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UK Government Sets Out Proposal for New Free Trade Area Ensuring Frictionless Trade and Continued Regulatory Alignment

On 12 July 2018, the UK government published a White Paper setting out its plans for a future relationship with the EU. Two areas will be of special interest to Hong Kong businesses: the UK’s proposal for a new free trade area, including a common rulebook for goods and a Facilitated Customs Arrangement (“FCA”), and the UK’s commitment to “open and fair competition”, meaning “high regulatory” standards in the areas of competition, state aid, environmental, and labour policies, assured through a “non-regression” legislative requirement.

The White Paper makes clear that the UK will leave the EU’s Customs Union and the Single Market, but proposes a deeply aligned free trade area for goods although with few commitments on services. Through the FCA, the UK envisages maintaining EU tariffs and trade policy for goods destined for the EU, and its own tariffs and trade policy for goods intended for consumption in the UK. This “would remove the need for customs processes between the UK and the EU, including customs declarations, routine requirements for rules of origin, and entry and exit summary declarations”, and “preserve frictionless trade”. Where the end destination of the goods cannot be “robustly demonstrated” by the importing trader, the trader will pay the higher of the two applicable tariffs and be eligible for a refund later. However, the UK government estimates that, for 96% of its imports, the correct rate will be paid up front.

The FCA will be combined with a common rulebook for trade in manufacturing sectors, including automotive, aerospace, chemicals, electronics and pharmaceuticals. The rulebook will also include the Union Customs Code and rules related to safety, security, sanitary and phytosanitary rules, to be interpreted consistently with EU practice and jurisprudence.

The interpretation as well as the implementation of new rules to maintain alignment with EU standards will be governed by a new institutional framework. A “Joint Committee” will scrutinize new rules to determine whether they fall within the scope of the common rulebook, and in that case the UK Parliament would be treaty-bound to implement the legislation. Should the Parliament refuse to implement legislation or adopt legislation no longer deemed equivalent, “the EU could propose proportionate and where possible localised rebalancing measures, for instance, requesting financial compensation.” If no agreement is reached, the relevant part of the free trade agreement could be suspended. This is inspired by the Norwegian model. Yet it should be noted that the Norwegian parliament has built up a backlog of more than 600 pieces of European legislation waiting to be enacted.

The Joint Committee would also be empowered to act if divergent legal interpretations between the EU and UK courts develop, but this area is intentionally left vague. The future role of the European Court of Justice in policing the future agreement has been a strong bone of contention.

A services alignment will operate under the same framework but would be more limited. The UK will seek to secure a number of opt-ins, notably in transport sectors such as aviation and haulage, allowing British firms to continue to operate across borders. The recognition of professional services is also sought, although financial services and broadcasting are likely to face access restrictions. Yet the EU is highly critical of any attempts to cherry-pick select areas of the Single Market and reject others, which undermines the coherence and burden-sharing among EU Member States.

To ensure that manufacturers only need to undergo one series of tests when selling products in either market, the UK will seek non-voting membership in agencies for highly regulated sectors such as medicines, chemicals and aerospace. This relates to another important area of the negotiations, namely the UK’s commitment to “open and fair competition” after Brexit, i.e. a commitment not to introduce less stringent product, safety, environmental and social standards. More specifically, this means that the future relationship would include a series of “non-regression provisions” within state aid, competition, environmental and labour rules.

For example, in the area of chemicals, the White Paper sees the UK remaining as an associate member of the European Chemicals Agency (“ECHA”) and therefore within the REACH regulatory framework. This is strongly advocated for by industry leaders. On 14 June 2018, Mr Hariolf Kottmann, the president of the chemicals trade association CEFIC, spoke at the Helsinki Chemical Forum and warned delegates of the dangers of the UK leaving the EU. He recalled that leaving the EU would necessarily lead also to leaving the regulatory body ECHA, and noted that the chemicals industry was competitive largely thanks to the existence of “an integrated single market, one that operates across borders”. The value of EU-UK chemicals trade is estimated at EUR 42 billion.

Unfortunately, the European Commission’s current response is that it would be impossible for the UK to retain some form of association with ECHA while being outside the EU’s single market. While the European Commission apparently shares many of the concerns of the chemical industry, the EU agencies are, according to the Commission, “part and parcel of the Single Market” and “fulfil important regulatory tasks which are intrinsically linked with the implementation of EU legislation”. If the UK leaves the Single Market, then a necessary consequence would be an automatic termination of its ECHA membership.

Nonetheless, in this context, the European Commission signalled that there may be alternatives to ensuring relatively smooth and frictionless trade between the UK and EU post-Brexit. In particular, it welcomed the possibility of regulatory non-regression in the area of chemicals and other sectors, and said that this could help to ensure a “level playing field” between EU-27 and UK companies without undercutting environmental and social standards.

The overall EU response, however, has remained lukewarm. The European Commission has stated that the common rulebook will not be sufficient to avoid border-checks. It emphasised the importance of being prepared for every eventuality, including a “no deal” scenario. If the UK leaves the EU’s Single Market and Customs Union, there will inevitably be disruption to supply chains, which Hong Kong sellers will need to be alert about. The Commission recommends that traders “analyse their supply chains, […] prepare to deal with customs procedures (in some cases for the first time in their business life) and take any steps required to ensure continued regulatory compliance.

At a meeting with UK lawmakers on 16 and 17 July 2018, EU chief negotiator Michel Barnier warned that currently the two chief issues threatening to derail talks were the failure to agree on a common contingency plan to avoid a hard border with Northern Ireland – a so-called “backstop” solution – and the role of the EU’s judiciary in policing the final agreement. He also said that hostile amendments to customs legislation passed by pro-Brexit members of parliament were complicating discussions and making a no-deal scenario more likely.

Content provided by Picture: HKTDC Research
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