Authors: York-Alexander von Massenbach and Ronja Grönwoldt
Unfortunately, the seventh round of the Brexit negotiations relating to an EU-UK free trade agreement have failed to make any significant progress. The positions of the parties appear to have hardened but there is little time left to reach an agreement: The agreement must be entirely finalised by the end of October at the very latest in order for it to be ratified by parliament in time when the transition period ends on 31 December 2020. The deadline for an extension has definitely passed on 30 June 2020. Therefore, if no agreement can be reached over the next few weeks, the UK will leave the EU at the end of the year without an agreement; the so-called “no-deal Brexit”. The next round of negotiations is due to start on 7 September 2020. However, regardless of whether a free trade agreement is realised, the end of the Brexit transition period on 31 December 2020 will mean numerous changes. This article aims to provide an overview of the current state of negotiations that have been further complicated by the coronavirus pandemic, as well as provide an outlook on the changes that are expected from 1 January 2021 onwards.
The main focus of the Brexit negotiations is a free trade agreement. This would be a far cry from a common internal market and customs union, but would have the advantage of eliminating customs duties and would reduce the negative economic impact compared to a “no-deal” Brexit. However, the conclusion of a free trade agreement is uncertain. Although in principle both parties would like to see an exemption from customs duties, agreements still have to be reached on many other essential points.
Officially, the EU is striving for a comprehensive free trade agreement which should preserve as many of the existing regulations as possible.
The UK, on the other hand, is seeking several agreements: a general free trade agreement, modelled on the EU´s agreements with third countries, and other individual agreements in the areas of fisheries, nuclear cooperation, aviation, energy, judicial cooperation and law enforcement.
In addition to many individual issues, there is still a great deal of disagreement common market rules, fishing rights and the role of the ECJ:
1. Common market rules (“level playing field”)
One of the major points of contention is fair competition. In particular, there is strong disagreement over state aid.
The EU aims to achieve fair market conditions by agreeing to a so-called “level playing field”. To prevent unfair competition to the disadvantage of European businesses and citizens, for example through UK state aid or dumping, the EU is asking to respect the respective safeguards in the areas of state aid, taxation, labour law and environmental protection.
The UK, on the other hand, wants to be bound as little as possible by the rules and standards of the EU. Especially in the area of state aid, the UK is seeking to minimise regulation and has prepared its own subsidy regime. The reasons for insisting on this standpoint are not only economical but also political; British voters were promised independence from EU supervision when they left the EU.
2. Fishing rights
Another more emotionally than economically driven issue in the negotiations are fishing rights. A large part of Europe’s fishing grounds are located in British sovereign territory. The EU’s common fisheries policy distributed catch quotas to share catches and equal access rights for member states. The UK is now calling for the creation of so-called “zonal attachments”: the UK wants to negotiate annual quotas for the distribution of “British” fish with the EU to ensure that priority is given to British fishermen. This would, in particular, affect fishermen from France, Belgium, the Netherlands, Denmark, Germany and Spain, who have so far accounted for a large proportion of the catch quotas. The ministers of the countries affected have firmly rejected the system proposed by the UK to secure their fishing quotas.
3. The roll of the ECJ
Further disagreement lies in the future role of the European Court of Justice (ECJ). The EU wishes to keep the ECJ in place as the final instance for disputes between the EU and the UK. The UK, on the other hand, is seeking to completely remove themselves from the jurisdiction of the ECJ as part of their parliamentary sovereignty. As a compromise an arbitration tribunal, which could be composed of judges from the ECJ and the UK Supreme Court, is currently under negotiation.
4. Other topics that need to be negotiated
Due to the fact that the three beforehand mentioned issues have been primarily discussed, many more far-reaching issues have receded into the background and will not be able to be negotiated any further as there is no more time left. However, we think it is worth mentioning the negotiations that are still underway in the following areas:
The EU is not seeking to regulate financial services under the free trade agreement, but unilaterally terminable equivalence decisions. The UK, on the other hand, is calling for a binding commitment to grant market access in the free trade agreement to safeguard the financial centre in London.
As a result of Brexit, it will no longer be possible to automatically enforce UK court judgments within the EU, which could have a negative effect on the UK as a place of jurisdiction. This issue is still under negotiation, however, at the moment it is uncertain whether an agreement can be reached in this regard. Monetary claims, however, between Germany and the UK still remain enforceable on the basis of a bilateral convention from 1960.
The transposition of the General Data Protection Regulation into UK law has taken place, therefore, these rules will continue to apply after the end of the transition period. However, the EU is concerned that in the future this high level of data protection could be weakened by the UK. Whether an adequacy decision will be issued by the EU Commission is therefore still part of the ongoing negotiations.
Irrespective of whether a free trade agreement is agreed upon, the British withdrawal from the EU will have countless other consequences. Many issues will only become apparent after the withdrawal, but we would nevertheless like to point out the following, already foreseeable changes that are not part of the free trade agreement negotiations:
Brexit will abolish the freedom of establishment and the freedom of movement for workers between the EU and the UK. Aside from negotiations on facilitated entry for business travel, these rights are not part of the negotiations. The new British national regulations on residence and work permits are at an advanced stage. As things currently stand, the draft law on the new points-based immigration law could still be passed in time. This points system is intended to control immigration according to qualifications, however, it does not contain any provisions for the preferential treatment of EU citizens.
Furthermore, Brexit will revoke the freedom to provide services between the EU and the UK. Negotiations are currently only taking place in the financial services sector. And even if agreement is reached in the financial services sector, regulations in the rest of service sectors are currently not being negotiated.
If no free trade agreement between the UK and the EU is reached in time, the UK will leave the EU without a deal. In this case there would no longer be free movement of goods between the EU and the UK.
The EU has already announced that it will not grant more favourable conditions for the import of goods from the UK. The Union Customs Code (UCC) which is already applicable to third countries will apply.
The new British customs tariff (“UK Global Tariff - UKGT”) will apply to goods imported into the UK. The average customs duties of the UKGT are lower than those of the UCC. In addition, customs exemptions are provided for certain goods, especially household goods and foodstuffs. On the other hand, import duties would be imposed on the automotive, agricultural and fishing industries. The customs tariff for importing a car, for example, would be around 10%. The application of import duties would have a significant impact on the German economy, as 7% of its exports go to the UK.
In this regard, we have included a link to the British government’s online tool where you can view what customs rates are to be expected (https://www.check-future-uk-trade-tariffs.service.gov.uk/tariff). This gives companies who are active in the export business the opportunity to calculate the expected customs rates for individual goods.
Ultimately, it will only be possible to make clear statements about the consequences that will occur after the end of the transition period on 31 December 2020 when it is clear whether an agreement will be reached. We would recommend that German companies continue to plan for a “no-deal” Brexit in order to be prepared for this “worst-case scenario” which is becoming more likely. We would be happy to provide you with advice and refer to our Brexit homepage (https://www.luther-lawfirm.com/newsroom/newsletter/detail/der-brexit) and our Brexit brochure for further information.