondments of highly qualified employees. But there is no longer general access to each other’s services markets; for example, financial services providers no longer have access to customers via “passporting.” Professional qualifications are no longer automatically mutually recognized, with few exceptions. Investment protection is reduced to GATS-level (in this regard the Agreement clearly is CETA-minus). In the context of a “divorce,” this outcome was generally predictable, given that higher access in services would only have come in the context of ongoing regulatory alignment, in contradiction of the “divorce.”
- Energy, public policy and other aspects of trade
With respect to energy, there is to be regulatory and technical cooperation, as well as a reconfirmation of the Paris Agreement climate goals. But the UK is no longer part of the EU energy market and emissions trading scheme. The UK has concluded a separate agreement with Euratom on peaceful cooperation on nuclear technology, which has not entered into force. Again, any deeper coordination of UK and EU energy markets would have required dynamic regulatory alignment going-forward. Energy therefore fell away.
- The level playing field
While both parties remain free to shape their public policy in the fields of subsidies, labor and social policy, or climate and environment policy, the agreement provides for “level playing field” principles and mechanisms that aim to prevent a distortion of trade as a result of measures in these fields. In particular, each party may take countermeasures (subject to arbitration) against potentially damaging measures by the other party. We return to this issue later on this note.
- Movement of persons
There is no longer free movement of persons between the EU and the UK. Visitors planning stays of more than 90 days in any 180-day period need a visa; those planning any work other than routine business meetings and conferences need an appropriate visa. There is coordination of some social security benefits. On the first of these issues, the political positions of the UK and the EU were arguably aligned, although coming from different starting-points: for many in the UK, the end of freedom of movement and related immigration concerns was a cornerstone of their support for the Brexit deal. For the EU, UK withdrawal from the responsibilities of EU membership meant it would automatically lose freedom of movement and its attendant benefits to the UK labor market.
- Aviation and road transport
In aviation EU and UK carriers continue to enjoy access to point-to-point traffic between EU and UK airports. But they no longer have access to each other’s aviation markets otherwise, including with respect to domestic flights or flights connecting to other countries. The UK is free to negotiate “fifth freedom traffic rights” (e.g., the London–Brussels–Berlin route for a UK carrier) with the member states of the EU individually. There is cooperation on aviation safety, but the UK no longer participates in the European Aviation Safety Agency.
Likewise, 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. During a transitional period of 5 1⁄2 years, EU fishing quotas in UK waters will gradually be reduced by 25% of their pre-Brexit extent, after which new arrangements are to be negotiated. While fisheries took on symbolic value in the negotiations, and the UK started out by asking for significantly more, in the end their marginal economic value could not outweigh the benefit of closing the broader deal.
- Cooperation and UK participation in EU programs
In the field of security, the UK will no longer participate in the EU security agencies and no longer has access to the Schengen Information System SIS II database. But UK cooperation continues with EUROPOL and Eurojust, and there are mechanisms for the exchange of certain security-relevant data, such as passenger name records, Prüm Convention data (DNA, fingerprints, vehicle registrations) and criminal records.
The UK no longer participates in EU development funding programs. It continues to participate in five technical EU programs:
- Horizon Europe (research)
- Euratom research and training
- Satellite surveillance
One of the programs in which the UK decided to no longer participate is the Erasmus student exchange program. This may reflect a reluctance on the part of the present UK Government to promote interaction between UK students (the majority of whom opposed Brexit) and their fellow Europeans, in favor of promoting a “national” UK identity.
- Institutional provisions and dispute settlement
The agreement establishes a Partnership Council, made up of EU and UK representatives. Operating by mutual consent, it is authorized to administer the agreement, resolve disputes through negotiation and modify certain parts of the agreement if necessary. The Partnership Council also will take this role in supplementing agreements between the EU and the UK, unless agreed otherwise (Articles COMPROV 2 and Inst 1.2).
When disagreements between the parties cannot be resolved through consultation, either party may submit the dispute to an independent arbitration panel. If that panel finds that one party has breached its obligations, the other party may suspend (part of) its own obligations under the agreement. The agreement excludes any role of UK or EU courts, including the European Court of Justice, in dispute settlement between the EU and the UK.
3. What the Deal Does Not Do
What the deal does not address – largely because of preconditions laid down by the UK from the outset – are the non-tariff barriers previously avoided through membership of the Single Market. Thus, notwithstanding the Agreement the UK and EU will face conformity assessments for compliance with each other’s respective regulatory standards; as noted, the deal provides for minimal mutual recognition of qualifications for service suppliers (with some notable exceptions, including lawyers); and free movement of persons, a cornerstone of the EU Single Market, is largely suspended for the UK, subject only to FTA-level rights of Temporary Entry (i.e., entry of specific categories of economic actors for limited periods for the purpose of defined undertakings).
The outcome is a deal that among other things leaves exposed the key services drivers of the UK economy, which to date enjoyed a healthy comparative advantage and corresponding surplus vis-à-vis- the rest of Europe. Deprived of “passporting” rights, UK financial services suppliers going forward will need to rely on EU equivalence determinations, over which they have no formal control, which can be withdrawn at any time, and which in any event fail to address all aspects of financial services. Indeed, it is striking that the Agreement fails even to include a stand-alone chapter on Financial Services.
In other words, as in all divorces, the reality of longstanding economic ties could not be ignored but has been maintained only to a bare-bones level. In the result, key UK economic interests have been sacrificed.
4. A Deal Largely Driven by Non-Economic Considerations
The negotiation outcome reflects the fact that the UK went into these negotiations with red lines that were for the most part ideological, rather than economic.
Simply put, the value of asserting regulatory independence and “sovereignty” vis-à-vis EU institutions outweighed in UK policy terms any benefits that might have flowed from a “softer” EU-UK rupture.
In this sense, the EU-UK TCA achieves the UK’s main objectives: with only a minor exception the deal contains:
- no provision for oversight by the European Court of Justice;
- no obligation to remain in precise dynamic alignment with EU regulatory evolution; and
- full rights for the UK to set its own policy on industrial subsidies.
However, all this is subject to a dispute settlement procedure (see below) which gives the EU considerable discretion to retaliate (via tariffs) if the UK does, in practice, decide significantly to diverge from EU standards.
5. A Deal Recognizing the Depth of Prior Partnership
As in any case of deep and longstanding mutual commitment, the existing UK-EU relationship was characterized not merely by economic interdependency, but by cooperation across a range of crucial cross-continental governance issues, notably relating to security, judicial cooperation and social security coordination.
The EU-UK TCA reflects these circumstances. Unlike typical FTAs, the present deal includes extensive provisions for ongoing cooperation in areas such as security, criminal justice and nuclear research.
This outcome reflects a calculation on both sides that despite the current rupture, continued ongoing collaboration in these key areas was in their mutual interest.
The difference is that this now is presented as a bilateral arrangement between separate political entities, as opposed to EU Member States together seeking effectively to pursue collective EU goals.
6. A Deal Driven by the Need to Manage Ongoing Mistrust
As in any divorce agreement, incorporating by necessity various ongoing economic ties and non-economic responsibilities, the EU-UK TCA also is marked by the EU’s desire to manage and contain its former partner.
The UK is a relatively large market, albeit significantly smaller than that of the EU. It sits close to the Single Market. Some UK politicians “sold” the Brexit deal on the potential benefits of regulatory arbitrage vis-à-vis the EU. Moreover, the UK through Northern Ireland shares a common land border with an EU Member State, the Republic of Ireland: this raises specific security issues linked to the long history of British colonialism and of Irish self-determination.
Together, these factors resulted in a series of exceptional safeguard mechanisms in the Agreement, going far beyond those in any typical FTA.
Indeed, the Irish question was urgent enough to require resolution through the preliminary Withdrawal Agreement. The outcome was in effect to keep Northern Ireland within the EU regulatory and customs space, and to place the “dividing line” between the UK and Ireland down the middle of the Irish Sea. This will pose significant challenges to trade between Northern Ireland and Great Britain going forward, requiring the completion of customs declarations for future trade between these two constituent elements of the United Kingdom. Moreover, the application of EU State Aid disciplines on Northern Ireland could in effect lead to back-door imposition of such rules throughout the United Kingdom. Indeed, while initially hailed by newly elected UK Prime Minister Boris Johnson, within less than the space of a year his Government publicly resiled from the Withdrawal Agreement terms in an Internal Market Bill that purported to ignore agreed conditions for management of the Irish border. Yet given the centrality of respecting the Good Friday Agreement (notably, to maintain open borders along the north-south Irish divide), and in order to secure the main deal with the EU, the UK ultimately abandoned this public repudiation of its recent international commitments.
The UK’s approach to its Withdrawal Agreement commitments likely only stiffened the EU’s resolve to include extraordinary safeguards in the EU-UK TCA, to maintain conditions for fair competition between the two parties.
First, the Agreement recognizes a right to adopt rapid-fire remedial measures where State subsidies adopted by the other Party causes or risks causing a significant negative impact on trade and investment between the Parties. This is disciplined by the need to act on the basis of facts rather than conjecture, and for remedial measures to be governed by necessity and proportionality. Moreover, the appropriateness of such measures will be subject to fast-track independent arbitration.
Second, against the backdrop of undertakings of non-regression from current levels of labor, environmental and other social protections, where significant future divergences between the EU and UK giving rise to material impacts on trade and investment between the Parties, an affected Party may adopt appropriate “rebalancing” measures, again subject to requirements of necessity and proportionality and to the discipline of arbitral adjudication.
Third, contrary to the UK’s initial demands, all aspects of the deal fall under a common institutional framework, including with regard to dispute resolution, with the possibility of cross-sector disciplines being imposed. Indeed, the Agreement assumes that any future additions to the current UK-EU framework will de facto fall under the umbrella of the Agreement.
As in all EU FTAs, the economic provisions of the agreement are moreover subject to an overarching political framework agreement, including the ability unilaterally to suspend benefits in the case of failure to respect basic human rights. This effectively requires the UK to remain a party to the European Convention on Human Rights, an arrangement separate from the EU but whose judgements have often been criticized by some in the UK.
Together, these provisions reflect a far higher degree of sensitivity to the future evolution of State industrial policy of the other Party than typically is found in an FTA, and far more effective provisions for rapid-fire response to case of any future damaging convergence.
As in any divorce agreement, provision for managing future disputes has therefore gained unusual prominence.
Ultimately, the drivers of divorce agreements are largely symbolic and intangible. The EU-UK TCA appears to be no exception in this regard.
Withdrawal from common cause with other EU Member States in theory leaves the UK the ability to cut its own regulatory path, to sign its own economic deals, and to realize a wholly independent national destiny in international trade.
Ultimately, UK producers will decide which of the three great regulatory “blocks” (the EU, the US or China) with which to align. At the end of the day, the UK remains an island immediately off the coast of mainland Europe, whose main market remains the EU Member States. In practice, UK producers are unlikely to abandon the EU regulatory standards that remain the passport into the massive Single Market on their doorstep. Geography is often a bigger determinant of trade than politics. The UK sends over 45% of its exports to the EU and 52% of its imports also come from that same source. Historically, as a Member State, the UK played a strong role in EU regulatory standards development. It remains to be seen what if any influence the UK will retain on EU standard-setting.
The UK also may now seek to negotiate trade agreements with third party States independently of the EU. It will go into such negotiations as a significant market with preferential access into the EU market. But it will no longer be part of a negotiating block representing 30% of the world economy. The history of trade negotiations suggests this will make a difference. Moreover, the era of “low hanging fruit” in international trade negotiations arguably has passed. UK Prime Minister Boris Johnson has announced that the UK will be relaunching trade negotiations with India as of early 2021. This may well be a litmus test for the UK’s comparative future success in international trade negotiations.
As for broader international trade developments, the UK’s ability to strike an independent path and to exercise leadership going forward will likely largely depend on the quality of the policy leadership it brings to the table and the persuasiveness in practice of its example. Having painted its departure from the EU as a victory against Single Market protectionism, to the benefit of “Global Britain,” the ultimate success of the Great Divorce may be measured by the extent to which the UK lives up to its self-declared exceptionalism through its future actions and relative economic performance.