A never-ending Brexit: UK and EU FTAs draft comparison

The European Union and the United Kingdom have both submitted to each other their owns proposals for a future comprehensive free trade agreement that should regulate the EU-UK bilateral trade in a (foreseen) post-Brexit scenario.

The European Commission transmitted to the UK on 18 March 2020 the ‘Draft text of the Agreement on the New Partnership’, a single, comprehensive and overarching legal agreement proposal that aspires to cover the entire future EU-UK partnership. This draft does not only include sections on the future FTA, but also noteworthy chapters on Security Partnership (including sections on Law enforcement and judicial cooperation in criminal matters, Foreign Policy, Security and Defence, fight against irregular immigration, Health security and Cyber-security) and Institutional and Horizontal Provisions. This draft agreement is intended to latch onto the EU-UK withdrawal agreement, that alongside with the Political Declaration has established the terms and the framework of the UK withdrawal from the EU, in accordance with art.50 TEU.

On the other hand, on 19 May 2020, the UK Government published its own draft on the future bilateral FTA entitled ‘UK-EU Comprehensive Free Trade Agreement’ (CFTA). Key differences between the two drafts are just visible in those areas where the UK seeks only a FTA, on the blueprint of the EU-Japan EPA (EU-Japan Economic Partnership Agreement) and CETA (EU-Canada Comprehensive Economic and Trade Agreement), coupled alongside a series of ancillary agreements, whereas the EU approach is based on the adoption of a single comprehensive agreement.

Several complex differences exist in those areas where the UK proposes measures beyond existing FTAs. The British CFTA proposal, for example, wishes to include in the trade agreement provisions on the access to EU databases and cooperation between data protection authorities, a legal subject far away from the ‘traditional’ issues handled by the European ‘new generation’ bilateral trade agreement grounded on art. 207 TFEU.

The UK and EU did not succeed to reconciliate key differences on major framework issues. These mainly include level playing field provisions, competition and state aid, and the overall governance structure of the CFTA agreement (drafted by the UK government). The differences between the two sides on these framework issues are preventing the negotiating teams from moving onto advanced stages in their discussion, such as consolidating and agreeing final text, even in chapters where there is a high degree of consent. The impasse has halted progress across the breath of the negotiation, and it seems that until these framework issues won’t be resolved, limited further progress will be possible.

Within any normal FTA negotiations these kinds of disagreements would be expected at this stage. However, given the unique nature of this agreement, where returning to the status quo is not an option, and the tight timeframe, there is increased pressure to quickly resolve the impasse. Given the progress made so far, the two drafts can converge on common points, from which a broader consensus could be reached on the main critical issues. As a result, much of the trade issues will have ultimate to be solved through the smoothing of the discrepancies rooted on the draft agreements submitted by each party.

The first main difference between the two drafts concerns the level-playing-field provisions. The EU proposes obligations to uphold common high standards in competition, State aids, environment, climate change, employment and relevant tax matters ‘over time’ with EU standards as a reference point. However, the UK is still firmly opposed to any obligation which would involve giving up control of its own laws to be aligned with the EU regulation or for the EU institutions to have no jurisdiction over the UK. The EU negotiating team has interpreted the UK disapproval as a failure to engage on social and environmental standards and on preventing unfair trade distortions and unjustified competitive advantages including on State aids and tax measures.

On this point, the EU draft agreement contains similar provisions on voluntary regulatory cooperation along the lines of CETA, coherently with the UK intent to shape the future UK-EU partnership on the path of the existing (and even not yet ratified by each MS) free trade agreement between Canada and the EU. Nevertheless, the EU draft text goes far beyond from CETA-inspired provisions, as it contains an entire chapter on ‘Level Playing Field and Sustainability’ (LPFS). Its position as the second chapter, even before the chapter on ‘Goods’, shows its importance in relation to the overall draft agreement. Since the EU is constantly evolving, the question may be raised whether the UK should be in dynamic alignment with the EU. A chapter on a level playing field appears to be absent from CETA, although it contains legal instruments that are related.

The EU is seeking legally binding commitments to uphold high standards over time in the abovementioned thematic areas. The partnership would involve continued application of EU rules (dynamic alignment) on State aid. In the remaining areas, the parties would agree not to regress below the standards applicable at the end of the transition period (non-regression). In addition, the governing bodies would be able to modify the commitments to reflect evolving standards in most areas of level playing field. Commitments would be subject to strong enforcement mechanisms domestically. As a result, from the UK perspective, the EU seems to ‘over-ask’ by positing a level playing field, beyond mere regulatory coordination.

Indeed, the UK draft CFTA does not include chapters on ‘level-playing field’, instead, on the title ‘Regulatory Approaches on Services’, it comprises a chapter on domestic regulation and on mutual recognition of professional qualification. Concerning the latter, the UK’s draft provisions have a higher level of ambition than that given in previous EU FTAs. In fact, art. 13.7 CFTA on ‘Condition for Recognition’ states that public authorities shall permit access to the profession to a service provider who applies for recognition and who has relevant professional qualifications, and the same authority could refuse access to a regulated profession every time when at least one of four conditions are met.

On the contrary, the EU draft agreement on art. SERVIN 5.14 on ‘Professional Qualification’ does not set duties and conditions to the recognition of professional qualifications, as it only encourages professional bodies and authorities to develop and provide joint recommendations on the recognition of professional qualifications to the Partnership Council (i.e. a body involving representatives by both the parties, established in ANNEX INST-1).

Nonetheless, the two texts contain similar provisions on the core of services and investment regulation. Both the parties agreed on providing no limits on market access, reciprocal non-discriminatory national treatment, limitation of the requirements for a national presence and the application of the most favoured nation principle (in order to update the agreement over the time to any new EU FTA which goes beyond the provisions currently agreed).

The UK government also proposed to allow temporary entry of short-term business visitators without the requirement of a work permit, economic needs test or other prior approval procedures. Additionally, the UK agreement proposal supports the temporary stay of professionals for work purposes, including intra-corporate transfers and graduate trainees, through additional detailed provisions. These commitments are shared between the two texts and they are substantial common points to move the negotiations on.

The two parties share common grounds also on the trade of goods’ regulation. Both the European Commission and the UK government agree on tariff free and quota free trade; nonetheless, there remains significant barriers hindering further negotiations. These barriers are the result of the exposure of goods and technical barriers to trade chapters to the EU’s demands on level playing field provisions and alignment on competition and State aid rules.

The UK text contains more comprehensive provisions in relation to prohibiting various types of quotas. EU FTA includes the requirement for a service supplier to “establish a commercial presence” or to be resident in a Party’s territory in order to supply the cross-border service, differently from the UK draft. This is the result of an existing tension between the liberalising trading purposes of the UK and the more protectionist instincts of some of the EU Member States that has long been a feature of intra-EU financial services regulatory negotiations, prior to Brexit.

While many provisions of the UK text on trade in goods are similar to those agreed in the CETA and in the EU-Japan EPA, other provisions go further. In some cases they are even novel suggestions without precedent in existing FTAs, such as the UK proposals on rules of origin (RoO). The latter are provisions usually included in FTAs governing the conditions under which an imported good is recognised to be ‘originated’ from the FTA partner country, thus becoming eligible for preferential trade. While the UK proposals might be good for market access, they will require additional time to be tested and negotiated, given their additional degree of complexity. .

On the other hand, given the short geographical distance between the EU and UK (and, therefore, the resulting low shipping costs), should the UK unilaterally lower its production costs after the transition period (through, for instance, lower labour and environmental standards, and State aids), less restrictive RoO will provide manufacturers with incentives to increase the UK share in the production chain, thus penalising the EU.

As several reports have highlighted, there has been limited progress on the goods chapters, likely due to general-framework issues and the higher degree of complexity of the provisions.

Regarding fisheries, no agreement has been reached so far by the two parties. The Title V of the EU draft agreement and the accompanying annexes present a position that would result in a continuation of fisheries management in the UK, along the principles of the Commons Fisheries Policy (CFP). Existing current quota shares would be upheld, while failure to comply with provisions would allow the other party to impose additional tariffs. On the other hand, the British government seeks almost total exclusion of EU fleets from UK waters, especially in the English Channel. According to the UK draft, future fishing opportunities should be based on the principle of ‘zonal attachment’, in order to fairly mark the respective fishing areas. The granting of access to EU vessels to fish in UK waters would be subject to annual negotiations, in compliance with UK rules and licensing requirements including reporting obligations.

As far as critical disagreements persist, it is highly unlikely to reach an agreement on a common text before the end of the year, when the post-Brexit transition period is due to end. Nonetheless, during the ninth round of negotiations, that took place from 29 September to 2 October 2020, the parties underwent a challenging discussion on 11 negotiating tables, that ended up with some points of convergence, even if several key issues, such as the ones concerning level-playing-field provisions, are not yet cleared up. Some positive new developments have been reached on topics such as aviation safety, social security coordination, and the respect of fundamental rights and individual freedoms, which are pre-conditions for the future police and judicial cooperation in criminal matters, whereas no further improvement are reported on keys areas such as trade in goods, services and investment, civil nuclear cooperation, and participation in Union programmes.