The TCA is a political win for an economic loss; the task is to build on it
The dust has now settled on the frantic efforts by the EU and the UK government to secure a Preferential Trade Agreement (PTA). As business prepares to get back to normal after the holidays, let’s look at the agreement in the cold light of day. We will write separately on services. Does the Trade & Cooperation Agreement (TCA) concluded on Christmas Eve deliver for UK goods exporters?
There are positives. A deal is better than No Deal. The government achieved its political objectives. The Court of Justice of the European Union (CJEU) has no role in governing the TCA. The UK, can, in theory, make its own regulations, even if they will apply only to Great Britain and not, thanks to the Northern Ireland Protocol, to the whole UK. Clearly, though, if negotiators understood the trade-offs, they were ready to sacrifice a portion of the UK’s goods exports on the altar of their definition of sovereignty.
Leaving the Single Market was bound to bring new non-tariff barriers (NTBs) for British goods exporters. However, even if we forget that the original Vote Leave promise was to maintain the “current free trade arrangements” or better, and we make a different comparison, the TCA compares unfavourably with the PTAs that other countries less important to the EU have negotiated with it.
It remains to be seen whether those affected by falling trade volumes and slower post-pandemic recovery will value a nebulous – and potentially only theoretical – concept like autonomy in technical issues like standards and workers’ rights over the very real ability to trade freely. For those who favour free trade, there will, though, be plenty of scope to make our case and build on the TCA.
Non-Tariff barriers (NTBs)
The UK has a deal to avoid tariffs on its EU exports. Tariffs, however, would only have been a minor part of the costs of trading with the EU from outside the European Economic Area (EEA). (The EEA is also known as the Single Market or Common Market). Non-tariff barriers (NTBs) are far more important.
The absence of NTBs – as Margaret Thatcher envisaged in 1988 – has been the primary benefit of the Single Market. The regulatory standards in the UK have been the same as those in France. For a UK firm, selling in France has been substantially the same as selling in the UK. All goods sold in France must meet French standards. But there was no need for proof. If it came from the UK, then it met UK standards. UK standards were French standards, so voilà! – “Bob’s Your Uncle”. There was no need for import/export documentation on food. Chemicals did not need a French agent.
Three of the EFTA countries enjoy the same facilitations through the EEA agreement. Switzerland largely replicates them through its own bilateral treaties with the EU.
For the UK, however, all this will now end. The TCA has avoided tariffs, but NTBs – the primary driver behind the economic losses from leaving the Single Market – are back with a vengeance. As this summary provided by the European Commission sets out, there will be no frictionless trade. British goods will be subject to regulatory checks – including sanitary and phytosanitary (SPS) checks and evaluation of the voluminous new paperwork requirements for agri-food products – at the border. Chemicals firms face new costs such as an Only Representative (OR) or EU legal entity.
To some extent, the return of NTBs was inevitable in leaving the Single Market. We should therefore, goes the argument, compare the TCA to other PTAs. On this comparison, the TCA brings Great Britain more obligations and fewer benefits than countries that are less important to the EU as an export market than the UK gave negotiated in their own PTAs.
The first example is mutual certification. Mutual recognition in the Single Market means that anything produced in one Member State meets the standards of all (the “Cassis de Dijon” principle). However, failing that, in some trade agreements such as EU-Canada there is “mutual certification”, which is shorthand for “mutual recognition of conformity assessments”. Under such a provision, producers in the partner country can get a certificate of compliance with EU standards from a testing house in their own country. The TCA, though, does not contain even this reduced provision. Rather, it has a commitment to consider mutual certification as one option. Obtaining multiple conformity assessments will make compliance costs prohibitive for many British companies.
Nor does it have facilitations for authorisations for chemicals firms that South Korea has in return for incorporating REACH, the EU’s chemical regulation, into Korean law through K-REACH, even though Great Britain will maintain UK-REACH. And these are just a couple of examples.
Border easements: not so easy
There are likely to be problems at the border too once exporters attempt to pick up volumes again. The TCA does not replicate New Zealand’s agreement (Annex 8A) to limit sanitary border checks of Products of Animal Origin (POAO) to 2%. It does not even replicate Canada’s (Annex 5-J) provision to limit them to 10%. While the UK will wait 6 months to apply the panoply of border checks to imports, British exporters will see them appearing on the other side of the Channel very quickly. There is no agreement to limit them to a reasonable percentage of shipments. Those who believe in capricious Gallic whim should be fearful of French customs agents dialling up the friction at will.
The Trade and Customs Facilitation (TCF) section consists of commitments to work together to ease the flow of trade traffic at borders. This is one place where we see scope to build. However, hauliers can expect disruption unless and until that collaboration yields something concrete.
Indeed, as volumes ramp back up after the pre-Christmas stockpiling, normal New Year lull, and end of the period when hauliers were avoiding ports to not be stuck in the first jams, that disruption is already beginning. The UK government has committed to light checks on incoming goods for the first six months. It has also provided guidance on how to get outgoing goods to UK ports. However, getting them from there through the EU border is another process. UK exporters are learning it live.
Less than is customary
It was always clear that the UK government’s objective of regulatory autonomy would result in the loss of some facilitations associated with regulatory alignment. The EFTA countries get these in return for keeping the same rules. However, even on customs matters, the TCA’s provisions compare negatively with those of the EFTA countries, which, like the UK as of New Year’s Day, are not in the EU Customs Union (EUCU). The UK, unlike the EFTA countries, will not be in the Pan-Euro Mediterranean (PEM) Convention on Rules of Origin. Hence, it is likely that a lower percentage of UK goods than EFTA country goods will qualify for tariff-free trade. Neither does the UK have the facilitations at its key arteries Dover, Holyhead, or Larne that Norway and Switzerland have on their long EU land borders.
The rationale for a PTA without regulatory alignment, despite all the frictions that it brings, is regulatory autonomy. This was why the government chose Canada as its precedent and repeated “Canada-style free trade deal” ad nauseum even though it started the negotiation asking for more benefits than Canada has. At least when losing the benefits of having the same regulations, it should be possible to benefit from better – which means less – regulation. But the picture is complicated.
The TCA contains “non-regression” clauses prohibiting a rollback of existing environmental and labour law. However, as domestic authorities will enforce these, they are not as binding as they might have been.
More interesting, though, is the rebalancing mechanism. Each side will have the right to take rebalancing actions if the other’s firms have gained a distortive advantage through different regulation. If this happens repeatedly, they can request a review of the trade agreement – the T in TCA – at the end of 2024. They will review the entire TCA at the end of 2025.
If the UK’s regulations differ significantly from the EU’s, the EU can hit it with tariffs. The EU can also pull out of the trade agreement at the end of 2025 if this is happening too much. The TCA mandates Impact Assessments (IAs) of regulatory changes. In those IAs, the UK will need to consider rebalancing tariffs and the future of the TCA every time it looks to make different laws. Such obligations are not part of the comparatively very light Level Playing Field (LPF) provisions in EU-Canada.
There is always a trade-off between access and autonomy. The UK, though, despite being 2nd only to the US as an export market for the EU, has received a worse trade-off than other countries. How?
As we pointed out on PEM, the EU was unwilling to grant benefits to the UK that it grants to other countries. Those facilitations could have led to a unique deregulatory haven serving the EU market from the EU’s doorstep. The other “neighbourhood” countries that enjoy deep trading relations with the EU all align their regulations with it. Apart from the EFTA-EEA countries, all are on some path to joining the EU. They are incorporating Single Market rules through that process.
Proximity meant that the EU never wanted to treat the UK entirely as it does Canada or Japan. It has no such agreement with any other neighbouring country.
Vive la difference
That the UK secured the autonomy that it did is therefore a political achievement. While its obligations are greater than those that Canada faces, they are still lower than the EU initially wanted. The theoretical and symbolic freedom to differ is there.
Build build build
As it stands, the TCA puts the interests of the UK political class before those of the British economy. Those of us who prefer access over autonomy now face the challenge of making our case to build on the deal to secure better terms. Indeed, we can do that in several ways.
The TCA is full of language that calls for cooperation on technical standards. It creates 19 joint committees on various technical issues. The easements that, for example, New Zealand’s agreement on POAO checks provides, would be a boon. It would be the UK’s sovereign choice to commit to commensurate sanitary standards to secure this.
On other technical issues, it calls for reference to international standards. This potentially sets up a way to work towards the benefits of standardisation without accepting the EU as global standard-setter.
Show us the plan
But the pressure is also now on those who would sacrifice trade for autonomy. Until the 2025 review, the UK will have the theoretical ability to change whatever it wants. Yet the deal, while it provides sovereignty, does not grant impunity. The UK will have to consider in IAs the consequences of its actions on the ability to trade. What’s more, business does not want to diverge on technical standards: having the same rules eases trade with the EU. On “horizontal” regulations – workers’ rights and environmental standards – the PM has promised several times that there will be no rollback.
It is therefore up to those who would sacrifice trade for autonomy to tell us what they want to change.
- Which Single Market regulations do they not like?
- Do the businesses affected even want to get rid of them if this creates new barriers to the EU market?
- Why is getting rid of them worth the new costs that UK exporters are facing?
- Why is it worth the tariffs through which the EU can “rebalance” the deal?
As the end of 2025 looms nearer, what is the potential value of returning to the cliff-edge we have just avoided and facing the spectre of ending up with no deal at all again?
And if they have no answers?
If the UK decides not to exercise its ability to diverge from EU laws and standards, the question of why British producers should continue to suffer costs of this freedom will be come more pertinent. Business and the public will demand answers and look for alternatives.
We’ll pick that up next time. But as you’re on our website, here’s a clue.