What’s in the deal?

Author: Sophie Andrews-McCarroll

Living with Brexit: The Road Ahead is a new series of blogs by the IIEA’s UK Group and additional contributors which will examine the outcome of the deal and its implications for Ireland - including for trade, business, agriculture, fisheries, transport, and  the Northern Ireland Protocol. It will also examine the political implications of the deal, for the future of Anglo-Irish relations and the future of the UK after Brexit.

This first blog in the series, by Sophie Andrews-McCarroll, IIEA Researcher, provides an overview of the key points of the agreement, including the resolutions to the final sticking points in the negotiations. It also flags some issues which are not fully resolved in the Agreement, and which may present complications in the future.

After 11 months of intense negotiation, UK and EU negotiators concluded their discussions on Christmas Eve, 2020. The agreement reached by the negotiators has been described as a ‘thin trade deal’, covering trade in goods, with limited services coverage and additional provisions for cooperation in criminal law and policing and social security cooperation.

While no agreement could replicate the full gamut of EU-UK cooperation, the December 2020 deal aims to mitigate Brexit’s potential for disruption, and provide a baseline for future cooperation. Significantly for Ireland, it provides an important backdrop to the implementation of the Ireland/Northern Ireland Protocol, which will be dealt with in a later blog, as well as attempting to ensure a minimal level of disruption in flows of goods between the islands and to and from the EU.

The deal was hard won. Negotiations were slow to make progress, were often acrimonious, and almost throughout were hindered by the outbreak of the COVID-19 pandemic, which limited face-to-face meetings and briefly side-lined the Chief Negotiators of both sides. Multiple deadlines passed without agreement, as three key sticking points - the level playing field, fisheries and governance - seemed likely to lead to a break-down of dialogue at several stages in the negotiations.

The key sticking points – where did we land?

A Level Playing Field for Free and Fair Competition

One of the most significant points of contention in the negotiations was EU’s requirement that the UK would adhere to a regulatory ‘level playing field’ and follow rules for fair competition between both parties. This includes provisions on State aid, competition policy and labour and environmental provisions, ensuring that one side could not undercut the other by lowering standards and benefitting from cheaper labour or less onerous environmental standards.

The resulting compromise contains theoretical scope for either side to unilaterally impose tariffs if they deem the other to have breached their commitments. Notably, the measures in this chapter of the agreement are exempt from the dispute settlement mechanism that applies to the rest of the agreement, and are instead each accompanied by a separate dispute resolution mechanism.

A novel ‘rebalancing’ approach was adopted, allowing each party to unilaterally temporarily apply tariffs if, based on “reliable evidence”, it deems there to have been significant divergences from the level playing field commitments which have a material impact on trade between the parties. If the measures are considered to be disproportionate, the Parties may go before an arbitration tribunal. If the arbitration tribunal agrees that the rebalancing was disproportionate, the other side can take countermeasures.

Broadly, the level playing field chapter contains:

• Provisions committing both parties to maintaining competition law which adequately tackles anti-competitive business practices.
• A requirement for both sides to establish an independent body to manage controls over State aid.
• Clauses which provide for the suspension of normal subsidy controls in national or global emergencies - as seen in the COVID-19 policy response.
• Limited non-regression obligations on labour and environmental policies.

Of these, State aid proved one of the most difficult negotiation points, as despite rarely breaching State aid rules when a Member State, the UK objected to the EU having influence over its future subsidy policy. The EU meanwhile maintained that without sufficient subsidy control, it would be unfair for the UK to benefit from tariff-free access to the Single Market. The result is a complex compromise. The State aid principles in the agreement largely reflect current EU State aid rules, but with much greater flexibility of implementation and enforcement, with oversight provided by an independent body.

The question of ‘non-regression’ on labour and environmental policies is also notable, and was also a contentious one during the negotiations, in light of the UK’s stated desire to achieve full regulatory sovereignty. What has been agreed means that if a drop in standards below existing levels by either side affects trade between the two parties it may be considered in breach of the agreement.

However, reflecting the sensitivities surrounding this issue, there is a much higher threshold for retaliatory measures than would normally be seen in an agreement like this, as there must first be a proven material impact on trade between the two parties. Parties are also expected to resolve disputes initially through a consultation process. If this is ineffective, a panel of experts is to be convened, to report on whether or not there has been a breach. There may also be provision for retaliatory trade measures to be implemented, in the form of temporary trade sanctions, followed by a fast-track arbitration process

Fisheries

The compromise on fisheries represented the strong mutual interest on both sides to reach agreement with continued access to waters on some basis - not least for the purposes of striking an agreement.

This issue and its implications for Ireland will be explored in detail in a later blog, but in short, the deal means the UK has regained control of its Exclusive Economic Zone (EEZ), 200 nautical miles around its coastline, meaning it can claim exclusive rights to fishing in this area. However, it has also agreed to a five-and-a-half-year transition period with the EU on access to its waters. Over this time, the fishing quotas (total allowable catch of EU and UK vessels in the other’s waters) will be gradually reduced for EU vessels and increased for UK vessels.  After this, negotiations on fishing quotas will take place on an annual basis, as had been the UK’s negotiating position throughout the negotiations.

There are also provisions for dispute settlement whereby if one side believes there to have been a breach, it may suspend access to its waters pending an urgent ruling on the matter by an arbitration tribunal.

What else was agreed?

There is a significant amount of content in the agreement’s 1300 pages, including provisions for social services, energy, air and road transport, and other matters of import, but a number of key issues stand out for Ireland in particular, and merit some further discussion in this short analysis.

Trade in Goods

One of the touted advantages of the deal has been continued tariff-free trade in goods between both parties. The deal largely accomplishes this, though as Irish consumers have already discovered in the two weeks since the deal came into effect, there have been a number of early complications with supply chains and classifications of goods which have led to bare shelves in some UK supermarket chains operating in Ireland.

The arrangements here are complex, but in short, the deal:

• Removes all tariffs on goods.
• Include ‘rules of origin’ provisions which must be complied with in order to benefit from tariff-free access to the other’s market.
• Includes flexibility on rules of origin documentation for the first 12 months of the agreement.
• Outlines detailed rules on Sanitary and Phytosanitary (SPS) standards referring in particular to animal and plant health. This allows parties to introduce conditions deemed necessary to protect animal welfare and food safety.
• Includes a chapter aimed at tackling technical barriers to trade arising from technical regulations aimed at labelling requirements or conformity assessment procedures on imports.
• Introduces an authorised economic operator scheme to minimise disruptions caused to vulnerable supply chains by customs checks.

However, the deal does not remove what are known as ‘non-tariff barriers’ to trade (NTFs). The full range of NTFs which a business may encounter varies and is hard to capture, but it might include such issues as customs-related charges and paperwork, or rules of origin or SPS compliance checks. All of these have the potential to slow down the transit of goods, or make them more costly to import/export. It is still possible that the resulting costs to business, which may be as yet unknown and significant, could be passed on to the consumer. It is also notable that the deal does not prevent new SPS checks on imports from 2021, presenting another likely non-tariff barrier to trade in the likely event that further divergences between the EU and UK occur.

Trade in Services

The agreement provides only limited coverage of services. This deficit was understood and expected well in advance of the deal being agreed, but it is still striking to note how bare the provisions here are. In large part, this was necessitated by the fact that the free  movement of people between the EU and UK, which is so interlinked with the provision of services, has ended, and the deal does not contain mutual recognition of professional qualifications (though it is possible that an agreement on this will be negotiated at a later date).

The text is also limited when it comes to provisions for financial services – a remarkable situation when one considers that the UK is a powerhouse in this field, and was often seen as the EU’s financial capital. There are no passporting rights for UK banks in the agreement nor is there regulatory provision for the same. Both sides have committed to working on a memorandum of understanding on equivalence by March 2021 to allow each to recognise the others’ rules and allow financial services trade to continue. While this outcome is less than optimal for the UK, it is a clear opportunity for other EU Member States, such as Ireland, who may wish to entice business away from London.

Law enforcement and judicial cooperation in criminal matters

Though there are agreements in place as part of the deal to cover future cooperation in this area, they are clearly less optimal than what already exists, and the issues at stake are critical for both sides. This area will be closely monitored in the coming months and years.

The deal facilitates cooperation between the EU and UK in a number of key policy areas, including the exchange of DNA profiles, fingerprint data and vehicle registration across the EU. There is also agreement on the continued sharing of Passenger Name Records (PNR) between the EU and UK. However, it is notable that the UK will no longer have access to Schengen Information System (SIS II), the EU IT system which shares information on individuals and objects of interest to law enforcement across Member States. This is quite a significant departure. UK police have said that this system was accessed by them a remarkable 539 million times in 2017 alone, and both the police forces and security agencies have said that losing access to the system will be a major setback in efforts to combat criminality, terrorism, and people trafficking.

There are further agreements for continued cooperation with Europol and Eurojust, including arrangements on how the EU and UK should respond to arrest warrants. This does not go as far as participation in the European Arrest Warrant, but is nonetheless more significant than provisions under international law, which would otherwise have applied.

Conclusion

Reaching agreement in the space of just nine months of formal negotiations was an astonishing achievement, in particular given the demanding circumstances. Given the tight time frame between the conclusion of negotiations and the end of the transition period by which it must be implemented, a very limited window was left for scrutiny or for adjustment for businesses. Early in 2021, it still remains to be seen what longer-term implications this will have for flow of trade, though there are early signs that the lack of time to prepare has impacted on business.

The UK will have some important choices to make in the years to come. The Ireland/Northern Ireland Protocol in particular will have an indirect effect in shaping UK future alignment with the EU. Northern Ireland remains more closely linked to EU regulation than the rest of the UK, so the UK may be faced with a series of micro decisions to align with similar conditions as Northern Ireland and minimise disruption to trade in its internal market, or to diverge from Northern Ireland and accept the reality of a regulatory border. This is just one aspect of the relationship which creates an incentive for the UK to continue to try to influence EU policies.

Either way, future cooperation and coordination will certainly be easier on the basis of a deal than no-deal, and the relationship will continue to develop on this foundation in the coming months and years. For now, the realities of the deal must be quickly communicated to businesses and consumers, to aid the transition to this first iteration of the new relationship.

A note on Ratification

The deal has been provisionally implemented, pending ratification by both parties. The UK Parliament already voted to ratify the agreement on Wednesday, 30 December with 521 votes in favour and 73 votes against, MPs from the Alliance Party, SDLP and the DUP were among those who opposed the deal.

The EU must also ratify the deal. In a Council decision, it has been provisionally implemented, which gives time for the European Parliament to scrutinise it. This will happen in the coming weeks.