An Uneven ‘Level Playing Field’ – the EU/UK Trade Agreement

A week before the expiry of the transition period, the EU and UK announced they had finalised the terms of a Trade and Cooperation Agreement (‘TCA’). Legislation – the European Union (Future Relation) Act 2020 – was rushed through the UK Parliament in a single day to give domestic legal effect to the Agreement while for the EU, the Council adopted a decision authorising the signing of the Agreement and giving it provisional application pending scrutiny by the European Parliament and the conclusion of the Agreement on behalf of the EU. Finally, the EU and the UK had set out the terms of their future relationship at least for the matters falling within its scope. 

A key stumbling block during the course of the negotiations had been the EU’s insistence that the UK agree ‘robust commitments’ to ensure ‘fair and open competition’ between the Parties. Fearing that the UK might adjust its regulatory policies in areas of competition law and state aid, taxation, social and environmental protection to seek a competitive advantage, the EU insisted that there needed to be a ‘level playing field’ for trade as the quid pro quo for tariff-free market access. Despite agreeing in their joint Political Declaration that level-playing field (or ‘LPF’) requirements would form part of the agreement to be negotiated following the UK’s withdrawal from the EU, the negotiations on the TCA began with the EU and UK adopting different positions on how future regulatory divergence might be managed. Bridging those differences would be crucial in reaching an eventual agreement.

The Philosophical Challenge of Brexit

Once it became clear that the UK would not be seeking a future trade relationship based on continuing alignment with EU rules, the challenge for the UK and the EU was how to reconcile their respective demands for regulatory autonomy with a liberal approach to open markets. 

While the UK seemed content to operate according to default international rules – not just World Trade Organization rules on trade in goods and services but also international agreements covering labour and environmental standards, tax, government subsidies, aviation etc. – the EU’s position was clear that access to the EU market could not undermine its model of a regulated social market economy. And for the EU, default international agreements and conventions would not be a sufficient guarantee of protection against unfair competition. And so for the EU, its negotiating strategy was to seek to limit UK deviation from EU rules post-transition, while also seeking to tether both the UK and the EU to international rules and standards to plug any gaps and avoid any unilateral defection by the UK from common international rules.

When it comes to evaluating the compromise eventually reached in the TCA, it is useful to look back to the draft texts the Parties circulated at an early stage in the negotiations. The UK published a relatively thin draft Free Trade Agreement that – while containing basic boilerplate provisions on subsidies, competition policy, taxation, trade and labour and trade and the environment – contained neither specific commitment to maintaining a level playing field nor clauses preventing any regression in standards. By contrast and building on the text of the Political Declaration as well as earlier slide presentations to the EU27, the EU draft text contained detailed and explicit requirements on a level playing field. 

The text which has been agreed – Title XI of Part One dealing with LPF obligations – is based on the EU text, but clearly shows where compromises have been made. Significantly, the text makes clear that the purpose of the provisions ‘is not to harmonise the standards of the Parties’ and the right of each of the Parties to regulate is asserted. The result is a relatively uneven level playing field in legal terms with variation as to the source of obligations – the Agreement itself, international standards incorporated by reference, the domestic provisions of both Parties – as well as the applicable enforcement and dispute-resolution mechanisms. 

Subsidies

Perhaps the most significant disagreement was over the control of subsidies to businesses. The UK’s positionwas that for the future it would observe the WTO Subsidy and Countervailing Measures (‘SCM’) Agreement and would consult on whether to go further in domestic law to legislate for a UK subsidy control regime (the United Kingdom Internal Market Act 2020 reserves subsidy control to the UK Government). Accordingly, the UK’s draft text defined subsidies in terms of the SCM with both Parties simply reaffirming their rights and obligations under international agreements including the SCM. Objections to subsidies made by the other party would be the subject of consultations but with no dispute resolution mechanism attached.

The EU’s started from a very different position. Mirroring the approach taken in the Protocol on Ireland/Norther Ireland under which the UK agreed to comply with EU state aid rules listed in an Annex to the Protocol, the EU’s draft agreement anticipated that the UK would give effects to acts and provisions of EU law listed in an Annex (including amended or replaced provisions). Albeit that the European Commission would not enforce EU state aid rules directly against the UK, the EU insisted instead that the UK create an operationally independent authority with powers equivalent to that of the Commission and whose decisions would have the same legal effects. Given that the substantive requirements to be enforced would be instruments of EU law, the EU also sought to ensure that UK courts tasked with reviewing decisions of a domestic authority would have the ability to seek authoritative interpretations of those instruments from the Court of Justice of the EU. As for dispute resolution, the EU’s approach focused on breaches by the UK and what remedies it might seek.

The TCA compromise is delicately balanced. First, the UK won the linguistic battle in that the Agreement refers to ‘subsidies’ not ‘state aid’. Secondly, and more significantly, the substantive provisions are neither as thin as the UK wanted in terms of reaffirming the SCM Agreement nor as far reaching as the EU sought in demanding continued compliance with specific EU rules. Instead, the Agreement itself is the direct source of detailed substantive definitions of what constitutes a subsidy, certain prohibitions and any exceptions, though as George Peretz QC notes the substance of these rules mirrors EU state aid rules. Thirdly and perhaps crucially, the Agreement commits BOTH Parties to having in place and maintaining an effective system of subsidy control consistent with principles set down in the Agreement. That includes each party establishing or maintaining an operationally independent and impartial subsidy control authority. Finally, the Agreement contains provisions on cooperation, dispute resolution and remedies (including a right of recovery) but without reference to the Court of Justice.

Competition Policy

The compromised reached on competition policy – the rules governing anti-competitive behaviour of companies – is almost exactly the opposite of what happened with subsidies. Whereas the EU had proposed that the Agreement itself contain substantive rules governing competition policy (consistent with EU prohibitions on anti-competitive agreements, abuses and concentrations of market power), these have been stripped out leaving each party to maintain an effective competition law addressing these types of anti-competitive behaviour. Each party is to entrust competition law enforcement to operationally independent bodies (the EU dropped its requirement that such bodies be adequately resourced).

Within the EU, the enforcement of competition rules takes place at both EU and domestic levels and so cooperation between regulators is an important feature of the competition regime. The TCA states that the competition authorities of the UK, the EU and its Member States ‘shall endeavour’ to cooperate and coordinate with regards to their enforcement activities where ‘possible and appropriate’ including through the exchange of information. It holds open the possibility of a subsequent agreement on cooperation and coordination. But what is clear is that now both the EU (and its Member States) and the UK competition authorities will autonomously apply their own competition law regimes even to the same transactions and activities.

Taxation          

In their approach to taxation matters, both Parties began from a similar starting point, namely international standards on good governance in taxation matters including OECD work and standards against Base Erosion and Profit Shifting (BEPS).  However, the EU originally tagged on to this a reaffirmation by the Parties of the Code of Conduct for business taxation agreed by EU ministers in 1997 – this was not accepted in the agreed text. So, to the extent that there are substantive norms in play they are those applicable to both the EU and the UK through international bodies like the OECD rather than deriving from the Agreement, or from the domestic law of either party. 

What is particularly noteworthy, however, is the EU’s insistence in including non-regression provisions. In its early draft, the EU had included a clause requiring the EU and the UK not to weaken or reduce levels of protection against tax avoidance below ‘common high standards applicable in the Union and the United Kingdom at the end of the transition period’. This would restrict unilateral departure from international standards given effect with their respective legal orders as well as any common EU rules.

The TCA does include a non-regression clause in tax matters but its focus is on limiting the ability of either party to defect from specific common international standards agreed in the OECD at the end of the transition period. Limits on changes in domestic law only apply to country-by-country reporting by credit institutions and investment forms. In other words, while both EU and UK affirm their commitment to implement OECD BEPS minimum standards, there is no wider commitment to non-regression on tax avoidance. And while the EU had envisaged that the Partnership Council established under the Agreement would have a power to modify common standards to including additional areas or higher standards, this was not accepted and was not included in the final text.

Labour and Social Standards

The issue of ‘non-regression’ – committing both sides not to reduce levels of protection below current levels – is dramtised in respect of labour and social protection standards. The UK’s approach was simply to cut and paste from the ‘Trade and Labour’ chapter of the EU’s trade agreement with Canada – ‘CETA’. Under that agreement both Canada and the EU recognised the inappropriateness of reducing labour standards in order to promote trade and investment, with both Parties committing not to waive or derogate from its labour standards. The EU wanted something more demanding in its negotiations with the UK. 

Firstly, the EU sought to more clearly define the benchmark of rules against which to assess non-regression. It defined this as the ‘common standards applicable within the Union and the United Kingdom at the end of the transition period’. Secondly, there was an exhortation to increase levels of protection through the respective law and labour practices of the Parties. Thirdly – and most controversially – where both Parties increased their levels of protection, the new level would become the benchmark for non-regression and not the position at the end of the transition period.

The TCA recognises the regulatory autonomy of both Parties to set their own levels of labour and social protection. However, both the EU and the UK have committed to neither weaken or reduce – in a manner affecting trade or investment – their levels of protection as they existed at the end of the transition period. The qualification is important as it only applied where changes in standards would impact on trade or investment, something which may be a basis for disputes. The exhortation to higher standards was modified to require the Parties to ‘continue to strive’ to improve levels of protection. However, if standards are raised, there is no ratchet clause to heighten the benchmark level of standards to reflect such changes.

These provisions are also underpinned by commitments to have and maintain effective domestic systems of enforcement including access to administrative and judicial proceedings and appropriate and effective remedies.

Environmental Standards

Consistent with the approach it had taken to labour laws, the UK’s pitch was simply to replicate the ‘Trade and Environment’ chapter of CETA in its draft EU-UK Agreement. Again the EU sought something more expansive including express inclusion of rules relating to climate change (including targets) which was not included in the UK’s draft agreement (the UK had oroposed including climate provisions as part of an energy agreement with the EU). What was agreed by way of non-regression mirrors the approach agreed on labour standards. Level of environmental and climate protection (including targets) as well as their effective enforcement are to be maintained at their level as at the end of the transition period.

A significant feature of the agreement is what it says about carbon pricing. Although the UK had signalled that it would establish its own emissions trading system (‘ETS’) it had also floated the idea of introducing a carbon tax as an alternative. In its draft text the EU had sought to insist that the UK establish a carbon pricing system equivalent to the EU-ETS. In the TCA the UK has agreed to have in place a carbon pricing system on 1 January 2021. Both Parties have agreed to cooperate on carbon pricing and to give ‘serious consideration’ to lining their systems. Albeit there is no long-term commitment to maintain an ETS beyond 2021, the UK is set to mirror the EU-ETS in its domestic law for the foreseeable future.

Dispute Settlement and Rebalancing Measures

In addition to the general dispute-resolution mechanisms laid down in Part Six of the TCA, the LPF Title contains its own ‘horizontal provisions’ laying down procedures for consultations between the Parties in the event of disputes, the appointment of expert panels to manage disputes and ‘rebalancing measures’ in the event that significant divergence between the EU and the UK has a material impact on trade and investment. The application of these mechanisms – or particular aspects of those mechanisms – is variable.

For competition policy and for tax matters, the Part Six dispute-resolution mechanisms are not to apply whereas for subsidy control the provisions do apply but with exceptions to exclude an arbitration panel ruling on individual subsidies. For disputes over labour and environmental standards, there is a derogation from the Part Six dispute mechanisms and instead the horizontal provisions on consultations and the use of expert panels – to be established by the Trade Specialised Committee on the Level Playing Field for Open and Fair Competition and Sustainable Development – apply exclusively.

Perhaps the most controversial aspect of the LPF horizontal provisions is the clause dealing with ‘rebalancing measures’ in the event that EU and UK regulatory policies covered by Title XI diverge ‘in a manner that changes the circumstances that have formed the basis for the conclusion of this Agreement.’ Action can be taken relatively swiftly by either Party. What is not specified is what is meant by a ‘rebalancing measure’ – it does not appear to be defined by the Agreement but it appears to be different from the ‘temporary remedies’ that may be adopted under the TCA. Any rebalancing measures must be restricted in scope and duration, be ‘strictly necessary and proportionate’ and ‘least disturb the functioning of the Agreement’. A review of the whole trade title may be undertaken in the event that there is frequent recourse to rebalancing measures.

All in all, it is clear that the EU pushed the UK to agree LPF obligations and dispute mechanisms that go beyond what might be found in a standard EU free trade agreement. But the EU did not get everything that it wanted. The result is necessarily a political compromise. But in legal terms what is striking is how different the substantive chapters are in terms of the sources of the norms that create, implement or enforce as well as the institutions for enforcement and the mechanisms for resolving disputes.

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