The UK/EU Free Trade Agreement

The draft Trade and Cooperation Agreement agreed upon by the UK and EU, consists of three main pillars: a free trade agreement, new partnership on security, and a horizontal agreement on governance.

The free trade agreement came into effect on 1 January and, with the UK now a non-EU country, new bureaucratic procedures come into effect, particularly with regards to the movement of goods and services.

Free Trade Agreement

• The agreement covers not just trade in goods and services, but also investment, competition, State aid, tax transparency, air and road transport, energy and sustainability, fisheries, data protection, and social security coordination.
• It provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin.
• Both parties have committed to ensuring a robust level playing field by maintaining high levels of protection in areas such as environmental protection, the fight against climate change and carbon pricing, social and labour rights, tax transparency and State aid, with effective, domestic enforcement, a binding dispute settlement mechanism and the possibility for both parties to take remedial measures.
• The EU and the UK agreed on a new framework for the joint management of fish stocks in EU and UK waters. The UK will be able to further develop British fishing activities, while the activities and livelihoods of European fishing communities will be safeguarded, and natural resources preserved.
• On transport, the agreement provides for continued and sustainable air, road, rail and maritime connectivity, though market access falls below what the Single Market offers. It includes provisions to ensure that competition between EU and UK operators takes place on a level playing field, so that passenger rights, workers' rights and transport safety are not undermined.
• On energy, the agreement provides a new model for trading and interconnectivity, with guarantees for open and fair competition, including on safety standards for offshore, and production of renewable energy.
• On social security coordination, the agreement aims at ensuring a number of rights of EU citizens and UK nationals. This concerns EU citizens working in, travelling or moving to the UK and to UK nationals working in, travelling or moving to the EU after 1 January 2021.
• Finally, the agreement enables the UK's continued participation in a number of flagship EU programmes for the period 2021-2027 (subject to a financial contribution by the UK to the EU budget), such as Horizon Europe.

Importing goods from the UK to Malta

But what does the agreement mean to people in Malta wanting to import goods from the UK?

The biggest change to note is that customs controls will apply when purchasing goods from the UK. Once Brexit happened, the UK and EU needed to decide the rules for their future trading relationship. This was important because the EU is the UK's largest and closest trading partner.

Under the deal, no tariffs or quotas will be introduced.

But not everything stays the same. Trade in goods will become a lot more burdensome, since the UK has formally left the EU customs union and single market. Although there will not be any tariffs levied or restrictive quotas imposed, there will be a whole series of new customs and regulatory checks, including rules of origin and stringent local content requirements.

This will add red tape, slowing down the overall process, and just-in-time supply chains will take a while to adjust to the new reality.

Customs officers will examine packages arriving from the UK in order to check for prohibited or restricted goods, confirm that the description and value stated on the Customs Declaration is correct and check the Customs Declaration to determine if Customs Duty, Excise Duty and/or Import VAT are chargeable.

For this reason, as of 1 January, all goods purchased from online portals will need to be declared. The same for goods purchased from the UK through MaltaPost’s SendOn service.

The UK’s withdrawal from the EU will affect companies that sell goods or supply services to the UK, buy goods or receive services from the UK, move goods through the UK or use UK materials and goods to trade under preferential schemes with EU partner countries.

In the area of tax and customs, this means, that companies:

• May need to file customs declarations when importing or exporting any goods to/from Great Britain (the UK excluding Northern Ireland) or when moving goods through Great Britain.
• May need to provide security and safety data, in addition to the customs declaration.
• May need a special licence to import or export certain goods (e.g. waste, certain hazardous chemicals, GMOs). Companies will need to comply with additional formalities if importing or exporting excise goods (alcohol, tobacco, or fuel) to/from Great Britain.
• May have to comply with different VAT rules and procedures for transactions with Great Britain than for transactions within the EU and with Northern Ireland.

The deal also doesn't completely eliminate the possibility of tariffs in the future. Both sides will need to stay close to shared rules in areas like workers' rights and environmental protection. If either the UK or the EU shift their rules too far, the other side could introduce tariffs.

Initial Deloitte analysis

The vast majority of the deal content has been widely anticipated and planned for by business for some months. The publication of both sides’ negotiating mandates early in 2020 at least made it clear what the best case scenarios could be. The EU sought to protect the fundamental freedoms of its single market while the UK prioritised limiting the erosion of sovereignty through its international obligations. In both respects each side can claim to have achieved their objectives.

Deloitte specialists are examining the full 1,246 pages of legal text according to each chapter but have highlighted a nuber of notable inclusions:

• Tariff-free, quota-free trade in goods between the UK and EU. This goes further on tariffs than the EU has before in an FTA and is very good news for business, particularly those in high tariff sectors such as food and agriculture.
• Rules of Origin which recognise both UK and EU content as “originating” (known as full bilateral cumulation), with a six year phase-in period for electric cars, allowing the UK time to build up qualifying components. There are also helpful measures which permit businesses to self-certify as having met origin requirements and to provide a single statement of origin for multiple shipments over the course of a year. Outside the FTA the EU has also said statements of origin can be made from day one with the detailed proof not being required until 2022.
• Minimal cooperation has been agreed in sanitary and phyto-sanitary (SPS) measures beyond default WTO agreements. Each side will maintain autonomy of their animal and plant health standards with periodic reviews taking place through a new SPS specialised committee.
• Mutual recognition of Authorised Economic Operator status and agreement on managing “roll-on, roll-off” trade at ports will facilitate a somewhat more straightforward process for the transport of some goods, particularly through Dover-Calais. There is no requirement for international permits for road haulage, and limited cabotage arrangements where drop off and pick up can be made in the EU.
• In principle, service providers will not need to establish a local presence to trade within each other’s markets – and they will be able to avoid economic needs tests, residency requirements and a range of other non-tariff barriers. However, there are very lengthy reservations listed to these headline provisions. The parties have agreed ‘national treatment’ to prevent discrimination between nationals and ‘most favoured nation’ provisions to ensure the treatment of service suppliers keep pace with either party’s future FTAs.
• There is not much in the FTA on financial services, and what there is, is very much in line with previous precedents. However there is a separate joint declaration where both sides agree to try and reach an agreement on regulatory dialogue and stability around equivalence decisions in future.
• Business mobility rights have been agreed (e.g. attending conferences, seminars, meetings) for short-term stays, permitted for 90 days in any 180 day period. Intra-corporate transfers (with spouses and dependents), contract and self-employed working are also supported. Travellers will otherwise rely on the rules of individual member states for the right to work as the free movement of people ends.
• The agreement contains some modern provisions on data, including a ban on localisation requirements, commitments to protect personal data, support for electronic signatures and continuing to provide open government data. There is a separate bridging agreement which will maintain personal data flows from EU to UK for up to six months until an adequacy decision is reached.
• There is wide-ranging protection and enforcement of intellectual property rights, including patents, trademarks and designs, at least in line with existing international agreements.
• The agreement is limited to adherence to international frameworks and cooperation in areas such as tax and debt recovery including VAT, customs duties and excise. UK autonomy on tax rates and rules is preserved.
• The FTA includes provisions on public procurement processes largely built on existing WTO agreements, but extended to other sectors such as hospitality and education. The UK had previously refused to include a chapter on procurement in the agreement.
• A comprehensive system, similar to one we have today, is established covering liability for social security contributions when working or living outside of home country, avoiding dual contribution situations.
• The UK will participate in five EU programmes including the Horizon and Copernicus scientific programmes, and leave others – such as Erasmus, which will be replaced by a new UK scheme.
• Provisions on security include the exchange of criminal records data through a new infrastructure which will replace existing real-time access to the European Criminal Records Information System (ECRIS) data; DNA, fingerprint and vehicle registration (Prüm) and extradition. However, the exchange of passenger name records is asymmetrical and UK law enforcement will lose access to the Schengen Information System (SIS) II system on wanted or missing persons. There are also some provisions on cyber security cooperation.
• The deal includes agreement on a range of other specific topics negotiated alongside generic trade chapters, including on energy (continued access to EU internal energy market); logistics and haulage (continuity of haulage without permits); and aviation (comprehensive provisions amounting to up to fourth freedom of the air and cooperation on aviation safety). There are also specific provisions on telecoms, delivery services, chemicals, motor vehicles and medicines.
• Arbitration of the agreement will be undertaken through a new Partnership Council and there will be no role for the European Court of Justice. Financial services are exempted from potential retaliation in future trade disputes.

What does this mean for business?

The deal provides business with much needed certainty and a more stable start to 2021 than leaving without a deal. However, there is a lot of detail to go through and significant change to the trading landscape of the future that should not be underestimated. Immediate changes include:

• A return to full EU border formalities from 1 January 2021. Goods entering the EU from the UK will require customs declarations to be completed, including proof of origin (without which duties could become payable). Goods entering the UK from the EU will be subject to a phased implementation of border controls over six months.
• There is treatment of the UK as a third country for regulatory purposes by the EU, requiring businesses to undertake additional processes for EU and UK approvals for product and manufacturing standards. This is especially the case for the food items which will be subject to the EU’s SPS rules. Some food items, such as raw meat, will not be permitted at all in future.
• There is a loss of automatic market access into the EU’s Single Market for services, particularly for UK regulated services firms which may need to establish an EU subsidiary in some countries which have reservations within the FTA.
• No new recognition of professional qualifications, even though a minimal framework, is included in the FTA – on the positive side, grandfathering provisions originally agreed in the Withdrawal Agreement can be utilised.