Brexit: a Q&A on the proposed EU/UK trade deal

Put simply, the term "free trade agreement" (or FTA) encompasses any arrangement between two or more countries on any aspect of trade.

There is a tendency to think of trade agreements as being largely concerned with reducing import tariffs i.e. the duties which are levied on different types of goods when they imported into one country from another.  However, trade agreements deal with many other aspects of trade which are equally if not more important in practice, including:

• Non-tariff barriers: removal or reduction of "non-tariff barriers" or NTBs, such as quotas, subsidies and "technical barriers to trade" or TBTs (e.g. regulatory requirements which may differ from one country to another, so that products/services which are legal in country A cannot be sold in country B).
  
  
• Investment: the terms on which a national of one country can invest in another  (these are known as "bilateral investment treaties" or BITs), including the rights and protections afforded to those individuals (e.g. protections against appropriation of property without compensation). For further discussion of BITs in the context Brexit, see this briefing. 
  
  
• Trade facilitation: e.g. measures to reduce border red tape.

Ambitious FTAs may cover all the aspects of trade mentioned in answer to Question 1 above. They may also cover additional issues such as government procurement, intellectual property, digital trade (including data protection), competition and state aid, together with labour and environmental standards. Such agreements (including schedules) are extremely complex and contain a high level of technical detail relating to thousands of different types of products and services; they typically run to over 1000 pages (including schedules).

The main aim for parties negotiating an FTA is usually to achieve a significant improvement on the terms of trading available to them based on their WTO commitments, which effectively act as a "baseline" for discussions (see Brexit Q&A: WTO Rules). For example, in relation to tariffs, WTO members commit not to impose tariffs on other WTO members above a certain level; these are known as WTO "MFN" or "Most Favoured Nation" commitments. An FTA would seek to either remove those tariffs altogether or to reduce them by a significant margin in relation to goods traded between the parties to the FTA.

Subject to some exceptions (e.g. relating to developing countries), free trade agreements between WTO members must cover "substantially all trade" between the parties in goods or services (as the case may be).  This rule is designed to encourage countries to undertake ambitious free trade agreements, as opposed to narrow agreements relating only to particular sectors.  Since both the EU and the UK are WTO members, it will be difficult for them to ignore this rule by concluding a series of narrow sectoral agreements.  If they were to do so, other WTO members could bring proceedings before a WTO Dispute Resolution Panel claiming that they should be given the same preferential treatment as would apply between the EU and the UK under the sectoral agreement.  

That said, there would be nothing to stop the EU and the UK concluding a free trade agreement which provides for a higher level of integration for certain sectors, with others receiving a lower level of preferential treatment – provided that the agreement as whole was comprehensive i.e. it covered substantially all trade in goods and/or services. It is also not uncommon for countries to enter into sectoral agreements relating to issues such as mutual recognition of conformity assessment, which are not covered by the WTO rule referred to above. Examples of EU-negotiated agreements of this type can be found here.

Despite the initial indications that the UK Government was seeking to conclude an ambitious and wide-ranging FTA with the EU, it appears that, in reality, the scope of any trade deal will be more limited than initially thought. 

There are, without doubt, some areas in which both sides have been reasonably ambitious in their proposals (at least by reference to other FTAs).  For example, in relation to tariffs, both the UK and the EU are seeking to establish a free trade area in which there should be no tariffs, fees, charges or quantitative restrictions on trade in goods between the EU and the UK.  This would go further than the EU-Canada FTA and even the tariff aspects of the EU's arrangements with EEA/EFTA countries relating to goods (where trade is mostly tariff-free, but tariffs apply on some agricultural products, for example). However, there are also numerous areas where the proposed FTA is likely to lead to increased friction/barriers on future trade.

As a result, even if a deal can be reached between the UK and EU, the trading relationship will not be as favourable as it has been whilst the UK was still part of the EU Single Market and Customs Union.  This also means that the difference between a deal and no deal is not likely to be as significant as was first anticipated when Brexit negotiations first began.

For more information on the likely impact of Brexit on services, see our briefing: Service providers: getting ready for Brexit.

Parties to free trade agreements typically recognise that movement of people is necessary to facilitate trade, particularly for services businesses – but they are often reluctant to commit to dispensing with requirements imposed by their own domestic immigration regimes.  Based on the draft texts published by the UK and the EU, the proposed EU-UK FTA is unlikely to be an exception to this general rule. This means that business travel between the UK and the EU will probably be subject to additional red tape from 1 January 2021, even if there is a deal.

For more detail on these issues, see this briefing.

The EU is concerned that the UK could pursue a policy of deregulation in certain areas or could decide to subsidise UK businesses, thus enabling them to undercut competitors in the EU. It is therefore seeking so-called "level playing field" commitments from the UK designed to prevent the UK engaging in such tactics. For its part, the UK insists that it does not wish to engage in a "race to the bottom" as regards regulation, but is also insistent that it should be free to regulate as it sees fit after the end of the transition period and should not be required to make changes to keep pace with EU regulation.

As explained in this briefing, we consider that there are potential compromises on level playing field issues such as state aid which could enable a deal to be reached.  However, if both parties stick to their relatively extreme starting positions, it is possible that the negotiations could founder on this issue.

Each trade agreement will normally contain its own specific enforcement mechanism, the extent of which will vary depending on the complexity and scope of the trade agreement. Enforcement can normally only be conducted at state-to-state level.  This contrasts with the current position, where a business faced with barriers to trade which it believes are contrary to EU law can:

• Bring proceedings in national courts based on alleged infringement of EU law by the relevant Member State; and/or
  
  
• Complain to the European Commission, which effectively polices compliance with EU Treaty obligations (with an FTA, there is very unlikely to be any institution charged with policing the agreement to which businesses can complain).

A business faced with trade barriers which it believes are contrary to the provisions of any EU-UK FTA will have most likely have one option only, namely to seek to persuade its government to raise that issue through the dispute resolution mechanism of the agreement (beyond that, it cannot take action on its own behalf).

What do the EU and UK draft FTA texts say?

Both the UK and EU draft texts of the proposed FTA provide for dispute resolution to be referred to a panel of arbitrators, should "consultations" fail to resolve the matter.  Additionally, the UK draft provides for a mediation procedure (but provides no detail), whilst the EU draft provides for the possibility of "accelerated consultations" for certain matters (again, these are not specified, nor is the relevant procedure).  The key substantive difference is that the EU proposed text provides for the arbitration panel to refer issues to the CJEU where a point relating to the interpretation of EU law is involved. This is similar to the dispute resolution mechanism in the EU-Ukraine FTA (click here for more details). 

The short answer to this question is "No," although in a number of cases the UK either has agreed or is in the process of negotiating arrangements to preserve as many of the benefits of existing trade agreements as possible. 

After the end of the transition, the UK stands to lose the benefit of EU trade agreements unless it has negotiated additional roll over arrangements or entirely new FTAs to apply from 1 January 2021.

At the time of updating this Q&A (October 2020), the UK had negotiated a significant number of continuity trade agreements with territories including South Korea, Switzerland, Chile, South Africa and Norway.  The UK has also reached a trade agreement with Japan which is understood to be similar to the recent EU-Japan deal.  However that still leaves a number of territories where talks are ongoing, including Canada, Mexico, Turkey and Singapore.    Even where agreements have been reached, it should also not be assumed that they will necessarily replicate the benefits of existing EU trade agreements in full (for example, in relation to Japan, it is not thought that the UK has succeeded in matching the EU's agreement in all respects, although there are a small number of areas where it claims to have improved upon it). Click here for more detail.

How big is the impact?

The impact of losing the benefit of these trade agreements needs to be kept in perspective. According to the UK Government, the relevant agreements benefit only about 10% of the UK's total trade (note that this figure does not include Japan, but the EU-Japan trade agreement has only recently come into force). That said, for individual businesses that have significant customers in territories where benefits will not be preserved, the lack of a "big picture" impact will not be much comfort.  

One of the benefits of the proposed EU-UK FTA being relatively unambitious is that it should not need to be ratified by all EU Member State Parliaments, which can be an extremely lengthy process.  Ratification by the EU Council of Ministers and the European Parliament should be sufficient.

Concerns that ratification by all Member State Parliaments might be necessary arose partly because of legal challenges and partly because the European Commission gave into political pressure for such a process in relation to the Canada-EU FTA.  However, in a 2017 ruling on the EU-Singapore FTA, the Court of Justice of the European Union (CJEU) ruled that only those provisions concerning indirect foreign investment and investor-state dispute resolution procedures raised issues of so-called "mixed competence" (and therefore required ratification by each individual Member State as well as the EU). The draft FTA texts put forward by the UK and the EU do not appear to include such provisions. This means that the FTA should come within the EU's exclusive competence, which avoids the need for ratification by Member State Parliaments. 

What if the agreement goes beyond a "thin FTA"?

That said, if the eventual deal with the UK were to include areas such as aviation, where there is mixed competence, or social security, where only the Member States have competence, then a longer ratification process might be in prospect (but see further below under "What if there isn't time to ratify before 31 December 2020?").  Similarly, if the FTA forms part of a wider Treaty covering issues such as security and fisheries, it would cease to be within the EU's exclusive competence, necessitating a longer process.

What if there isn't time to ratify before 31 December 2020?

If the agreement cannot be ratified in time for the end of the transition period on 31 December 2020, the EU and the UK could decide to apply the agreement on a provisional basis.  There is precedent for this e.g. the EU-Canada FTA was applied provisionally until it had been ratified by Member State Parliaments. Alternatively, the EU and the UK could potentially agree provisional arrangements that seek to maintain aspects of the status quo, perhaps along the lines suggested at Question 10 below – although these would probably have to be strictly time limited in order to minimise the risk of challenge by other WTO members.

The Brexit transition period is set to end at 11.00pm GMT on 31 December 2020. Setting aside the political challenge of having to negotiate, and ratify, the relationship between the UK and the EU in such a short time frame, the task for UK businesses of being operationally ready for Brexit is immense, particularly given the additional pressures that the coronavirus pandemic has created.

A last-minute deal may leave businesses with very little time in which to put the necessary procedures in place and many commentators have expressed concern over the UK's readiness for the introduction of new border red tape from 1 January 2021 (much of which will be introduced whether or not there is a deal).

The UK Government did not request an extension to the transition period by the deadline specified in the Withdrawal Agreement of 30 June 2020.  Should the UK Government decide that it needs more time to either: (i) finalise the terms of an FTA; (ii) allow sufficient time to implement the terms of the FTA; or (iii) allow sufficient time for businesses and border authorities to adapt to a "no deal" scenario, the options would include the following:

As regards this last option (an implementation period as part of an FTA), one approach would be to include provisions in the new EU-UK trade agreement which preserve some aspects of the status quo, pending full implementation of what has been agreed.  Such provisions could make use of existing models, for example:

• The Irish Protocol from the October 2018 version of the draft Withdrawal Agreement, which effectively keeps the UK within the Single Market for goods and the Customs Union; or
  
  
• The "reverse Ukraine" model: the EU-Ukraine agreement allows Ukraine access to the single market in particular areas once it has aligned its laws with relevant EU legislation. A similar mechanism could be used "in reverse" to provide for "phased" exit by the UK from different aspects of the transition at different times. For more about the Ukraine model, click here. 

However, published descriptions of the formal negotiating "strands" relating to the proposed EU-UK FTA do not refer to discussions of any implementation period.  As a result, businesses should plan on the basis that the benefits of the transition period will cease on 31 December 2020.

Realistically, the best that can be hoped for may be a series of unilateral measures taken by each side with a view to giving business more time to adapt, as proposed by both the EU and the UK in the run-up to the end of the negotiating deadline for the Withdrawal Agreement under Article 50. However, these measures were limited in scope and businesses should not assume that significant transitional easements will be forthcoming.