Trade and institutional frameworks after Brexit

Chris Smith

Introduction

The debate covers three in a series of five reports by the House of Lords European Union Committee examining the UK’s future relationship with the EU. A report covering food, the environment, energy and health was debated on 15 November 2021 (the Library’s briefing for the debate can be found here). The fifth report, on security cooperation, has not yet been debated.

Report on the institutional framework

Committee’s findings

On 22 March 2021, the committee published a report on the institutional frameworks governing the UK-EU relationship after Brexit. These frameworks are set out in the trade and cooperation agreement (TCA) agreed by the EU and UK on 24 December 2020.

The committee said the governance structures put in place by the TCA are complex because they sit alongside those previously agreed under the October 2019 withdrawal agreement. The committee said this “is likely to prove challenging” and that there was a case for simplifying and rationalising the arrangements.

The TCA took effect in practice on 31 December 2020. However, the committee said that in some respects the text was provisional or incomplete. These included 15 declarations that set out the parties’ intentions to address unresolved questions. The committee called this a “formidable list of ‘unfinished business’”.

The committee’s other conclusions and recommendations included that:

It was concerned by the absence of regular ministerial and head of government-level dialogue, to provide “strategic direction” to the UK-EU relationship.
The TCA set up a “varied” series of dispute resolution mechanisms, some of which were “novel, untested, and without clear precedents”. These include ‘rebalancing’, which allows one party to take action—such as imposing tariffs—if its standards become significantly higher in areas such as state subsidies, the labour market or climate policy.
It regretted that the “bulk” of dispute settlement mechanisms were state-to-state, providing little scope for businesses and individuals to resolve issues; for example, in extradition cases.
It expressed concern for the position of overseas territories; for example, calling for the “swift” conclusion of a treaty on the position of Gibraltar and for the UK to defend the interests of the Falkland Islands in light of tariffs and quotas on its fishing trade.
The Government should ensure that the provisions in the TCA for a ‘parliamentary partnership assembly’ are implemented.
There should be effective scrutiny of the arrangements in the UK, including regular appearances at select committees by the relevant minister (currently Lord Frost).
At the time of its report, the committee was also concerned that the EU had not ratified the TCA. However, it subsequently did so on 27 April 2021.

Government’s response

The Government’s response was published on 20 July 2021. It said:

The Government agreed that the institutions established are complex and that “significant attention and resource will be needed to make the structures work effectively”. It was confident there would be sufficient political engagement at “all levels”, including ministerial.
The minister overseeing the relationship would attend select committee hearings “as appropriate”.
Rebalancing, as a dispute resolution mechanism, is strictly specified and an appropriate compromise in the circumstances of the TCA.
The Government would continue to engage with businesses and individuals to identify and resolve any issues with the TCA. It noted detailed provisions in the TCA on extradition.
There was already “clear basis” for an agreement on Gibraltar and the Government would support the Falkland Islands as required.
Establishing a parliamentary partnership assembly was a matter for the respective parliaments, but the Government said it would support such dialogue.

Report on trade in services

Committee’s findings

On 24 March 2021, the committee published a report on UK-EU services trade under the TCA. It said the agreement was welcomed by the services sector as being preferable to ‘no deal’, but that “significant challenges remain” and negotiations in the area will continue for years to come.

The report took a sectoral approach. The committee’s conclusions in each area included:

In financial services, a lack of substantive provisions in the TCA leaves the sector in a period of uncertainty. The committee particularly highlighted a lack of clarity on ‘equivalence’ (the ability for UK firms to offer services in the EU, or vice versa, on the basis that one party recognises the regulatory regime of the other as ‘equivalent’ to its own). It noted the plan for structured regulatory cooperation and stated that this should be “deep”. It also called for Parliament to consider how to scrutinise the UK regulators in their use of new powers, possibly including a new, dedicated select committee. Overall, the committee was concerned that there could be a substantial shift of people and assets out of the UK financial services sector over time.
In professional and business services, UK firms face a “patchwork of complicated rules that vary by sector and member state”. The committee called for the Government to support smaller companies, which would be hardest hit by the new environment. The committee particularly mentioned the absence of mutual recognition of professional qualifications and called for the Government to explore all options in this area, including a side agreement to the TCA.
In data and digital trade, the TCA offers “unprecedented cooperation”. The report called for the UK and EU to work together to ensure that the regime keeps pace with innovations.
In the creative industries, the committee was “deeply concerned” about restrictions on mobility, believing these could make touring “prohibitively expensive and bureaucratic”.
In research and education, the committee welcomed the UK’s affiliation to the EU’s ‘Horizon Europe’ programme. However, it asked the Government to reconsider its decision not to participate in Erasmus+. It argued that the Government’s Turing Scheme was not an adequate replacement as it does not provide for inbound mobility and student exchanges.

Government’s response

In the Government’s response, published on 27 May 2021, it stated it was continuing a dialogue to make further agreements with the EU. In the specific sectors, it said:

In financial services, the UK and EU had reached “technical agreement” on a memorandum of understanding to facilitate “meaningful and productive” regulatory cooperation.
In professional and business services, it was providing country-by-country guidance for businesses, and a new team to facilitate mutual recognition for professional qualifications.
On data and digital, it “stands ready to engage in any future review processes”.
In the creative industries, that the Government was working to support those wishing to tour in Europe, including by offering greater guidance on the applicable regulations.
In research and education, that the Turing programme was not a replacement for Erasmus+ as it was intended to be global, rather than just focused on Europe.

Report on trade in goods

Committee’s findings

The committee published its report on UK-EU trade in goods on 25 March 2021. It concluded that the TCA “falls far short of the ambition of frictionless trade”. It argued that the Government should use the mechanisms available under the agreement to reach a smoother trading relationship with the EU.

Amongst the committee’s specific findings and conclusions were:

Zero tariff and zero quota trade was only possible for goods originating in the UK or EU and only if certain rules and procedures were followed, resulting in extensive paperwork. Rules of origin requirements, to prove that goods originated in the UK or EU, may be particularly onerous for smaller companies.
The TCA did not include mutual recognition of product testing and standards regimes. The committee described this as a “significant blow”, saying multiple testing adds time and cost.
Physical checks on animal and plant exports could become a “permanent barrier” to trade.
There should be a ‘trusted trader’ scheme to allow smaller businesses to benefit from simplified customs procedures.
“Substantial” non-tariff barriers remain, for example the different VAT regimes in EU member states. The committee said the Government should do more to support businesses in understanding these and in accessing the postponed VAT accounting scheme.
Problems with transportation were affecting all firms. The report said the Government should consult with the worst affected businesses to identify possible mitigating measures.
The Government should fund additional physical customs infrastructure at the UK border.
The Government’s guidance and advice should be more tailored and specific to businesses and be easier to understand.

Government’s response

The Government’s response, published on 26 June 2021, stated that the TCA had not been intended to produce frictionless trade. It argued this would be possible only if regulatory standards were fully aligned with the EU, and this would have been counter to Brexit’s aim of achieving autonomy and sovereignty.

The response listed a range of advice and funding the Government has made available for businesses; for example, online information, guidance on rules of origin and the Brexit support fund. It said the Government was “continuously reviewing and improving” its advice and support.

Responses in other areas included:

The Government and EU are discussing how to reduce issues such as the lack of mutual recognition of testing and standards and the additional checks on animal and plant exports.
Addressing the committee’s recommendation on trusted trader systems, the Government said that two ‘authorised economic operator’ schemes are accessible for smaller firms.
The Government cannot provide guidance on other countries’ VAT rules, but it is looking to better signpost information on other countries’ websites.
The Department for Transport is continuing to monitor issues around transportation.
The Government has already made a “very significant investment” in customs infrastructure.

Introduction

Report on the institutional framework

Committee’s findings

Government’s response

Report on trade in services

Committee’s findings

Government’s response

Report on trade in goods

Committee’s findings

Government’s response

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