The Brexit Deal – Chances and Challenges

On 24 December 2020, the UK and the EU reached an agreement to govern the new relationship following the UK’s withdrawal from the EU – the Trade and Cooperation Agreement. Though this deal is better than no deal, the EU and the UK must prepare themselves for far-reaching changes with a significant impact on bilateral trade.

1. The Road to a Deal

31 December 2020 marks the end of the transition period that has been running since the United Kingdom formally withdrew from the European Union on 31 January 2020, as agreed between the UK and the EU in the Withdrawal Agreement of 17 October 2019. During the transition period, the UK continued to be treated as an EU Member State. The conclusion of the Trade and Cooperation Agreement (“Agreement”) between the UK and the EU on 24 December 2020 prevented, almost at the last minute, the UK from reverting to the rules of the World Trade Organisation with its rigid tariff schedule from 1 January 2021. So far, the Agreement has only been signed by the British Government and the EU Commission. The European Commission considers that the Agreement can be concluded as a pure EU agreement (Article 217 of the Treaty on the Functioning of the European Union), as it only concerns areas that fall within the exclusive competence or shared competence of the EU. Accordingly, only the unanimous consent of the EU Member States in the Council and the consent of the European Parliament, but not a ratification by the national parliaments, would be required for the ratification of the Agreement. On the UK side, the UK Parliament still has to give its consent. All EU Member States have already declared their provisional approval. On the British side, the vote is expected by the end of 2020. The European Parliament will most likely give its consent by 28 February 2021. Until the formal ratification process has been completed, the Agreement will come into force provisionally.

Yet even though the Agreement will facilitate trade between the EU and the UK in the future, economic operators both in the UK and in the EU will have to fundamentally change their processes from 1 January 2021.

2. Impact on the Trade in Goods

The most important aspect of the Agreement is the establishment of a free trade area between the UK and the EU. There will be zero tariffs and zero quotas on traded goods. Yet, as is the case with all free trade agreements, this only applies if the agreed rules of origin are met. Non-EU/non-UK origin goods will not enjoy this preferential treatment when crossing the borders between the UK and the EU. Economic operators can self-certify the origin of goods and enjoy “full cumulation” (i.e. processing activities also count towards origin and not just the materials used) to lower administrative burden. However, this does not change the fact that economic operators must familiarise themselves with the rules of origin and have the corresponding proof of origin available, as third-country duties would (subsequently) be incurred if they were unable to prove EU/UK origin in the event of an inspection.

In addition, since the question of whether or not customs duties are payable on goods crossing the border depends on the status of origin of the traded goods, customs formalities will apply for the import and export of goods as of 1 January 2021, which will inevitably – at least at first – lead to significant transport delays and supply chain disruptions.

To avoid unnecessary technical barriers to trade, the agreement provides for self-declaration of compliance for low-risk products and for certain products of mutual interest such as wine, organics, automotive, pharmaceuticals and chemicals. Nevertheless, all goods imported from the UK into the EU must continue to meet EU regulatory standards. Agricultural products from the UK will have to have health certificates and undergo sanitary and phytosanitary controls.

3. Impact on Other Areas and Open Issues

In addition to the trade in goods, the Agreement also addresses a wide range of other areas, while leaving certain issues out and making them the subject of future negotiations. In the following, some further provisions of the Agreement will be presented, whereby the list of issues is only exemplary and by no means exhaustive.

What the Agreement leaves out completely is the provision of financial services. On 1 January 2021, the UK financial sector will therefore lose its automatic access to the EU. It was only agreed that a “Memorandum of Understanding” on future cooperation would be sought.

Regarding road transport, UK operators will lose their right to conduct unlimited cross-trade in the EU and up to three cabotage operations within the territory of an EU Member State. Yet, the Agreement provides for full transit rights across each other’s territories as well as for unlimited point-to-point access for hauliers carrying cargo to and from any point in the other party’s territory, provided they meet the agreed standards of safety and working conditions. Hauliers will also be able to carry out two additional transport operations in the territory of the other party (including a maximum of one cabotage operation for UK hauliers), limiting the risk of having to return without cargo.

The free movement of persons will also cease to apply. UK citizens will no longer have the freedom to work, establish a business or live in the EU and vice versa; instead visas will be needed for long-term stays. Furthermore, there will also no longer be an automatic recognition of professional qualifications.

The Agreement does not apply to the overseas countries and territories of the EU and to UK’s Overseas Territories. The Agreement does also not apply to Gibraltar and leaves its future relationship with the EU open. It is intended that UK, Gibraltar and Spain will continue negotiations to seek a solution.

As the Withdrawal Agreement, including the Protocol on Ireland and Northern Ireland, will remain in place and be implemented on 1 January 2021, Northern Ireland will remain part of the UK customs territory, but all relevant EU internal market rules and the Union Customs Code will continue to apply in Northern Ireland. The necessary controls and customs formalities will take place at the entry points to the island of Ireland in Northern Ireland, rather than on the land border between Northern Ireland and the Republic of Ireland.