Oxford Review of Economic Policy, Volume 38, Number 1, 2022, pp. 68–81
Adam Bennett* and David Vines**
Abstract This paper analyses the Trade and Cooperation Agreement (TCA) between the EU and
the UK. We focus on two specific features: rules of origin and non-tariff barriers. The putative purpose of the TCA was to promote free trade between the signatories, and both of the features identified have ‘level-playing-field’ objectives which are designed to promote that purpose. However, both
can also be used for covert protectionism against the other party to the agreement. The paper recommends that rules of origin and non-tariff barriers should be recrafted where possible, and there is
a description of how this might be done. The aim of such action would be to make transparent the
role of these features in preserving a level playing field. Doing this would also make clear that any
residual unadulterated rules of origin and non-tariff barriers existed for purely protectionist reasons
and jeopardized open borders. Hopefully, the exposure of such protectionism would encourage its
dismantlement.
Keywords: Brexit, Trade and Cooperation Agreement, tariff levels, rules of origin, non-tariff barriers,
level playing field, Northern Ireland Protocol
JEL classification: F13, F15, F52, F55, H77, K33
I.
Introduction
This paper seeks to analyse the effects of the Trade and Cooperation Agreement (TCA)
between the European Union (EU) and the UK. We focus on two specific features: rules
of origin and non-tariff barriers. The putative purpose of the TCA was to promote
trade between the signatories. Both of these features—rules of origin and non-tariff
barriers—have a ‘level-playing-field’ aspect, and they can both be used to promote the
free-trade purpose. However, both of these features can also be used as a means of
covert protectionism against the other party to the agreement.
*Associate Fellow, Chatham House, London, UK, e-mail: abennett@plas-cwm.com
**Balliol College and Economics Department, Oxford University; Director of the Ethics & Economics
Programme at the Institute for New Economic Thinking (INET) in the Oxford Martin School at Oxford
University; Research Fellow, Centre for Economic Policy Research, London, UK, e-mail: david.vines@economics.ox.ac.uk
This paper draws on helpful conversations with Eric Beinhocker, Alan Beattie, David Cleevely, Paul
Gretton, Martin Sandbu, Alan Winters, and Martin Wolf.
https://doi.org/10.1093/oxrep/grab049
© The Author(s) 2022. Published by Oxford University Press.
For permissions please e-mail: journals.permissions@oup.com
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The EU–UK Trade and Cooperation
Agreement: lessons learnt
The EU–UK Trade and Cooperation Agreement: lessons learnt
69
1
Pascal Lamy, interviewed by The Week in Westminster, BBC, 1 February 2020.
Interestingly the GTAP CGE model used by Fusacchia et al. (2022) is directly descended from the
ORANI model developed by the Productivity Commission in Australia in the 1970s and 1980s. That model
was used to analyse the effects of trade liberalization on different sectors in the economy. See Dixon et al.
(1982), Powell and Snape (1993), and Dixon and Rimmer (2016).
2
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This paper recommends that rules of origin and non-tariff barriers should be
recrafted where possible, and there is a detailed description of how this might be done.
The aim of such action would be to make transparent the role of these features in preserving a level playing field. Doing this would make clear, at the same time, that any
residual unadulterated rules of origin and non-tariff barriers existed for purely protectionist reasons, and jeopardized open borders. Hopefully, the exposure of such protectionism would encourage its dismantlement.
It is worth making a remark, at the beginning of this paper, about the highly
unusual nature of the Brexit negotiations. As Pascal Lamy observed in January
2020, the EU–UK Trade and Cooperation Agreement (TCA), which is essentially
a zero-tariff free trade agreement (FTA), was the result of ‘the first negotiation in
history where both parties started off with free trade and discussed what barriers
to erect’.1
It is 50 years since both parties did the opposite thing. When the UK was negotiating whether to join what was then the European Economic Community (EEC),
the two parties started off with barriers and then discussed how to remove them.
There was much analysis of whether the trade-creation effects of the UK joining
the EEC might actually be overwhelmed by trade diversion, lowering economic welfare in UK. The analysis of James Meade, and before him Jacob Viner, showed that
this might be possible, a demonstration which initiated what has become known as
the general theory of the second best. And when the UK actually joined the EEC,
there was undoubtedly trade creation in industrial products, but there was also clear
trade diversion as a result of joining a protectionist Common Agricultural Policy.
Nevertheless, these static gains and losses were almost certainly swamped by the dynamic effects of economies of scale, and the benefits of greater competition, things
which have emerged with the creation of the Single European Market (SEM) of the
European Union.
It is important that there should now be, in detail, a backwards version of the tradecreation-versus-trade-diversion analysis which was carried out so many years ago. What
will be the effect of the restriction of trade-creation between the UK and the EU? And
to what extent might these barriers be mitigated by a dampening of the policy-induced
trade diversion?
The paper by Ilaria Fusacchia, Luca Salvatici, and Alan Winters (Fusacchia et al.,
2022, in this issue) provides exactly the type of analysis which is required, using a computable general equilibrium (CGE) model.2 The authors show that the re-creation of
trade barriers between the UK and the EU could cause a significant reduction in trade,
despite the TCA being (putatively) designed to limit the damage that Brexit might do.
This damage is likely to occur, despite the fact that many UK producers will seek alternative export opportunities outside EU, precisely because of the creation of barriers
to UK exports to the EU introduced by Brexit, and despite the fact that it will now
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II.
The Trade and Cooperation Agreement
How did this hitherto unique situation, in which both parties started off with free trade
and discussed what barriers to erect, actually come about?
When the UK joined the EEC, it envisaged the arrangement as essentially a means
for greater integration of trade, to the mutual benefit of both parties. The vision of the
architects of the EU, however, was much more ambitious—in the eyes of some, nothing
short of an eventual federal United States of Europe. Between 1973 (when the UK
joined) and 2016 (when it voted by referendum to leave), a series of European treaties
built upon the 1957 Treaty of Rome (when the expression ‘ever closer union’ was first
coined).4 These treaties progressively moved the relationship between the UK and its
European partners away from the simple customs union for trade that the UK thought
it had entered in 1973, towards an increasingly comprehensive political union. It is not
the purpose of this paper to analyse the evolution of the resulting tensions, but it was
perhaps only a matter of time before conflict arose about these two competing visions
of the future.5
At the core of the UK’s negotiating objectives, as set by Prime Minister Boris
Johnson in 2019 and consistent with his Brexit referendum slogan ‘take back control’,
was the idea of ‘restoring sovereignty’, with the freedom to strike bespoke trade deals
3 That is because the TCA puts new obstacles in the way of importing goods from the EU, but does not
alter the already existing obstacles which constrain the importing of goods from outside the EU. Of course
this damage might be offset in part, wholly, or more than wholly, by new agreements which enhance the
UK’s trading position with the rest of the world. It is not, however, the purpose of the paper by Fusacchia
et al. (2022), or the purpose of this paper, to address that question. The focus of the paper by Fusacchia
et al. is to reach an understanding of effects of the TCA when it is implemented when considered on its
own.Nevertheless, as the authors show, it is important to be clear about the meaning of the phrase ‘on its
own’. There are a number of assumptions which they needed to make about the way in which the UK will
inherit the agreements with other countries which it had already had when it was part of the EU. In fact, the
assumptions which they make have mostly been borne out, because the UK has negotiated equivalent agreements with virtually all of the relevant foreign partners.
4 These included the 1992 Maastricht Treaty (which prepared the ground for further integration, including the introduction of the euro), the 1997 Treaty of Amsterdam (which transferred certain powers from
nations to the European Parliament), the 2001 Treaty of Nice (which enlarged the European Parliament to
deal with the admission of Eastern European countries), and lastly the 2007 Treaty of Lisbon (which moved
from unanimity to qualified majority votes in the Council of Ministers but also, fortuitously for the UK,
introduced for the first time an explicit procedure for quitting the EU).
5 See Toombs (2021) and Stephens (2021) for alternative and contrasting interpretations of the road
to Brexit.
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become relatively cheaper to purchase some imports into UK production from non-EU
sources rather than EU sources.3
The present paper goes beyond that of Fusacchia et al. (2022). We seek to find ways
of minimizing the economic damage which is being caused by the move to a trading
relationship of the kind specified in the TCA, damage as compared with what would
have been possible for the UK had it remained a member of the EU. We aim do this
while nevertheless respecting the overarching objectives of the British government in
negotiating its departure from the EU.
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71
6 This ‘freedom of manoeuvre’ concept of sovereignty is distinct from the legal one relating to the primacy of EU over national law. The latter concept of sovereignty (which only became explicitly treaty enshrined when the Lisbon Treaty was agreed in 2007) became contentious in 2021 when Poland (a member of
the EU) argued that under its constitution Polish law remained supreme within Polish borders. This interpretation has been vigorously contested by the EU. This matter ceased to be an issue for the UK when that
country departed the EU in 2020, and in this respect, at least, the UK can be said to have fully regained its
sovereignty.
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around the world. At the core of the EU’s negotiating strategy, aside from discouraging
others from following the UK out of the EU, was the protection of the integrity of its
EU-wide single market and the preservation of a level playing field for those operating
within it.
Although the UK’s negotiating team cast the choice of sovereignty as a binary option—you either have it (outside the EU) or you don’t (inside the EU)—in practice, it
is, of course, a matter of degree.6 All treaties between nations, or contracts between
people, involve some surrender of sovereignty—the freedom to act unilaterally—in exchange for specific commitments by the other party to do the same, for the sake of the
common good. The UK had initially sought an FTA similar to the one the EU had
agreed with Canada. The Canada agreement, which went into force on a provisional
basis in 2017, eliminates tariffs on a wide range of goods and services without any requirement to align Canada’s regulatory framework with that of the EU. The EU was
not willing to grant the UK a similar deal because it felt that the UK’s geographical
proximity to the EU would make it too much of a competitive threat unless it were sufficiently aligned with the EU’s regulatory structure. The EU wanted the UK to commit
to remain aligned, now and in the future, with the EU’s regulatory framework, and for
disputes to be adjudicated by the European Court of Justice (ECJ).
In the end, a compromise agreement was reached under which, in exchange for an
FTA with the EU for goods only, the UK would be able (in principle) to deviate from
the EU’s regulatory framework, but where these deviations could be subject to tariff
sanctions from the EU if they were deemed to compromise the level playing field of the
EU’s single market. Importantly, such sanctions would be adjudicated by a ‘Partnership
Council’ staffed equally by both sides, and not by the ECJ (on which the UK no longer
has any representation).
It seems unlikely that the UK would wish to deviate significantly from the key features of the EU’s existing regulatory framework, given that these have already been
approved by parliament and enshrined into UK law (by virtue of its prior membership
of the EU), especially as there could be a cost in terms of new tariff barriers resulting
from such a deviation, as agreed under the FTA. However, it is not inconceivable that
it might choose to do so if the EU were to introduce new regulations in the future that
the UK was not willing to replicate, accepting the resulting tariffs (if triggered) as a
price worth paying for divergence in this case. By virtue of its entering a FTA rather
than customs union, and being outside the single market, the UK has also secured its
right to enter into bilateral bespoke trade agreements with other countries or trading
blocs around the world. Brexit could therefore be said to have restored several degrees
of sovereignty, albeit with strings attached and at a cost in terms of trade with Europe
compared to its prior membership of the EU.
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III.
Rules of origin and the level playing field
Rules of origin, which are defined under the FTA, stipulate (product by product) the
maximum proportion of inputs that do not originate in either party to the FTA for
the resulting final product to be eligible for tariff-free trade between the two parties.
The purpose is to ensure that producers in one party of the FTA are not unfairly
undercut by producers in the other party if they have access to foreign inputs which
are cheaper than those available to the first party. These rules also prevent these foreign input suppliers from gaining indirect preferential access to the market of one
party (not accorded to third countries generally) via tariff-free (or lower-tariff) trade
with the other party in violation of the WTO’s Most Favoured Nation rules.8 Rules
of origin therefore have a respectable level playing field objective. Unfortunately, they
are a very blunt instrument—a producer whose share of inputs is a fraction below the
threshold is exempt from any tariffs, while a producer who (for whatever reason) finds
its foreign-input proportion just a fraction above this threshold is fully penalized. We
have argued elsewhere that rules of origin could be replaced with a system whereby
7 Rules of origin stipulate the maximum amount of inputs not originating from either party to the FTA
that can be incorporated into a final product for that final product to qualify for tariff-free trade between the
parties. Treating goods originating in one party as also originating in the other party is known as ‘bilateral
cumulation’.
8 Anne Krueger carried out the original analytical work on rules of origin in the 1980s and early 1990s.
See Krueger (1999), Krishna and Krueger (1995), and Krueger and Krishna (1995).
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The EU, on its side, has aimed to protect its single market by, inter alia, invoking the
working of the ‘rules of origin’ which typically accompany FTAs.7 In keeping with the
presumption that there will be ‘free trade’ in goods with the UK (those goods which
satisfy these rules of origin), such trade is to continue to be tariff free. However, UK
exports to the EU will henceforth also be festooned with paperwork (previously not
needed), paperwork designed, in part, to ensure compliance with the EU’s regulatory
standards. This paperwork was not required while the UK was still in the EU, but is required of countries outside the EU trading with the EU either through FTAs (and this
includes Canada) or on World Trade Organization (WTO) terms alone.
The 1998 Good Friday Agreement (GFA), covering the status of Northern Ireland,
introduced a significant additional complication for the EU–UK FTA. The GFA,
signed by both the UK and the Republic of Ireland, stipulated (inter alia) that there was
to be no border between the Republic of Ireland and Northern Ireland. This was not a
problem when both countries were members of the EU, because no border was needed
to partition them. But with the departure of the UK from the EU, notwithstanding the
FTA, the EU needed a border that could be policed in order to ensure that trade was
FTA compliant. The solution, in the context of the agreed EU–UK FTA, was to draw
an effective border down the Irish Sea, thus de facto retaining Northern Ireland in the
EU’s single market, even though de jure Northern Ireland (as a constituent of the UK)
was not a member of the EU. These unique trade arrangements are governed by the
Northern Ireland Protocol.
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9 ‘Britain can finesse EU rules of origin’, Adam Bennett and David Vines, letter to the Financial Times,
9 October 2020.
10 We accept that this would require a change to the way that ‘origin’ is defined as compared with current
EU definitions, in the sense that intermediate goods imported under this scheme, with EU duty paid, would
be deemed to be of EU origin by virtue of the terms of this proposed scheme, even though, under existing
definitions, they would not. It is also accepted that if this were a bespoke arrangement between the EU and
UK for their FTA, it would need to be cleared with the WTO as a bona fide FTA. However, should there be
a problem of uniformity in this regard to WTO rules, there is a case for this scheme (or something like it) to
replace all rules of origin in current and future FTAs with customs unions (like the EU) around the world.
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producers with access to cheap inputs from outside the FTA could elect to pay the
tariff on that input as applied by the other party to the FTA, so as to ensure that
they are not unfairly advantaged compared to the producer with higher foreign input
costs (because subject to a higher input tariff).9 Provided that this producer could
prove (with documentary support) that he has paid the required amount of partner
country tariffs on his inputs (and that they have not been rebated through re-export),
then that producer should be able to demonstrate at the point of export to the FTA
partner that his finished product complies with the desired level playing field of the
FTA as regards inputs.10
How would this be done? Already, when goods are imported from abroad (including
from the EU to UK), it is necessary to cite the import tariff code to determine whether
it is tariff free, or reduced tariff, or full tariff. The shipper can do this in advance, and
pay any tariffs due ahead of time, so that when the goods arrive they can be simply
waved through. We would envisage something similar for UK exports to the EU, with
the tariff codes for all the relevant intermediate inputs (i.e. those that do not meet the
rules of origin) incorporated into the finished good listed on the customs form. The
cumulative tariff on these inputs would be paid in advance (though the finished good
itself would be tariff free), and the final good simply waved through EU customs when
shipped with the ‘input duty paid’ sticker on it (and some reference code indicating that
the good is being imported under the rules-of-origin waiver scheme so that this could in
principle be checked). To whom these input tariffs should accrue would be a matter for
negotiation between the EU and the UK, but under the scheme outlined directly above
they would be collected at the point of import (so by the EU in the case of an EU import from the UK).
So why would the EU not agree to such a reformulation of rules of origin? This
is because rules of origin exist not just to ensure a level playing field, but can also be
exploited for pure protection. The EU tariff system protects EU members from foreign competition, except from countries that enjoy an FTA with them. Rules of origin,
meanwhile, protect the EU not just against unfair competition (the level playing field)
from its FTA partners, but also against fair but unwanted competition from those FTA
partners. This explains why rules of origin have some bizarre qualities. A good that has
been manufactured in the EU ceases to be of EU origin the moment it leaves the EU. If
its FTA partner attempts to re-export it back to the EU, it becomes a non-originating
product from either party and is subject to the relevant EU tariff. It would only qualify
as an originating product if it had, in the interim, been substantially worked on and
altered. There is no economic logic to this change of status, but there is a protectionist
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IV.
Non-tariff barriers and equivalence
The TCA between the EU and the UK only covers trade in goods, and has left the
governing arrangements for the key sector of financial services trade, in particular,
11 The aim here is to divert a lot of goods traffic between the Republic of Ireland and the rest of the EU
away from the hitherto normal and economically efficient Holyhead/Liverpool/Bristol to Dover route, and
instead to the longer (and less efficient) way to Brest or down the English Channel to Rotterdam. This is not
a ‘level playing field’ objective, but protection of the EU’s transportation industry at the expense of its FTA
partner.
12 Diagonal cumulation operates between more than two countries provided they have FTAs with each
other containing identical origin rules and provision for cumulation between them. As with bilateral cumulation, only originating products or materials can benefit from diagonal cumulation.
13 As it turned out, the application of the proposed punitive rules of origin for electric and hybrid
vehicles were given a 5-year stay of execution (as part of the final fish-versus-cars negotiations on the eve
of the agreed text of the FTA), possibly because the EU realized that the lack of extant domestic battery
manufacturing capacity would result in EU producers being penalized by these rules of origin almost as
much as UK producers. After 5 years it is expected that both sides will have the required domestic battery
manufacturing capacity in place, or if not, there is provision in the agreement for a further extension of
this easement.
14 Although, in principle, the new rules of origin went into force on 1 January 2021, a grace period of
one year was granted during which compliance with the rules would not be challenged while exporters got
used to the new rules. UK exports to the EU experienced a big dip in January 2021, but they subsequently
recovered to levels not much lower than pre-Brexit during the remainder of 2021. This initial dip and recovery
probably relates to exporters getting used to the new burden of paperwork and, in the case of larger exporters
used to handling such administrative matters elsewhere in the world, taking it in their stride. There may well
be another sharp export dip in January 2022, when the rules of origin are more aggressively enforced by the
EU. It is at this time that we can expect this subject to become a live and noisy political issue again.
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one: it is designed to prevent transit trade (apart from sealed shipments) that involve
shippers repackaging (but not altering) cargo to optimize transportation.11
The EU’s rules of origin also exist to scupper what the EU’s negotiating chief Michel
Barnier derided as the UK’s ‘assembly hub’ (Barnier, 2020). A particular focus here is
the UK’s car industry. If UK car manufacturers were to pay the same tariff on their inputs as EU manufacturers (as under the scheme outlined above), one must wonder why
the EU would not be willing to give up its rules of origin. It is for the same reason that
the EU won’t allow the UK diagonal cumulation with Japan (which has similar FTAs
with both the EU and UK), allowing the UK to import Japanese parts without falling
foul of the rules of origin.12 The UK would appear to be particularly good at this kind
of assembly work. It has created a lot of jobs in the UK, which the EU would like to
relocate to Europe.13 In short, despite entering what is supposed to be a ‘free trade
agreement’, seeking only a ‘level playing field’, the EU actually wants extensive industrial protection from its FTA partner following its departure from the EU.
The scheme outlined in this paper to replace rules of origin for non-originating inputs
with partner-tariff paid inputs would ensure and make transparent the level playing field
purpose that the (imperfect and blunter) rules of origin were intended to protect. Any residual rules of origin would then be revealed for what they would be—devices to protect
one party from free trade with the other party to the supposed FTA. Such ‘transparency’
might be resisted by the EU, but it would be hard to justify such resistance.14
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for future discussion. One feature of the latter that has been mooted is the possibility
that the de facto ‘equivalence’ of each party’s regulatory regimes for financial services
should be grounds for allowing the UK to operate largely unfettered in the EU (and
vice versa), as it had done while the UK was a member of the EU. The perceived drawback of this arrangement from the point of view of the UK is that the EU acknowledgment of equivalence is one that the EU could unilaterally withdraw with relatively
little notice. It is not the purpose of this paper to explore the possibilities and potential
snags of a future deal on financial services. However, the concept of equivalence cited
in the context of financial services is one that could usefully be deployed to deal with
the non-tariff barriers that have emerged as a major impediment in post-Brexit goods
trade since 1 January 2021.
A large part of these non-tariff barriers is represented by the onerous paperwork
that is purportedly designed to ensure that the EU’s regulatory standards for products are being respected. In a situation where a third country, e.g. Canada, has joined
an FTA with the EU from a starting point of regulatory frameworks that are very
different from those of the EU, such paperwork and proof of compliance would be
an entirely reasonable request. However, quite uniquely, the UK has sought an FTA
with the EU from the vantage point of a country that is already fully aligned with the
EU on product standards—by virtue of its prior full membership of the EU. Apart
from the legal separation of the UK from the EU, nothing has changed regarding
the UK’s product standards. For example, the handling of the harvesting and export
of crustaceans from the UK to the EU was exactly the same on 31 December (when
paperwork was not required) as on 1 January (when it was required). The result of
this paperwork has been a substantial reduction in what was supposed to be ‘free
trade’, and in some cases (e.g. the export to the EU of langoustines) its almost complete disappearance.
The solution to this observed problem—if the purpose of the paperwork is purely
to ensure the level playing field—is to apply the above principle of equivalence to
this trade in goods, on the grounds that regulatory compliance can be assumed because nothing has changed. The grant of such equivalence could, of course, be quite
reasonably rescinded at a later date if the EU were to judge (and have evidence) that
product standards in the UK had at some future point been degraded sufficiently to
compromise their own markets. It is notable that the UK chose to defer its own paperwork (as would otherwise apply to third countries), initially for 6 months (extended
to a full year) to allow EU suppliers time to adjust to the new UK paperwork regime.
Clearly, UK regulators were not concerned that this delay would compromise product
standards for EU imported goods, because they knew perfectly well that nothing has
(so far) changed. If the EU refuses to do the same, i.e. effectively grant (possibly temporary) equivalence, then the suspicion must arise that the purpose of this paperwork
is not so much the guarantee of a level playing field, but instead more the exercise
of industrial protection against its FTA partner in a market where ‘free trade’ is supposed to have been agreed. To apply a form of enduring ‘punishment’ for leaving the
EU—especially one which seemingly contradicts the stated purpose of the successor
agreement—would not seem to be a good basis for mutually more profitable relations
between the two sides in the future, even if the intention was, to misquote Voltaire,
‘pour décourager les autres’.
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Adam Bennett and David Vines
Northern Ireland and the border
15 Prior to Brexit the UK had established its own UK-wide steel quotas for imports from abroad (including from the EU post-Brexit), preparatory to departure from the EU, with the aim of protecting its steel
industry from (e.g. Chinese) dumping, in the same way as the EU aimed to protect its own. Under the FTA
agreement, Northern Ireland is treated as being effectively still part of the EU. Because shipments of steel
from Great Britain into Northern Ireland are considered ‘at risk’ of leakage into the EU (via the Republic of
Ireland), they are subject to the UK steel quota set by the EU. This means that those shipments could run up
against a binding EU total quota limit for UK-originating steel. This problem is the greater because the UK
share of the EU quota was almost certainly determined on ‘normal’ UK shipments to the (rest of the) EU,
which did not include Northern Ireland. So the resulting quota was (including Northern Ireland) probably
too small. To help ease this problem, the UK announced that even though it might be entitled to charge its
own steel quota tariff for EU shipments to Northern Ireland (because this quota applies to EU shipments to
the UK as a whole), it would waive this right pending a long-term solution to the problem.
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The need for equivalence (or something like it) for handling border checks and paperwork is especially important for shipments between Great Britain (which is outside
the EU single market) and Northern Ireland (which is treated as effectively within the
single market) as governed by the Northern Ireland Protocol. The deep-seated tensions
that were laid to rest by the GFA in 1998 by, inter alia, eliminating one border (between
Northern Ireland and the Republic of Ireland), now risk being inflamed again by the
FTA which has introduced another (new) de facto border, this time between Northern
Ireland and Great Britain. This imposed border between two parts of a single United
Kingdom has become one of the most sensitive features of the FTA agreed between the
EU and the UK.
The paperwork required to ‘police’ the leakage of non-single-market compliant
goods from Great Britain into the EU via Northern Ireland has created some absurd
anomalies, such as requiring tractors and machinery returning to Northern Ireland
after hire in Great Britain (i.e. entirely within the UK) to have British soil washed from
them before being allowed entry. This would seem to be both symbolically unwise as
well as wholly unnecessary. Reflecting the extraordinarily unusual nature of this particular feature of the FTA, some of these anomalies appear to have been completely
unanticipated. An example of this is the handling of steel quotas.15
While the equivalence route could iron out a lot of the problems that have arisen over
this new ‘border’, the border itself could not be eliminated entirely. Although rules of
origin could be replaced by the tariff-payment scheme recommended in this paper, this
scheme would still require some border certification, to ensure that the goods had paid
the required import duties on their inputs. So even with a ‘light touch’ and equivalence,
there is no neat solution to the Irish Sea border, because the problem is the symbolism
of the border itself (however deftly it is policed).
The only way out of this dilemma would be to put the border instead in the Celtic
Sea. The latter would avoid all ‘politically sensitive’ borders with Northern Ireland, and
yet protect the EU’s single market from UK ‘leakage’. It would, of course, mean that
the Republic of Ireland would face a border with its EU co-members. But most trade
between Ireland and the rest of the EU went via the UK prior to 1 January 2021, and
ideally should continue to do so. And there will be a border and border checks between
Dover and Calais/Rotterdam etc. anyway. If the equivalence rules are used sensibly,
The EU–UK Trade and Cooperation Agreement: lessons learnt
77
VI. Implementation of our proposals: the role of the
Partnership Council
With a large part of the envisaged future trading relationship between the EU and the
UK, especially in the area of services, yet to be defined, and with what has been already
agreed for trade in goods representing to a considerable degree a departure, sometimes
in unexpected ways, from the frictionless trade that prevailed before the disengagement
of the UK from the EU, it is inevitable that there will continue to be disputes and disagreements between the EU and the UK for some time to come. The rushed nature
of the negotiations combined with the rancour typically associated with a divorce (as
opposed to the harmony associated with nuptials that precede most discussions on possible FTAs), make it especially important to try to identify potential conflicts before
they become hot, and to resolve them quietly without the hostile megaphone diplomacy
that characterized much of the Brexit negotiations through 2020.
Nevertheless, day by day, the Financial Times is full of news stories about how the
Northern Ireland problem can only be resolved if both sides do their best to make it
workable. There are also more general stories, day by day, about how trade between the
rest of the UK and the EU will only settle down if similar best efforts are made to make
it workable. How can ‘make it workable’ be achieved?
16 It is hard to see how Ursula von der Leyen’s decision (quickly rescinded) to invoke Article 16 of the
Northern Ireland Protocol on 30 January 2021 (as part of the Covid-19 vaccine spat with AstraZeneca) and
assert a border between Northern Ireland and the Republic of Ireland could be conceived as being consistent
with the bilateral treaty between the Republic of Ireland and the UK in the GFA, or thereby be consistent
with international law. The rapid reversal of this decision presumably indicates the EU’s recognition of this
dilemma.
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Irish trade should avoid perverse non-tariff barriers (especially if rules of origin are redefined to stop them losing their origin via export), and Irish goods, of course, wouldn’t
be subject to any tariffs. Ireland, meanwhile, would get the best of both worlds—cheap
goods from the UK, all the benefits of EU membership, and no tensions in Northern
Ireland. The economic merits of such an arrangement would be considerable, given
the importance of Irish trade with the UK, but it would, of course, bat the political
problem of an internal border out of the UK and into the EU instead.
The acceptance of the Irish Sea arrangement was the price the UK had to pay for
the FTA. If the UK had opted instead to forgo an FTA and operate solely on WTO
terms and at the same time pursue a liberal trade strategy, then it could have chosen to
eschew this Irish Sea border (for goods, if not for migrants). Consistent with its commitments under the GFA, it would nevertheless have been required to keep the land
border with the Republic of Ireland open. If the EU remained determined to protect its
single market against leakage from a non-EU member (i.e. the UK), it would then have
had no choice but to impose a border instead in the Celtic Sea, separating the Republic
of Ireland from the rest of the EU, as the GFA, which was signed by an EU member
country, would preclude them from enforcing a land border with Northern Ireland.16
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Adam Bennett and David Vines
17 At present it looks as if the EU is free to respond to a divergence of standards in relation to one category of goods, by means of a ‘punishment’ imposed on the UK’s exports in some other area. Furthermore,
it looks as if the EU is free to impose disproportionate punishments when the UK is judged to be adopting
different standards; that is to say, it looks as if the EU’s defence of the integrity of the Single Market goes
right up to and includes a nuclear option.
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The Partnership Council has been charged with adjudicating, via its balanced membership, disputes between the two sides. We believe that this body will come to be crucial in the search for a workable solution. We say this especially because the proposals
in this paper are our own contribution to the discussion of what ‘make it workable’
actually means.
Our proposals to replace rules of origin for non-originating inputs with partner-tariff paid inputs would ensure and make transparent the level-playing-field purpose that
the rules of origin were intended to protect. Any residual rules of origin would then be
revealed for what they would be—devices to protect one party from free trade with the
other party to the supposed FTA. To implement this proposal of ours would require
administration, by the Partnership Council, to ensure that the appropriate tariffs were,
for example, being paid by those importing components into the UK to be used in the
production of goods which were to be exported to the EU. And vice versa for those
importing components into the EU to be used in the production of goods which were
to be exported to the UK.
Our proposals to do with non-tariff barriers have two parts, and we believe that the
Partnership Council will be crucial in dealing with both of these.
First, we believe that much paperwork might be avoided while the UK retains standards similar to those that rule in the Single Market. To implement this proposal of ours
would require confirmation, by the Partnership Council, that this similarity of standards remained the case. It would then require an agreement, in the Partnership Council,
to forgo paperwork.
Second, we note that it is the ambition of those who promoted Brexit in the UK to
set about adopting production processes and standards for goods which might at some
point in the future diverge from those that prevail within the Single Market. The proposals put forward in this paper would allow this to happen. In that case, of course, the
burden of paperwork would resume. And indeed, under the Treaty, the EU would be
allowed to retaliate against the UK, as and when such changed standards gave rise to
what is judged to be unfair advantage.
As a result of this, it appears obvious to us that the following three questions will
arise repeatedly, and we think that the Partnership Council will be called on to answer
them, over and over again. First, what is different and what is the same, in relation to
any set of standards in the UK when compared with those in the EU? And, second,
what retaliation should the EU be allowed to impose in response to standards being
judged to be different, and when and how should the EU be prevented from doing this
when UK standards are judged to remain substantially the same?17 Finally, third, how
will the Partnership Council be able to defend its autonomy, and sovereignty, from encroachment on its area of jurisdiction by the ECJ?
It is clear that we do not yet know how the Partnership Council might deal with these
questions. There is a valuable discussion by Paul Craig of the legal aspects of this set of
issues. See Craig (2021). Paul Craig has commented on our own argument as follows.
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79
He added that it is not yet clear
whether the Partnership Council is accorded decisional power in the areas dealt
with by this paper. However, even if it does not have such power, the bottom
line is that the Partnership Council could, if it was so minded, recommend
changes of the kind advocated in the paper. It is clear, moreover, from the terms
of Article 7, and from other dispute settlement provisions in the TCA, that the
Partnership Council will play a key role if there are serious disputes about the
application/implementation of the TCA.18
We would add that the Partnership Council could usefully have its role enhanced by
a permanent secretariat whose role is to anticipate and resolve problems behind the
scenes. This might help turn a relationship embittered by the dissolution of an economic and political marriage into one of friendship and cooperation, as the title of the
agreement suggests was actually the intention.
VII.
Conclusion
We argued, in section II above, that the TCA has restored several aspects of sovereignty
for the UK. But the outcome has been one with strings attached, i.e. one in which there
is a cost in terms of trade with Europe, compared to the UK’s prior membership of the
EU.19 A first task of this paper has been to show how this cost, in terms of trade with
the EU, might be reduced. Doing this would, we say, involve a deliberate surrender by
the UK of two aspects of its sovereignty, namely the ability to set tariff rates on imported inputs lower than those in the EU for goods to be exported to the EU, and the
ability to set standards which differ from those in the EU.
In negotiating its TCA with the EU, the UK has faced a negotiating partner which
has also been determined to protect its own ‘sovereign right’. It has become clear
that this right has been seen, by the EU, as not just a right to protect the integrity
of its Single Market, i.e. a right to preserve a ‘level playing field’, but also a right to
18
Paul Craig, note to the Editor, Oxford Review of Economic Policy, 3 June 2021.
Our conclusions are very similar to those reached by Paul Craig. He writes, in the conclusion to Craig
(2021), as follows. ‘Brexit has increased the UK’s sovereignty and control... [and] the ability to proceed unilaterally. This is, however, qualified both institutionally and substantively [because of non-regression clauses
and the scope for sanctions].... It should also be remembered that all such sovereign choices have consequences which include the substantial burdens flowing from matters such as increased customs formalities
and transaction costs.’
19
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It is clear from what is now Article 7 [of the] TCA that the Partnership
Council has a very broad remit. Under Article 7(3) each Party may refer to the
Partnership Council any issue relating to the implementation, application, and
interpretation of the TCA or of any supplementing agreement. The Partnership
Council may then, pursuant to Article 7(4), make binding decisions where the
TCA so provides, and in any other instance it can make recommendations to the
contracting parties concerning the implementation and application of the TCA.
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obtain a degree of industrial protection with which its members feel comfortable, not
just against the rest of the world, but also against its new trading partner, the UK.
It would help defuse misunderstandings if any such protection, applied by the EU,
was explicitly recognized, and asserted, as such. Instead, in the TCA, this protection
is being covertly applied, through the operation of rules of origin and through seemingly unnecessary paperwork. But rather unhelpfully, this is being done under the
cover of a public pretence that the TCA is an agreement that is all about free trade,
constrained only by a need to preserve a level playing field. It has been a second task
of this paper to clarify what is, and what is not, free trade, so as to identify what is,
and what is not, protection. Such clarification might lead to a deliberate surrender by
the EU of an aspect of its sovereignty, namely its ability to act against the UK in a
protectionist manner.
Of course we have to ask whether the EU might be likely to move in this direction.
There is no doubt that Brexit has created some bad feeling on both sides of the
Channel, much like in a divorce. Brexiteers and Remainers in the UK, and all those
who participated in the fraught negotiations in Brussels, continue to refight the
issues in speeches and newspaper articles, like old soldiers discussing a bloody
battle at a commemorative dinner. And there is no shortage of potential flashpoints
to keep emotions alive—Northern Ireland being a key one. This does not create an
environment conducive to reaching compromises that would be to the benefit of
both sides.
But we do nevertheless see a number of potential pressure points toward amelioration.
First, the TCA is creating some clear difficulties for those European States, and industries, which trade or cooperate most closely with the United Kingdom. Two examples
are French fishermen, and German car manufacturers. And it is also conceivable that
the EU may come to regret the way in which it has prevented its citizens from continuing to have unobstructed access to the financial markets in London, whose depth,
competitiveness, and range of services will be hard to replicate in Europe. It is—we
think—just possible that such a loss in gains from trade may in time come to exert some
pressure on EU policy-makers to review their stance.
Second, we see evidence of a willingness of both parties to keep kicking certain cans
down the road, in particular strict implementation of the Northern Irish Protocol. It
may well be helpful to do this, in order to avoid unnecessary tensions getting in the way
of productive talks in other areas outside the TCA, for example talks on defence cooperation. It is moreover possible that, after an extended period of can-kicking, it will
be determined that the risks to the SEM of the informal status quo are actually negligible, so that this status quo could then become de facto semi-permanent.
Third, the position of the US may become critical. Difficulties in Northern Ireland
have led to much rhetoric from the White House, and from Congress, about the importance of preserving the GFA. It is just possible that the US might come to exert pressure on both the UK and the EU to reach agreement. This could end up happening in
a similar way to what happened when the US exerted pressure on the relevant parties
in the run-up to the signing of the GFA nearly 25 years ago. It is also possible that the
heightening global tensions in relation to China, and the consequential strategic positioning by the US, the UK, and the EU, might turn out to be relevant. This is because
they might cause the US to exert pressure on the European Union to treat Britain in a
more straightforward, and less protectionist, manner.
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81
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In sum, the way forward which we chart in this paper will require flexibility and imagination in relation to rules of origin. It will also involve two further things: a retreat
from a de facto freedom to set some divergent standards by the UK, and a retreat from
protectionism against the UK by the EU. We see the Partnership Council as the place
where these two retreats might, together, be turned into a cooperative advance. We have
described the gains which might become possible if the UK and the EU were to act together in this way.