The Brexit trade deal agreed to by the European Union and United Kingdom on Dec. 24 details how all business between the two markets will be transacted from now on.
While the 1,246-page document contains regulatory alignment in several key areas, the majority of businesses that trade between the European Union and United Kingdom are likely to see changes—more paperwork and form-filling at a minimum—and some industry sectors are set to fare worse than others. Agriculture, food, and manufacturing are among those that will feel the changes most immediately.
The deal also stipulates some of its provisions are only in place as temporary measures to enable business to continue seamlessly—the rules around data transfers being one.
Below are some of the key points of the deal:
Trade in goods
The agreement guarantees there will be tariff-free, quota-free access for most goods and products traded between the United Kingdom and European Union. However, this is accompanied by multiple new customs procedures and formalities aimed at U.K.-based exporters, including new “rules of origin” requirements that are likely to make it more costly and burdensome to do business in Europe.
Under these rules, U.K. firms will need to certify the origin of their exports to qualify for tariff-free access to the European Union. While EU parts will count as “local content,” there will be limits on what proportion of goods can be assembled from parts made from other overseas countries to qualify for tariff-free access, which will inevitably impact manufacturers.
Another potential big barrier to trade is the absence of a mutual recognition agreement, which means U.K. regulatory bodies cannot certify products for sale in the European Union (and vice versa).
Data flows between the European Union and United Kingdom can continue as before for a maximum of six months, or until the European Union agrees to a data adequacy decision (expected to be finalized in early 2021). As such, personal data shipped to the United Kingdom during this interim period “shall not be considered as transfer to a third country” under EU law.
If the United Kingdom applies a new transfer tool to ship data to a third country during the interim period, it should inform the European Union “as far as is reasonably possible.”
The deal offers little clarity for financial firms. The agreement only features standard provisions on financial services, meaning it does not include commitments on market access. There is also no decision on so-called “equivalence,” which would allow firms to sell their services into the single market from London (but would leave the European Commission in the driver’s seat over whether the way they did this complied with EU rules).
U.K. professional qualifications are also no longer recognized.
The United Kingdom and European Union have committed to discuss how to move forward on specific equivalence decisions in future. Separately, both sides have made a joint declaration to support enhanced cooperation on financial oversight and aim to agree on a memorandum of understanding by March for further regulatory cooperation.
The ‘level playing field’
The issue of whether the United Kingdom would try to attract foreign direct investment by undercutting EU rules was one of the most contentious parts of the Brexit negotiations.
As part of the agreement, both sides have committed to upholding their environmental, social, employment, and tax transparency standards to make sure they do not provide an unfair advantage.
Both sides will also face tougher scrutiny on state aid and be prevented from giving an unlimited state guarantee to cover a company’s debts or liabilities. In line with EU law, the United Kingdom will not be able to rescue a failing firm without a restructuring plan, and any aid to failing banks will have to be the minimum necessary to help it wind down. As part of the agreement, the United Kingdom and European Union will have to disclose the subsidies they award.
However, the United Kingdom is not bound to always be in alignment with the European Union, nor does the agreement include any ratchet clauses that would force the former to make its rules more onerous to keep in step with the latter. Instead, the deal includes a “rebalancing” mechanism that will allow either side to retaliate with tariffs if they diverge too much, though “such measures shall be restricted with respect to their scope and duration to what is strictly necessary and proportionate in order to remedy the situation,” according to the agreement.
Any retaliatory measures will also be subject to arbitration by an independent panel—not the European Court of Justice.
More generally, disputes on any aspect of the deal must be negotiated between the European Union and the United Kingdom directly—with no role for EU courts.
An arbitration panel may rule on some areas and can order one side to resolve the problem or offer compensation. Failure to do so allows the other side to “suspend obligations,” which could mean blocking access or cooperation in some areas. “Time-limited” measures can also be used if either side believes the dispute involves (an unspecified) “serious economic, societal or environmental difficulty.”
Some experts warn there are virtually no restraints to prevent the two sides using trade remedies against each other if they feel the other party is not living up to its end of the bargain.