Brexit deal is little and late
Trade and Cooperation Agreement
A week before the end of the transition period, the European Union (EU) and the United Kingdom (UK) finally reached an agreement on a Trade and Cooperation agreement. This agreement prevents a fallback to the conditions of the World Trade Organization (WTO) as of 1 January 2021. But that certainly does not mean that there will be a soft landing. We will summarise the most important points of attention.
No tariffs and quotas
Let's start with the good news. The basis of the agreement is free trade without tariffs and quotas if the goods have their origin in the EU or UK. Given the scale of trade between the EU and the UK, this is a good starting point and better than the horror scenario of falling back on WTO terms. Nevertheless, the relationship between the EU and the UK will change drastically from January 1st. Trade barriers will be emerging and increasing differences in regulations are expected to occur in the coming years.
UK, a third country for the EU
Due to Brexit, the UK will be considered a third country by the EU from 1 January 2021. This means that the UK is no longer part of the EU internal market and customs union. Non-tariff obstacles arise such as additional controls at import and export and additional administrative obligations. As a result, the transport of goods between the EU and the UK will take longer and lead to higher costs. Companies must ask themselves whether the current supply chain is still optimal due to the changes and additional costs. Fortunately, the Trade and Cooperation Agreement does offer a limited degree of simplification, for example by recognizing each other's 'authorized economic operator' regimes and by accepting bilateral cumulation rules for customs purposes. This eases the suffering in certain sectors, but additional costs will certainly arise. In addition, the rules of origin are very important because a significant part of the trade between the UK and EU will be confronted with tariffs because of these rules.
Fight against unfair competition
Another aspect is the fight against unfair competition. The EU has consistently emphasized the importance of a level playing field if the UK wants to enter the EU market without tariffs and quotas. This is especially important to combat unfair competition when the British can now set their own rules. Or perhaps achieve lower standards than the EU, or not move along with the EU raising its standards. The level playing field is guaranteed in the agreement because the parties can apply trade tariffs to certain goods as a sanction in the event of unfair competition.
There is also a clear danger. The laws and regulations of the EU and the UK will diverge in many ways in the coming years. Due to the mechanism of imposing tariffs in case of a violation of the level playing field provisions, the risk of trading tariffs will always be hanging over the market. It is therefore important for companies to be aware of the risks in this area.
Consequences for financial services
Due to the very limited time for the negotiations and the desire of the UK to determine as much of its own regulations as possible, the Trade and Cooperation Agreement has a very limited scope. That makes it important to look at what is not or hardly addressed in this so-called 'thin' agreement. The emphasis in the agreement is on the flow of goods between the EU and the UK and not so much on the very extensive trade in services between the two. The most eye-catching sector is financial services. Brexit will give 'The City' less access to the EU market than before. We expect a decision on 'equivalence' - which will allow a certain degree of access - in the coming months. The same goes for the decision on the adequacy of UK data protection. These are both unilateral decisions that are not negotiated and have therefore been excluded from the agreement. But both will be very important for business.
End of free movement of people
As of 1 January 2021, the UK's exit from the EU will also mean the end of free movement of people between the EU and the UK. In the withdrawal agreement, many matters about, for example, the rights of EU nationals who now reside in the UK and vice versa were already addressed. From the 1st of January, a new regime with immigration rules will for example apply to UK nationals who want to settle or work in the EU. That is going to be fundamentally different in comparison to the situation before January 1st. Another notable point in the agreement is that on many levels the foreign qualifications for certain professions will no longer automatically be recognised.
Finally, it is now also clear that the British are no longer participating in the European student program Erasmus. Overall, the work of staff across borders becomes more difficult due to many additional obligations.
Continuous dialogue about loose ends
Although the relief about reaching an agreement is deservedly great, the Trade and Cooperation Agreement remains a very extensive document in which many matters have not (yet) been settled. There are still a lot of loose ends and in the coming years there will doubtlessly be a continuous dialogue on sensitive issues such as fisheries and the level playing field. Nevertheless, there is now an agreement that provides clarity after four and a half years of uncertainty. Our Brexit experts are happy to help you gain insight into the impact of this agreement on your company and assist with taking the right actions.