Without a deal, the UK’s EU membership would have ended on a cliff-edge on 31 December 2020. And, with many expecting a “no-deal Brexit,” the announcement came as welcome news, especially to those businesses with cross-border operations. However, the Agreement does not provide frictionless access for either party to the markets of the other, and the effects of the Agreement will be far reaching.
Whilst this alert does not cover the lengthy Agreement in full (further alerts will follow), we do summarize some important provisions that those doing business in the UK and the EU should be aware of (whether based in the UK/EU or not).
UK-EU Negotiations began back in March 2017 under Theresa May’s tenure as Prime Minister, following the Brexit referendum result on 23 June 2016. Since 2017, withdrawal and the Agreement have been extensively negotiated, with intense and protracted discussions taking place over the four-year period.
The negotiations were eventually concluded under Prime Minister Boris Johnson, May’s successor, on Christmas Eve 2020.
The Agreement consists of three main pillars:
- a Free Trade Agreement;
- a Partnership for citizens’ security; and
- a Horizontal Agreement on Governance.
The Agreement covers trade in goods and in services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, thematic cooperation and participation in Union programmes, and is underpinned by provisions which, according to the European Commission, aim to ensure a level playing field and respect for fundamental rights.
Summary of Some Agreed-Upon Key Points
Trade in Goods
- There will be no tariffs or quotas on goods produced in and moving from the UK to the EU, and vice versa, so long as the goods meet the applicable rules of origin (being the rules which set out how much of a product’s materials must be sourced from a particular country). Only goods “originating” in the UK/EU will benefit from the agreed-upon market access provisions. Exporters will be permitted to self-certify the origin of goods exported, which will be welcome news. However, there will be a collection of new documents and declarations with which exporters must become accustomed.
- The UK Government’s summary of the Agreement confirms that is the first time that the EU has agreed to a zero tariff/zero quota deal with a trading partner.
- The Agreement permits UK exporters to count EU inputs in products as UK inputs, and vice versa.
Technical Barriers to Trade
There will be no future standardization on conformity assessments, meaning traders selling products in both the UK and the EU will need to check conformity twice (in the EU and the UK).
Traders will be permitted to self-certify the conformity of products to EU/UK product standards.
The Agreement sets out specific processes for certain goods and products, including vehicles, chemicals, pharmaceuticals, organic products, and wine.
Customs and Trade Facilitation
From 1 January 2021, imports and exports between the UK and the EU will be subject to new customs checks and formalities. The Agreement aims to reduce this new burden on traders where possible by specifically recognising “trusted trader” (AEO) schemes and statuses. In short, trusted traders will benefit from simplified and streamlined customs processes.
Transport
Air, maritime and road service providers will not be permitted to provide the same range of services from 1 January 2021. In particular:
- UK air carriers will no longer be permitted to run unlimited commercial or cargo flights between two points within the EU. There will also be restrictions on flights to third countries which connect in a member state.
- EU and UK road hauliers will be permitted to transport goods cross-border, but will be limited to the number of further journeys they may make within either the UK or the EU once the goods have been delivered.
- UK operators of road passenger travel (e.g., bus and coach operators) will not be permitted to run regular services from one point within the EU to another within the EU, and vice versa.
Trade in Services
The Agreement includes provisions on:
- Market access and local presence—to ensure that suppliers and investors are not subject to foreign equity caps, restrictions on corporate form, and/or establishment requirements etc.
- National treatment—which prevent the UK from discriminating against EU suppliers/investors, and vice versa.
- “Most favoured nation” clause—should either side agree superior terms with another trading partner in the future, those terms will essentially be imported into the Agreement and will apply to the EU-UK relationship.
Financial Services
The Agreement provides disappointingly limited coverage on financial services and does not appear to provide much by way of scope for access into the single market by UK financial services firms. From 1 January 2021, UK firms will no longer have the passporting rights that have enabled them to sell their services into the EU without further regulatory approval. UK firms seeking access to the EU will be subject to the national requirements of individual member states, or EU equivalence determinations that will provide for a mutual recognition of regulation in a specific area.
Equivalence determinations do not, however, guarantee permanent access rights and cover a narrower scope of activity than currently enjoyed. (For example, activities such as providing investment services to retail investors, accepting deposits and lending are not covered.) There is also the risk that the EU maintains the discretion to withdraw any equivalence determination with 30 days’ notice.
The UK and the EU have also agreed upon a Joint Declaration that sets out their commitment to enhanced cooperation on financial regulatory matters. The Joint Declaration will be facilitated by a Memorandum of Understanding codifying the framework of cooperation, which is due to be finalized by March 2021.
Digital Trade and Data
The Agreement provides for the continued free flow of personal data from the EU to the UK for a period of four months following 1 January 2021, extendable by a further two months if agreed, and so long as the UK maintains its current data protection regulatory framework without change.
Had this “interim provision” not been agreed upon, EU-based businesses would have been restricted from continuing to transfer personal data to recipients located in the UK without a GDPR-approved appropriate safeguard in place (e.g., the Standard Contractual Clauses), unless an adequacy decision had been reached by the European Commission before the withdrawal date (which was unlikely).
Should an adequacy decision not be reached before the end of this six-month period, transfers of EEA personal data to the UK must be identified and protected by an “appropriate safeguard” (e.g., the Standard Contractual Clauses or Binding Corporate Rules), unless a “derogation” applies. The chosen safeguard should be adopted by the end of the period, and privacy notices must be updated (e.g., to include the appropriate safeguard in place).
Furthermore, the Agreement prohibits requirements to store or process data in a certain jurisdiction (“data localisation”), and confirms that neither side will discriminate against electronic signatures or electronic documents on the basis that they are in digital form.
Intellectual Property
Under the Agreement, the UK and the EU have confirmed that they will continue to comply with their existing obligations under the international IP agreements and conventions to which they are already party, e.g., the Rome Convention, the Berne Convention, the WIPO Copyright Treaty and the TRIPS Agreement.
The Agreement further incorporates a number of key concepts from EU laws on intellectual property. The Agreement’s IP provisions do not create any new obligations for businesses, and instead set a minimum standard with which both sides agree to comply after the UK’s withdrawal from the EU.
The Agreement permits both sides to determine whether and under what conditions the exhaustion of intellectual property rights applies.
Level Playing Field
The Agreement contains a number of “level playing field” commitments with which both the UK and the EU agree to comply. These commitments aim to ensure a commonality of standards in a number of key areas, including taxation, labour, environment and climate, and carbon pricing. The UK has also restated its existing commitments to human rights and has agreed to align with principles relating to state aid.
Energy
The UK will no longer have access to the Internal Energy Market, but the Agreement commits both sides to developing and implementing new and efficient trading arrangements, which ensure continuity on interconnectors (gas and electricity lines), by April 2022.
The UK and the EU have also agreed to cooperate on renewable energy, including in the North Sea, and have committed to effective implementation of the Paris Agreement. Per the UK Government summary of the Agreement, this will facilitate the development of hybrid projects that combine interconnectors and offshore windfarms, and opens up the potential for a North Sea grid, which will help realize the region’s potential, enabling renewable energy to continue to power UK homes and businesses in the future.
Nuclear Cooperation Agreement
The UK has agreed to a separate Nuclear Cooperation Agreement (NCA) with the European Atomic Energy Community (Euratom). The NCA demonstrates that the UK and Euratom are committed to civil nuclear cooperation, including on safeguards, safety and security.
Amongst other things, the NCA sets out a comprehensive framework around the transfer of nuclear materials, including procedures for retransfers to third countries.
Dispute Resolution
In the event of a dispute, either side may trigger the Agreement’s dispute resolution provisions. Where triggered, each side will be required to consult with the other, before submitting to independent arbitration, and not the European Court of Justice. If the arbitration panel’s decision is that the Agreement has been breached, the party at fault is required to either rectify the breach, or to agree to provide suitable compensation. If it does neither, then the other party can suspend obligations in response to any imbalance identified.
What else?
Amongst other things, the Agreement also includes provisions on fishing and free movement of peoples, which comes to an end at the end of the Transition Period. For now, EU and UK residents will not require a visa for short-term visits, although this may change, and UK business visitors may travel to the EU for up to 90 days in any 180-day period, also “managers” and “specialists” will be permitted to remain in the EU for a period of up to three years, and trainees for a period of up to one year. Also covered are public procurement; aviation safety; professional qualifications (there will be no automatic mutual recognition of qualifications); and law enforcement and judicial cooperation in criminal matters (the UK will lose automatic access to criminal and policing databases, but should gain access on request, and not be a member of Europol and Eurojust, but will have a presence). The UK will cooperate with the EU on extraditions. In a key change, the European Court of Justice will also no longer be the UK’s top court, save for in Northern Ireland (e.g., for trade rules).
Northern Ireland
The Agreement’s provisions do not apply equally to Northern Ireland in all cases. This is by virtue of the Protocol on Ireland/Northern Ireland, being the agreement which governs Northern Ireland’s relationship with the EU post the UK’s withdrawal.
Notably, and so as to avoid a hard border, customs checks will not be required for trade of goods between Northern Ireland and the Republic of Ireland (which will remain in the EU), and Northern Ireland will remain subject to the EU laws on customs and VAT for such trade. There will be a new customs and regulatory border between Northern Ireland and Great Britain, meaning that customs checks and controls will apply for goods moving from Great Britain to Northern Ireland. Goods moving from Great Britain to Northern Ireland will not be subject to tariffs unless the goods are at risk of moving on to the EU after.
Northern Ireland will also remain aligned with certain EU regulations, including those on agricultural and environmental production. Again, this is to avoid the creation of a hard border between Northern Ireland and the Republic of Ireland. Northern Ireland will also remain within the Internal Energy Market.
What next?
The Agreement has been approved by the UK Parliament and signed by the UK Prime Minister and EU Commission and Council Presidents. The Agreement must now be approved by the European Parliament, which is set to take place in early 2021. (The Agreement will take effect in advance of this approval, but the European Parliament could in theory reject the Agreement, although that would be unlikely.)
Key Takeaways
- Businesses with cross-border import/export interests should consider now how the new rules on trade in goods and customs will impact them, including the different rules applicable to trade between Great Britain and Northern Ireland, and the rules on “origination.”
- Businesses should keep up to date with any divergence in conformity standards between the UK and the EU, as these will no longer be harmonized.
- Non-EU/UK businesses with warehouses in the UK used to distribute products throughout the EU should consider setting up separate distribution centers in the UK and the EU.
- Businesses should review their data handling now and identify flows of personal data from the EU to the UK and beyond. They should act to implement appropriate safeguards and updates to contracts, data transfer agreements and privacy policies.
- UK financial services firms will need to assess the impact of the removal of passporting rights from 1 January 2021 and the extent to which continuing discussions between the UK and the EU provide comfort that they will be able to continue to provide financial services to clients in the EU.