The Brexit Deal

Background to Brexit

Brexit is an acronym for Britain Exiting European Union. European Union was formed after the second war for economic integration of European countries. EU was a single market with a common currency in which goods and services were traded seamlessly. However England joined it 1973. Cheap labour from Eastern European countries got easy jobs in England. The adverse impact of this was felt especially after the economic slowdown in 2008. Thus started a slow but growing demand for England to leave EU. In a referendum held in June 2016 those favouring Brexit (Leave) won by 52% to 48 % (Remain). Those favouring or opposing the Brexit came from both sides of the political divide i.e. Labour and Conservative parties. The transition period is to commence from 29 March 2019 and end on 31 December 2020. The ‘Withdrawal Agreement’ outlining the terms of breakup were decided between UK and Europe in November 2018. The British parliament had rejected the idea of leaving the Brexit with a ‘No Deal’ option.

A Brexit deal has been agreed, under the stewardship of British prime minister Boris Johnson and President European Commission Ursula von der Leyan days before a deadline of 30 December 2020. It means that the UK and the EU can continue to trade without extra taxes being put on goods.

Although it’s a trade deal that has been agreed, there will be more changes as the deal evolves. The deal is a compromise on the expectations both of the British and the Europeans. However, this deal falls short of the expectations of the Ireland and Scotland.

The following are the main points of the deal.

Trade in Goods

The agreement ensures that most goods traded between the EU and U.K. won’t face new tariffs or quotas. However, British exporters will face an array of new regulatory hurdles that will make it more costly and burdensome to do business in Europe.

• Market access: U.K. and EU goods will continue to receive tariff-free and quota-free treatment.
• Rules of origin: New rules require the U.K. to self-certify the origin of its exports to the EU. Certain products that contain a high threshold of inputs from outside the EU and U.K. may face new tariffs.
• Health and safety: The EU will require U.K. agri-food exporters to provide health certificates and undergo sanitary and phyto-sanitary controls at border inspection posts.
• Testing and certification: The absence of a mutual recognition agreement means U.K. regulatory bodies won’t be able to certify products for sale in the EU, a potentially big barrier to trade.
• Trade remedies: The EU and U.K. may pursue tariffs and other sanctions according to rules established at the World Trade Organization.

Financial Services

The deal offers little clarity for financial firms. There is no decision on so-called equivalence, which would allow firms to sell their services into the single market from the City of London. The agreement only features standard provisions on financial services, meaning it doesn’t include commitments on market access.

• The U.K. and EU will discuss how to move forward on specific equivalence decisions. The European Commission, which is in charge of allowing access to the EU’s market, said it needs more information from the U.K. and it doesn’t plan to adopt any more equivalence decisions at this point.
• Regulatory cooperation: The two sides made a joint declaration to support enhanced cooperation on financial oversight. They aim to agree on a Memorandum of Understanding by March.

Level Playing Field

The deal commits both sides to upholding their environmental, social, labour and tax transparency standards to make sure they don’t undercut each other. The British say the deal doesn’t include a ratchet mechanism that would force it to stiffen its rule in lockstep with the EU.

• Either side will be able to impose with tariffs if they diverge too much — subject to arbitration.
• European companies unhappy about any British government subsidies to rivals could ask U.K. courts to examine if they are unfair, EU officials said.
• No set limit for how much state help is problematic, this is taken on a “case-by-case” basis.
• The U.K. summary says both sides must be transparent about subsidies; both the EU and the U.K. will need an independent authority to check state subsidies.
• Courts must be able to order repayment of any illegal subsidies.
• A re-balancing mechanism is included.

Break Clauses

The trade deal could be reopened if the two sides cannot resolve a dispute, or want to change the terms of the agreement, according to people familiar with the matter. One of the biggest stumbling blocks in the negotiations was the question of how to settle disputes over trade in future. The mechanism is likely to work like this:

• Either side can hit the other with tariffs in particular areas if they think they are justified under the terms of the agreement.
• If one side thinks the other is being unfair on such tariffs, they can take the issue to an arbitration panel, which is independent and will not be the European Court of Justice
• Individual chapters of the trade agreement can be reopened to renegotiate particular areas where there are disputes.
• A nuclear option will be available to terminate the whole trade deal if it’s not working out, but the security agreement would stay in place.

Fishing Rules

This was one of the most contentious areas after disputes over the control of British fishing grounds came to symbolize the country’s desire to leave the EU.

• U.K. fleets will take 25% of the current EU catch in British waters, worth 146 million pounds ($198 million), phased in over five years. Britain’s opening negotiating position called for an 80% increase, so this represents a significant compromise.
• There is a transition period of five-and-a-half years during which reciprocal access rights to each other’s waters remain unchanged.

Customs

Both sides pledge to limit customs red tape, including through programs for trusted traders known as authorized economic operators (AEOs have benefits including fewer controls).

• “Bespoke” measures including cooperation at “roll-on roll-off” ports such as Dover and Holyhead in Britain are also foreseen, according to the U.K., while the EU refers to specific “facilitation arrangements” for wine, organics, automotive, pharmaceuticals and chemicals.
• The U.K. exit from the European single market on Jan. 1 was going to lead to more customs bureaucracy for both sides regardless of whether they reached a free-trade deal or not. The accord largely commits the EU and Britain to follow international practices aimed at minimizing customs costs for businesses.

Aviation and Trucking

The EU has stopped short of granting automatic recognition to British aerospace designs and products, according to a synopsis published by the U.K. government.

• Such recognition will be confined to minor changes until the EU “gains confidence in the U.K.’s capability for overseeing design certification,” the document says.
• On trucking: Both sides commit to “good and efficient management of visa and border arrangements for road hauliers, in particular across the United Kingdom-Union border” and to “appropriately facilitate the entry and stay of” truckers.

Data Flows

The Brexit deal includes a temporary solution to keep data flowing between the EU and U.K. until the bloc has adopted a data adequacy decision, according to EU officials and a U.K. summary of the agreement.

• This bridge period will last maximum six months, or end as soon as the EU’s data adequacy decision has been finalized, which could happen in early 2021, EU officials said.
• Both sides also committed to upholding high levels of data protection standards, which would include data-adequacy decisions from both sides.

Energy

The U.K. won’t have access to the EU’s internal energy market. This was expected but there will be new arrangements in place by April 2022 to make sure that trading is smooth and efficient on interconnectors — huge power cables that run between the U.K. and Europe.

• The U.K. is a net importer of electricity and gets 8% of its power from the continent. As an island nation, making sure trading across these interconnectors is efficient is important to Britain.
• Making trading smooth will “benefit U.K. consumers and help integrate renewables and other clean technologies onto the grid in line with our domestic commitment to net zero emissions” the U.K. document says.
• The deal includes guarantees on security of energy supply.
• The U.K. is no longer part of the EU’s emissions trading system but both sides agreed to cooperate on carbon pricing in future and “consider linking their respective systems.”
• The U.K.-EU agreement would be suspended if either side breaches their commitments to the 2015 Paris Agreement on climate, according to the summaries.

Professional Services

The deal means that there will no longer be automatic mutual recognition of professional qualifications, according to the EU’s reading of the treaty.

• “Doctors, nurses, dentists, pharmacists, vets, engineers or architects must have their qualifications recognized in each member state they wish to practice in,” the EU said.
• This is a loss for the U.K., which had wanted “comprehensive coverage” to ensure there were no “unnecessary” barriers to regulated services. However, the deal does still provide a “framework” for the recognition of qualifications, according to the U.K.’s summary of the agreement.

Business Travel

There are provisions so U.K. companies and individuals have “legal certainty and administrative clarity they need to continue engaging in business activity and delivering services in the EU when the transition period ends.”

• They agreed on length of stays “that broadly reflect the outcome reached in the EU-Japan Economic Partnership Agreement. This includes the ability for U.K. short-term business visitors to travel to the EU for 90 days in any 180-day period.”
• “The parties have also agreed not to impose work permits on business visitors for establishment purposes.”

Taxation

There are no provisions constraining our domestic tax regime or tax rates, according to the U.K.

• Both sides pledge to “uphold global standards on tax transparency and fighting tax avoidance.”

Agriculture

Trade of farm goods will benefit from the zero-tariff, zero-quota terms between the two sides. However, there will be new requirements at the border, adding costs and hurdles for shippers.

• No tariffs: The lack of levies is “especially important“ for the agriculture and fishing sector, as some meat and dairy products would have faced taxes topping 40% under WTO terms, the EU’s summary said.
• Extra checks: “U.K. agri-food consignments will have to have health certificates and undergo sanitary and phyto-sanitary controls at Member States’ border inspection posts,” the EU says. The U.K. summary notes that both sides will be able to maintain their own sanitary standards going forward.
• Organic products: There will be an equivalence agreement allowing for foods certified organic in one market to be recognized in the other, the U.K. said.

Dispute Settlement

Disputes on the deal must be negotiated between the EU and the U.K. with no role for the EU courts, according to a U.K. reading of the agreement.

• An arbitration panel may rule on some areas and can order one side to resolve the problem or offer compensation.
• Failure to do so allows the other side to “suspend obligations” which could mean blocking some access or cooperation.
• If there’s a “serious economic, societal or environmental difficulty,” either side can react with time-limited measures.

Law Enforcement

The deal will allow cooperation between the U.K. and EU, particularly as part of investigations into terrorism and serious crime, including with the exchange of DNA, fingerprint and airline passenger information.

• There will be cooperation between U.K. and EU law-enforcement agencies, but the U.K. loses membership in Europol and Eurojust.
• Extradition: The U.K. said there will similar cooperation on extraditions to that between the EU and Norway and Iceland, “but with appropriate further safeguards for individuals beyond those in the European Arrest Warrant.”
• Where extradition isn’t possible, there will still be “a path to justice in every case” such as requiring EU countries to refer cases to prosecution.