Editorial Comment: “The Trade and Cooperation Agreement with the UK: A Hard Brexit in Sheep’s Clothing”

What a Christmas gift for legal academics and practitioners, given to us on Christmas Eve by the European Commission and the British Government: the Trade and Cooperation Agreement between the European Union and the United Kingdom (TCA). The British Prime Minister Boris Johnson called the deal a ‘cakeist Treaty’ as in ‘having your cake and eating it’. Commission President Ursula von der Leyen used less pathos and proclaimed: ‘It’s time to leave Brexit behind. Our future is made in Europe.’ The Agreement was largely hailed as a last-minute deal that avoided the cliff-edge of a so-called ‘hard Brexit’: a withdrawal of the United Kingdom from the realm of EU law without any form of fall-back. Whilst the formula of ‘no tariffs, zero quotas’ that was used to describe the essence of the TCA has some merit, the Agreement as such must be qualified as a ‘hard Brexit in disguise’. Let’s have a closer look.

The core of the Agreement is about trade in goods. It embodies the Agreement’s main achievement: the prohibition of custom duties on imports and exports and charges having equivalent effect as well as the prohibition of quantitative restrictions (‘zero tariff, zero quota’). Whilst it is certainly true that the EU has not concluded a ‘zero tariff, zero quota’ trade agreement with any other third country, the market access as provided for by the TCA falls significantly short compared to that of the EU internal market for three reasons: first, ‘zero tariff, zero quota’ only applies to goods ‘originating in the other Party’, which is determined by rules of origin and extensive annexes to the TCA. For example, cars only benefit from the tariff-free access to the EU if they do not contain more than 45% of materials coming either from the UK or the EU; raw cane sugar from the Caribbean, imported and then refined in the UK, won’t qualify for it. Preferential tariff treatment must be claimed and requires proof of origin. Second, measures having equivalent effect as quantitative restrictions (or regulatory barriers) might remain largely unaffected by the TCA. Technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures as they are adopted by one party continue to apply to goods from the other party when they intend to enter the market of the former. Product standards remain, in principle, fully applicable to the goods of the other party. Narrow exceptions for specific goods (such as medicinal products or motor vehicles) to this general rule are set out in annexes to the TCA. Third, mutual recognition of conformity assessments is not foreseen by the TCA. This means that, for example, a check made by a UK institution as to whether a UK good is in conformity with EU standards is not sufficient for crossing the trade border. Goods might be subject to dual controls.

These shortcomings do not only lead to disruptions within EU-UK trade in goods but also to British-Northern Irish trade in goods. With the end of the transition period envisaged by the Withdrawal Agreement, the Protocol on Ireland/Northern Ireland, which is annexed to that Agreement, starts to apply. According to the Protocol, Northern Ireland remains part of the EU internal market for goods so that the border between Northern Ireland and the Republic of Ireland can remain open. Moreover, the UK remains subject to the EU State Aid rules and control with regard to measures that affect trade between Northern Ireland and the EU. The implications of these disruptions to inner British trade on the unity of the United Kingdom will be one of the most interesting developments to observe in the near future. By December 2025, the Northern Ireland Assembly will have to vote on the continued application of the Protocol on Ireland/Northern Ireland.

The chapter on trade in services is weak. It largely reproduces the UK’s and the EU’s WTO commitments. It allows for free access to the market of the other, subject however to lengthy negative lists attached to the TCA in annexes that set out non-conforming measures within each EU Member State that may continue to apply. Market access under the TCA is therefore of rather limited value for UK service providers in practical terms.  Moreover and most importantly, the passport for UK financial services is not covered by the TCA. It is ultimately for the EU to open up its market by means of unilateral equivalence decisions, which have not yet been made.

The refusal of the EU to grant the UK what it actually needs the most, unfettered access to the financial services’ market, is closely related to the lack of trust that the EU has in the UK and its intentions to enter into harmful competition when it comes to protection standards in the fields of fair competition, taxation, labour and social protection, environmental and climate protection, trade and sustainable development – the so-called level-playing field. The unfortunate episode of the draft UK Internal Market Bill that provided for a legal possibility to breach international commitments only amplified the EU’s concerns, which can also be seen in the inclusion of an explicit good faith provision in the final text of the Agreement. The result is an interesting and innovative chapter on ensuring a level-playing field between the UK and the EU.

Level-playing field refers to a situation in which different companies can all compete fairly with each other because no rules or standards in either jurisdiction confers a competitive advantage to businesses operating in that jurisdiction. With regard to the relationship between the EU and the UK, the level-playing field was defined by a broad range of common rules that are part of the EU legal order. In contrast to the usual situation in trade cooperation, in which the level-playing field can only be described by reference to general principles, in the case of the EU and the UK, future divergences from the previous common rules can impact the level-playing field between both trading partners. In order to manage these risks, several issues need to be addressed. Firstly, the previous common level of protection should be secured. This can be done by either defining a common level protection in the agreement’s text or by non-regression clauses that prohibit any lowering of previous common standards. Secondly, any such rules must be enforced, which can be achieved by special enforcement obligations and mechanisms within the domestic legal orders of the trading partners or by special procedures and remedies envisaged in the trade agreement. Thirdly and finally, future increases in levels of protection that might lead to divergences should be addressed because otherwise it might discourage policymakers from raising protection standards.

The TCA addresses all three issues with regard to the six areas deemed relevant to ensuring a level-playing field. In the area of labour and social standards as well as environmental and climate protection, the TCA provides for an obligation to establish effective domestic enforcement mechanisms that allow citizens to make sure that protection standards are upheld. Standards in both areas are secured by a comprehensive non-regression clause, the violation of which can be addressed by the trading partners via a special panel procedure that ultimately allows for the use of trade remedies such as raising tariffs. The bar for effectively making use of these remedies is, however, quite high. The TCA requires that any weakening or lowering of levels of protection needs to affect trade or investment between the Parties. In a similar vein, in the field of subsidies, remedial measures may only be adopted where there is the presence or the serious risk of a significant negative effect on trade or investment between the Parties. A similar limitation can be found with regard to the new ‘rebalancing mechanism’ that addresses future divergences once a party increases its levels of protection. For the adoption of rebalancing measures there must be material impacts on trade or investment between the parties arising as a result of significant divergences in the areas of subsidies, social and labour standards, and environmental and climate protection (fn 1). The meaning and the scope of this limiting criterion of ‘trade relevance’ will be decisive for the future effectiveness of the level-playing field rules in the TCA. In relation to a similar provision foreseen by the Dominican Republic-Central America FTA (DR-CAFTA), an arbitration panel in a case on labour standards involving the US and Guatemala ruled against the US claiming that Guatemala violated a level-playing field rule because it ‘failed to prove that there were cost savings from specific labour rights violations and that the savings were of sufficient scale to confer a material competitive advantage in trade between the parties’. This decision set a high bar and a high standard of proof for level-playing field violations. Having in mind that there is no ‘stare decisis’ in trade arbitration, one may wonder whether the future EU-UK expert panels or the arbitration tribunal in the case of disputes relating to subsidies and rebalancing measures will follow the example of the DR-CAFTA arbitration panel. Since the economic relationship between the EU and the UK is more balanced than the one between the US and Guatemala, and since the EU and the UK legal system were once part of the same legal order, it is not ruled out that a lower impact than the one established by the DR-CAFTA arbitration panel is applicable in the EU-UK relations. In any event, the very purpose of the ’trade relevance’ is to prevent the use of trade remedies in any deviation of the UK’s legislation from the policy choices made or to be made by the EU.

That means that the burden of proof will become decisive in future disputes between the EU and the UK. In this context, it is remarkable to observe the careful drafting of the procedures. When it comes to violations of non-regression clauses, measures may only be adopted after a panel report that has to be requested by the party that considers a violation of these clauses so that the burden of proof for these violations is on this party. In the field of subsidies and with regard to rebalancing measures, the party that claims violations of the TCA subsidy rules or the presence of significant divergences may ultimately adopt unilaterally trade remedies against which the party affected by the remedies has to initiate proceedings on the legality of the trade remedies, which means that this party has to prove that there is no Treaty-relevant violation of the rules. Given that the text of these provisions was probably carefully drafted by their alleged main user, the European Commission, against the background of the draft UK Internal Market Bill, this distribution of the burden of proof and the possibilities of certain pathways towards unilateral remedial measures hints at a pre-paved path that the EU intends to make use of in order to implement its high-level policy goal to ensure a fair level-playing field between the EU and the UK. It remains interesting to observe how these procedures will play out in the future.

Remarkably, the rules regarding the areas of competition law other than subsidy control, taxation and trade and sustainable development do not provide for non-regression clauses or remedial measures and do not take part in the rebalancing mechanism. A ‘Singapore-on-Thames’ with low taxes therefore remains a viable option, which explains why passporting rights for financial services are not included in the TCA but left to the unilateral political discretion of the European Commission to adopt a so-called equivalence decision for certain financial service activities.

Besides the trade agreement, the TCA also contains chapters on judicial and police cooperation in criminal matters (note that cooperation in civil matters is not covered), the coordination of social security benefits, and the participation of the UK in Union programmes. In the latter context it is particularly deplorable that the UK decided to leave the Erasmus+ programme (with the Irish Government stepping in and extending the Irish Erasmus+ scheme to Northern Irish citizens), whilst remaining in the Horizon Europe programme. This decision is once more an expression of the UK Government’s goals to make the most radical possible end it can to any sort of facilitated free movement of persons between the continent and the UK. It also represents the spirit that guided the negotiations, which was more about preventing specific content in the agreement than about constructing something together. The EU succeeded in securing the EU internal market’s integrity and the UK succeeded in putting an end to migration and in excluding the EU institutions, and in particular the CJEU, from any sort of influence on the interpretation and application of rules within the UK. The outcome is therefore a hard Brexit in disguise.

With the provisional application of the TCA the relationship between the EU and the UK entered into a new phase. The best news about the TCA is that any agreement is better than a no-deal scenario. Yet, it can only be understood as a starting point for setting up an ambitious trade relationship.  The Agreement acknowledges this by allowing the Partnership Council to amend parts of it, and by providing for a general clause calling for a review of the entire Agreement and supplementing agreements five years after its entry into force. The disruptions in trade between the UK and the EU but also between Northern Ireland and Great Britain are already visible. The danger of a strongly diverging UK is however in reality, and regardless of the terms of the agreement, rather small. UK businesses will – irrespective of policy choices made in London – likely align with EU standards simply because they want to keep the access to the EU internal market. The ‘Brussels Effect’ that Anu Bradford described so well will make the UK soon realise that formally ‘taking back control’ is not the same as ‘having control’ in a globalised world.

As for the EU, Commission President von der Leyen was certainly right to put Brexit into perspective: It’s done. So, let’s focus on how we, the EU, can tackle our problems together. The agenda is long: managing the pandemic together, the economic recovery and setting up a meaningful recovery instrument, the rule-of-law crisis, getting a grip on the digitalisation of the economy, the implementation of the Green New Deal and the cross-cutting greening of policy fields and the revamping of the constitutional  framework for these challenges with the Conference on the Future of Europe. In some of these challenges the UK’s political wisdom and market-liberal perspective will be missed, in others the absence of its usual veto player-role will make processes smoother. The divorce deal with the UK is only a footnote compared to these challenges. Brexit and the TCA will not be an incentive for other Member States to follow the path taken by the UK. It will rather be a showcase for the advantages of multilateral cooperation over solo national attempts in addressing the challenges of the 21st century.

The Editorial Board of EU Law Live

(fn 1) It’s worth mentioning that the Panel of Experts report of 25 January 2021 on violations of the Trade and Sustainability chapter in the EU-Korea Free Trade Agreement (KOREU) discussed the DR-CAFTA Arbitral Panel final report (paragraphs 90-95) and concluded differently on ‘trade relevance’ without being relevant to the outcome of the panel report. It qualified KOREU not to have the ‘same contextual setting of sustainable development’ as DR-CAFTA and considered national measures implementing fundamental labour principles and rights to be ‘inherently related to trade’ (paragraph 95). This looks like a more attenuated approach to understanding ‘trade relevance’.