After eight months of negotiation, and some four and a half years after the referendum vote to leave the EU, the EU-UK Trade and Co-operation Agreement signed on 30 December came into force provisionally at 11 pm (UK time) on 31 December 2020, and the UK finally left the EU customs union and single market.
The Agreement, which is one of a package of agreements reached with the EU, was approved by Parliament in the UK on 30 December but has yet to be ratified by the European Parliament and the Council of the European Union. This is expected to take place early this year.
Whilst the Trade and Co-operation Agreement offers some significant free trade benefits, it represents a profound change for British businesses and their trading arrangements. As a member of the EU customs union and single market, the UK was part of a single customs territory with the same standards, rules and supervision and enforcement systems. As a result, trade between the UK and other EU member states was seamless. This is no longer the case.
Many businesses will have been planning for Brexit for some time, implementing Brexit related reviews and addressing issues identified by, for example, amending standard contract documents, or addressing issues specifically when negotiating bespoke contracts. None of this preparation will have been wasted and if you still have work to do, it is important to act now.
The EU-UK Trade and Co-operation Agreement focusses on the arrangements for trading goods; the Agreement has very little to say about services. The key headline benefit of the Agreement is that goods imported and exported between the UK and the EU will be free from tariffs and quotas. However, it is clear that, at least in the short term, business exporting to, or importing from, the EU face significant change and some important challenges:
• To qualify for the preferential tariff arrangements, goods must comply with the applicable rules of origin set out in the Agreement. These are designed to determine the economic nationality of a product where that product includes materials or components made in more than one country. In some cases, compliance may not be straight forward. Marks & Spencer’s chief executive Steve Rowe, using the example of the company’s Percy Pig sweets which are manufactured in Germany, imported into the UK and then exported to the Irish Republic, France and the Czech Republic, noted that “About a third of the products in our food business is subject to complex rules of origin around componentry and how much has been altered in the UK.”
• Goods traded between the EU and the UK will now be subject to customs formalities and, in particular, all imports into the EU will need to meet EU standards and will be subject to regulatory checks and controls. In practice, as cross border traffic starts to return to normal levels after the Christmas and New Year period, this may mean delays and additional cost. Businesses which rely on the speed of delivery may be particularly vulnerable. Already, there have been a number of press reports of UK exporters having difficulties in getting fresh fish and seafood to EU markets and facing order cancellations as a result.
• The UK and EU are now separate regulatory systems, which means that most businesses serving both the UK and EU markets need to comply with two separate regulatory regimes. There is no mutual recognition of conformity assessments, which means that UK manufacturers will need to have their products assessed for compliance with an EU notified body. However, the Agreement does contain measures designed to simplify compliance requirements and facilitate trade.
• It is important to remember that under the Northern Ireland Protocol, agreed as part of the UK-EU Withdrawal Agreement, Northern Ireland effectively remains part of the EU single market. This means that goods entering Northern Ireland from Great Britain will need to comply with EU rules and will be subject to regulatory checks and controls.
Whether the disruption currently being experienced by some businesses is simply the consequence of teething problems, or symptomatic of more permanent regulatory friction, business will need to adapt quickly, and a clear understanding of responsibilities, both contractual and regulatory, and how they are impacted by the new arrangements will be crucial.