After months of brinkmanship and political deadlock, the UK and the EU now have a trade agreement, which went into effect on December 31. With his customary bombast, UK Prime Minister Boris Johnson called it “a deal which will, if anything, allow our companies and our exporters to do even more business with our European friends”. However, the terse statement from the European Commission referring to “new barriers to trade in goods and services, and to cross-border mobility and exchanges that do not exist today – in both directions” seems closer to the truth.
The 1,246-page EU-UK Trade and Cooperation Agreement (TCA), signed after nine formal rounds of negotiations and a subsequent flurry of increasingly tense daily contacts from October onwards, includes provisions which build upon World Trade Organization (WTO) principles, facilitate trade, and address non-tariff barriers such as import and export licensing restrictions.
Rules of origin
In a first for the EU, this deal includes 100% tariff liberalisation, whereby no tariffs or quotas will be imposed upon the movement of goods between the two sides. So far so good, but this is provided that the rules of origin are met. Herein, says Andrew Hood, partner at law firm Fieldfisher and former general counsel to Number 10, lies the first issue.
“It’s a pretty simple form of rules of origin compared to other agreements, but actually, it’s not particularly generous. It has bilateral accumulation, but it doesn’t have triangulation,” he tells GTR. “Therefore, unlike, say, the UK-Japan agreement, it means that you can’t bring in inputs from all over the world and have your good be accepted as a UK product even if the EU has trade agreements with those countries.”
With fully 47% of all British exports going to the EU, according to the ifo Center for International Economics, many UK exporters will have to get to grips with the rules around origin for the first time.
“Customs declarations and rules of origin paperwork are two key areas where UK firms doing business in the EU will now face fresh obligations,” says James Sibley, head of international affairs at the Federation of Small Businesses (FSB). “Manufacturers who import ingredients and parts from around the world need to be particularly alert to the new changes. Checking the guidance and speaking to as many people as you can – those in supply chains, hauliers, clients – is really important.”
To give them time to understand the often complex requirements, UK exporters have been given a year’s grace period on certifying the origin of components that make up their manufactured goods. But even with the one-year easement, proving that goods qualify under the deal will be an arduous task, and failure to adhere to the documentation requirements will mean that customs duties will be payable.
“In practical terms for companies, while they won’t have the tariff line on most of their budgets now, they do have a lot of other things to think about, one of which being paperwork, which shouldn’t be underestimated because it can be hugely complicated, even for the most basic of products,” says Hood.
It isn’t just rules of origin paperwork that exporters will have to contend with. Those who sell dual-use goods, which include a range of small and seemingly innocuous items from machine tools to chlorine, will now have to get export licences for trade between the UK and the EU, as the EU Dual-Use Regulation no longer applies in England, Scotland and Wales. Exporting without a required licence is a strict liability criminal offence, with even inadvertent breaches punished, and businesses that fudge their way through run the risk of falling foul of the more serious offence of deliberate evasion of export controls.
Making things fair
Another potential area for friction is around keeping as level a playing field as possible. In a briefing to the European Parliament in April last year, Issam Hallak, policy analyst in international trade and finance, said: “The geographical distance between the EU and UK is short and the resulting shipping costs low. In this context, should the UK unilaterally lower its production costs after the transition period – through, for instance, lower labour and environmental standards, and state aid – less restrictive rules of origin will provide manufacturers with incentives to increase the UK share in the production chain, penalising the EU.”
To address this, the EU had pushed for so-called “dynamic alignment” during the negotiations, which was met with fierce opposition from London. In the final deal, there is instead a provision for both sides to take countermeasures – including the imposition of tariffs – if they believe they are being damaged by the other party in subsidy policy, labour and social policy, or climate and environment policy.
“What is quite striking in the agreement is how fragile the framework around tariff-free access is at the moment. There are a number of levers that both sides can pull to enact trade remedies if they think the other side are not adhering to the level playing field,” Suren Thiru, head of economics at the British Chambers of Commerce, tells GTR. “One thing that’s notable is the re-balancing mechanism, which means that either side will be able to impose tariffs if they diverge too much. What we will have to look at over the next couple of years is how that fragility in the agreement impacts things like trade and investment.”
There is, however, some certainty around both environmental standards and employment rights, with the agreement including reciprocal commitments not to reduce levels of protection or fail to enforce standards in a manner that has an effect on trade.
Another potential non-tariff barrier that has been addressed – albeit only in a handful of areas – is around certification. For medicinal products, for example, there is mutual recognition of Good Manufacturing Practice (GMP) inspections and certificates, meaning that manufacturing facilities do not need to undergo separate UK and EU inspections. In the area of organic exports, too, there is an agreement that products that are certified as organic in one market will be recognised as such in the other.
However, not all certifications have made the cut. The familiar Conformité Européenne (CE) kitemark will only be accepted in the UK market until the end of this year, when it will be superseded by the new UK Conformity Assessed (UKCA) mark. This will be valid for Great Britain only, while for Northern Ireland the CE mark, and in some cases the new UKNI mark, will be needed – which means that companies selling products into the EU market and a British market will now need to go through two certification processes.
Red tape for businesses
Although the TCA is better than no deal at all, the increased red tape burden means that the post-Brexit trade landscape between the UK and the EU will be a decidedly rocky one – and many businesses will be facing additional costs that they may be unprepared for.
“From speaking to our members, the picture is mixed,” says the British Chambers of Commerce’s Thiru. “Large businesses are more prepared than smaller businesses.” He adds that the impact of the pandemic has also weighed on Brexit preparations, both in terms of reduced cash flows as well as on human capacity.
“Whatever your politics and whatever your views are, leaving the EU makes trade more difficult,” adds Fieldfisher’s Hood. “There is nothing in the deal that makes life easier for businesses. It makes life slightly less difficult than it might have been without a deal.”
Despite Prime Minister Johnson’s insistence that the TCA will drive “mutual respect and mutual recognition and free trade”, what is clear is that neither does it replicate what existed when the UK was an EU member, nor are there any new advantages to UK exporters seeking to do business with the EU. The deal, therefore, is better than nothing, but not by much.