Tag Archive for: Brexit

As part of a wider package of defence measures intended to strengthen European defence cooperation and capabilities development, on 5 November 2020 the EU established the rules for ‘third state’ participation.

25 EU Member States are signed up to the EU ‘Permanent Structured Cooperation’ – PESCO.  Of the 47 PESCO capability projects, 38 are aligned with NATO projects.

Post Brexit, the UK – or any UK-based company – involved in a specific PESCO project is subject to the ‘third state’ rules.

“Third states that can add value to a PESCO project ‘may be invited’ to participate if they meet a number of political, substantive and legal conditions”.  Amongst other things:

• A third state must share the EU’s values – and must not contravene the defence and security interests of the EU and its Member States;
• A third state must provide substantial added value.  However, participation must not lead to dependency on that third state or allow that state to impose restrictions on the use of developed capabilities.  The PESCO Member States will retain full control of the project’s intellectual property;
• Participation must contribute to the strengthening of the EU’s Common Security and Defence Policy (CSDP) and the EU’s level of ambition with respect to EU-led military operations;
• Participation must be consistent with the 20 defence policy commitments that PESCO member states have signed up to;
• A third state must agree a Security of Information Agreement with the EU and an Administrative Agreement with the European Defence Agency;
• There will be no blanket acceptance of third states into PESCO projects.  Participation will be by invitation only – and the terms and conditions of participation will be set down in an Administrative Agreement;
• The extent of a third state’s decision-making powers within a specific project will be in accordance with its contribution.  A third state will have no decision-making powers with respect to the overall governance of PESCO, or the strategic direction of the initiative.

These rules apply specifically to PESCO.  The ‘European Defence Industrial Development Programme’ and the future ‘European Defence Fund’ are subject to their own rules on third state participation.

Implications for the UK

Government statements since leaving the EU in January, have indicated that it no longer wishes to achieve the aims that were included in the joint  EU and UK ‘Political Declaration’ that underpins the ‘Withdrawal Treaty’.

Instead, the present UK Government: “favours a flexible ad-hoc approach to future defence cooperation with the EU.  If invited to participate in specific PESCO projects, decisions will be decided on a case-by-case basis.”

The UK’s negotiating objectives stated that foreign policy will be determined: “within a framework of broader friendly dialogue and cooperation between the UK and the EU”.  The document made no direct reference to defence or participation in EU programmes such as PESCO.

Any determination on future UK participation in PESCO will “depend upon how important the Government calculates a specific project to be for the UK’s national interest.”

Part of the decision making process will be to balance the advantages of participation against having to accept all of the EU’s terms and conditions on third state participation – particularly that the primary aim of PESCO is to strengthen EU capabilities, and the general conditions – including handover of the ownership of intellectual property rights to prevent such capabilities being used against the EU and its Member States in the future.

Reference

http://researchbriefings.files.parliament.uk/documents/CBP-9058/CBP-9058.pdf

Europartnership’s Guide to trading with the EU from 1 January 2021 V3

Photo:  UK warship taking part in an earlier EU ‘PESCO’ exercise

With 39 days until the UK leaves the single market, the country risks losing access to European finance markets – and the loss of jobs and revenue that the finance sector supports.

Background

To reduce risk to business and citizens, any financial services firm that operates internationally must be regulated and comply with standards and requirements for each country in which it operates.

This was a time-consuming and expensive process.  The EU simplified matters by introducing ‘passporting’ through a series of ‘single market directives’ – each addressing a specific area of operations.  Today, an EU-based firm authorised in one Member State, is able to operate in another without having to seek additional authorisation.

All UK-based and regulated finance firms lose all their passporting rights when the UK leaves the European ‘single market’ on 31 December 2020.  Without an agreement in place to mitigate arrangements this creates issues for:

• ‘UK’ authorised firms that currently passport their authorisations into Europe.  According to the Financial Times, there are an estimated 5,500 such businesses;
• ‘EU’ and ‘EEA’ authorised firms that currently passport their authorisations and do business in the UK.

At the instant that passporting rights are lost, firms must either: cease operating in the countries they presently passport into; or, apply for and be granted authorisation rights to continue operations by the regulators for each country that they presently passport into.

The Political Declaration – part of the UK-EU ‘Withdrawal Treaty’ – aimed to conclude ‘equivalence’ assessments before the end of June 2020.  That deadline was missed with each side blaming the other.

‘Equivalence’ is a system that can be used to grant ‘domestic market access’ to ‘foreign’ firms in certain areas of financial services.  It is based on the principle that the countries where the firm is based has regimes which are ‘equivalent’ in control, behaviour and outcomes.

‘Equivalence’ carries nowhere near the same rights as ‘passporting’.  However, it is the only option open to countries that are outside the ‘single market’ – which will be the UK position, ‘deal or no-deal’ from 1 January 2021.

On 9 November 2020, the UK took a unilateral decision to grant ‘equivalence’ to all EU and EEA regulated firms.  The Chancellor announced to Parliament “a set of equivalence decisions for the EU and European Economic Area member states.”

The UK’s 22 point ‘equivalence determinations’ allow UK-based banks to use EU financial benchmarks, clearing houses, credit-rating agencies and operational support networks, and it exempts them from finding and holding additional capital required to protect against future losses linked to EU exposures.

The EU cannot grant equivalence to UK finance firms without the unanimous agreement of each of the 27 member states and, with no consensus reached and 6 weeks remaining until the UK leaves the single market– is now unlikely to do so by 31 December.

Bigger firms – and those already operating internationally – have been establishing and registering offices in Europe, according to the CBI.  However, they report that many ‘smaller and medium’ companies have not been able to devote the time and attention to do this – focussing instead on Covid.  They have been working in the anticipation that the Government would deliver on the promises it committed to in the Withdrawal Treaty.

No agreement and no ‘EU-based’ subsidiary means an end to business in the EU for many organisations.  Lack of agreements between the UK and EU in other areas add further complexities – all of which militate against continued operations in Europe for UK companies.  We will deal status of ‘contracts’, ‘enforcement of contracts’, and recognition of professional qualifications in future ‘insights’.

The UK’s temporary solution

To avoid a cliff-edge in which firms might need to suddenly stop operating, the Government announced a ‘Temporary Permissions Regime’ on 9 November.  This will apply to EEA-authorised firms presently passporting into the UK.  It allows these firms to continue operating once the passporting regime falls away for up to three years, while they seek UK authorisation.

The EU has not reciprocated by putting in place a similar arrangement.

In theory, the UK and EU could agree rules on access for ‘financial services’ as part of a trade deal.  However, the Political Declaration did not mention that such an agreement would be reached – only that: “both Parties will have equivalence frameworks in place that allow them to declare a third country’s regulatory and supervisory regimes equivalent for relevant purposes.”

EU and EEA ‘equivalence’

Over time, EU laws developed a system to allow market access for firms based outside the European Economic Area (EEA). Each such law allows, within its specific area, the European Commission to decide whether the financial services regime of a country achieves outcomes “equivalent” to its own. EU financial services law includes around 40 areas for equivalence decisions.

Equivalence allows for market access in specific areas but does not cover most core banking and financial activities, like accepting deposits or providing investment services to retail (non-professional) investors.

Equivalence could not, for example, be a solution to concerns some British residents of EEA countries have that their UK bank accounts may close when banks lose passporting rights.  Importantly, therefore, even if the EU granted the UK equivalence in all areas possible, this would still fall far short of the market access under the passporting system. Equivalence decisions can also be withdrawn at any time.

EU equivalence decisions are based on technical analysis – either a country’s standards are equivalent, or they aren’t.  However, it has long been recognised that these decisions have a “clear political dimension.”

The European Commission meanwhile has focused on concerns around the UK’s “possible divergence from EU rules,” as a reason for withholding equivalence decisions.  ‘Equivalence assessments’ of the UK must be “forward looking” and take into account any British plans to diverge from EU rules.  The EC have also stated that they need more information – despite the UK government providing 2,500 pages of answers to EU questionnaires earlier in 2020.

Present situation

To date, the European Commission only lists one material equivalence decision as having been made in favour of the UK.  This recognises UK clearing houses as being equivalent so EEA firms can use them for derivatives transactions. The Financial Times recently reported that further equivalence announcements are considered “unlikely while talks on a trade deal continue, given the political sensitivities”.

In his statement on 9 November, the Chancellor said the UK Government would not wait for the conclusion of the European Commission’s equivalence assessments before publishing its own.  The Treasury then published a spreadsheet showing that equivalence was being granted to the EEA in 22 areas after the end of the transition period.

The 22 areas include access to the UK market for EEA credit rating agencies and investment firms. In areas not recognised as equivalent, the Chancellor announced a willingness to “continue the conversation” with the EU.

Exports of UK financial services were worth £60 billion in 2017.  Imports were worth £15 billion – so there was a surplus in financial services trade of £44 billion.

43% of financial services exports went to the EU and 34 % of financial services imports came from the EU.  The sector contributed £29 billion in tax in the UK

References

Political Declaration: June 2020 deadline to conclude equivalence assessments: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840656/Political_Declaration_setting_out_the_framework_for_the_future_relationship_between_the_European_Union_and_the_United_Kingdom.pdf#page=12

Chancellor’s announcement of EU equivalence concessions: https://hansard.parliament.uk/commons/2020-11-09/debates/D5E911A9-1270-457F-9F6A-57AE5C272FBA/FutureOfFinancialServices

Temporary Permissions Regime: https://www.fca.org.uk/brexit/temporary-permissions-regime-tpr

EU Equivalence with 3^rd Countries (which UK becomes on 1 January 2021): https://ec.europa.eu/commission/presscorner/detail/en/IP_19_4309

https://www.ft.com/content/4efd8bcd-0e95-48ef-b13f-b16d71da0168

Photo:  Daily Express

We have reported on concerns about disruption to the flow of goods and food into the UK as it leaves both the EU ‘single market’ and the EU ‘customs union’ on 31 December – irrespective of whether the Government can reach a trade ‘deal’ or not.

These concerns have been highlighted by investigative reports from the transport industry, Parliament and the Government’s own watchdog, the National Audit Office.

In February, the Government chose the ‘hard’ Brexit option.  There was no legal nor as yet proven trading reason to leave both the single market and the customs union.  The choice has left the nation left itself exposed to supply-chain disruption through a combination of forces that have come together towards the end of the ‘transition’ period.

The early claims of Brexit Ministers, such as David Davies and Liam Fox, that it was the ‘easiest set of negotiations imaginable’ proved wrong.  Nor did the Government learn lessons from its predecessors between 2016 and 2019 – that the EU are thorough, rigorous and of tough negotiators with red-lines unanimously set by the 27 EU member states.  The negotiations are going to the wire, and any ‘deal’ can now only be a ‘thin’ one – and any agreement is now at risk of failure if any of the complex steps to bring it into law falters.  It is already stretching UK constitutional law, with less than the minimum statutory 21 Parliamentary ‘sitting’ days now available – unless Parliament sits every Saturday and Sunday until the New Year.  The Brussels-based European Parliament is struggling to get MEPs together from across Europe due to Covid-19 – and there is no provision for them to ratify a Withdrawal Treaty by remote working.

Covid-19 has deflected attention of politicians and business leaders away from preparing for the Brexit end-game.  HMRC is introducing new rules, regulations and reporting on IT systems that – according the National Audit Office – will not be ready for 1 January.  Haulage Companies and shippers are only now getting guidance on what procedures are necessary.  A 270-page detailed guide for importers and exporters – issued less than a month ago – is incomplete.  Decisions continue to come – even at this late stage – on whether temporary staff can be recruited, and on what conditions.  Law continues to evolve – for instance, this week on emissions for cars and lorries – without which there can be no certainty for manufacturers.

And Covid-19 has created other operational problems that become a ‘double-whammy’ from the end of the year.  This week an announcement of disruption to smooth operations in the UK’s biggest freight terminal, Felixstowe highlights the issue.  The workaround in order to keep goods flowing was to divert a container vessel to Rotterdam, unload and ferry back to the UK via London Thamesport.  This contingency will not be possible after 1 January 2021 – ‘deal or no-deal’.

Felixstowe Port is privately owned and operated by Hutchison Ports who in a statement on their website, blame pre-Brexit stockpiling and the pandemic: “The Port of Felixstowe, like other major container ports worldwide, is still experiencing a spike in container volumes and dealing with the consequences of the ongoing Covid pandemic.  The current high volumes will last at least into December and possibly through into the New Year, but we are working hard to minimise the impact on daily operations and to maintain vital supply chains.”

The port is presently handling 18,673 containers arriving or despatched by rail, and 29,080 containers onto or from road vehicles per week.

The BBC reported that a Taiwanese shipping firm re-directed one of its ships to bypass Felixstowe because of “serious port congestion”.   An Evergreen spokesman said the firm had been told by Felixstowe’s owner that a berthing slot – where cargo is unloaded – would not be available for up to 10 days after the ship’s scheduled arrival.

Part of the problem appears to be a shipment of 11,000 containers of PPE ordered by the Government that is taking priority.  There is also a record number of empty and ‘long-term’ containers taking up storage space in the docks area.

Hutchison Ports have acknowledged issues raised by hauliers with the system for booking delivery and collection slots – however, a spokesperson is reported by the BBC as saying that “improvements to the system are under way.”

We cannot overstate the risks of disruption to critical manufacturing supply-chains, to essential medical supplies – and to the 40% of food that is imported not ‘home grown’.

The Department for Transport is reported as saying that it is “aware of the issues at Felixstowe Port” and – whilst stressing that this is a “commercial matter for industry to resolve” – said it would continue to monitor the situation for any impact on wider supply chains.  Monitoring is not enough, contingency plans need to be triggered now.  We firmly believe that as these forces come together – it is far better to be safe than sorry.

Footnote – Extract from Parliament’s ‘Register of Members’ Financial Interests’ – as at 09 November 2020 

“Grayling, Chris (Epsom and Ewell):  From 1 September 2020 to 31 August 2021, Strategic Adviser to Hutchison Ports Europe, of 5, Hester Road, London SW11 4AN.  I will be paid £100,000 pa, payable quarterly. Hours: around 7 hrs per week.”  Interest registered 04 September 2020.

References

https://www.portoffelixstowe.co.uk/

https://www.bbc.co.uk/news/business-54908129

https://publications.parliament.uk/pa/cm/cmregmem/201109/grayling_chris.htm

It is vital to the future of the UK that before the end of the Brexit ‘transition period’, the Government  has established the future trading relationship with the EU and, in parallel, agreed ‘trade deals’ with nations around the World.  Without agreements in place, there is risk to disruption of to food supplies and essential industrial supply-chains.  Having a wide set of global agreements in place is required if the UK is to open up the ‘global opportunities for growth’ that was a core promise of the Brexit manifesto.

The reality – with 50 days left until the UK leaves both the EU ‘single market’ and ‘customs union’ – is a long way short.

The EU presently accounts for 47% of UK international trade.  Talks are going down to the wire – but a ‘deal’ between the UK and EU – should one be reached at all – can only be a ‘thin’ one – and restricted to trade in goods.  There is now little chance of a deal on services, energy, finance, education, security, data, justice, fishing and governance – and many other areas of cooperation such as scientific research, fighting crime, and the environment.

The Government approach beyond Europe has been to attempt to ‘roll-over’ as many EU and ‘third-country’ deals as they could.  With the exception of negotiations with Japan, there has been no attempt to redress the balance of terms that apply to British businesses under the auspices of the EU trade deals.

With 50 days until the UK can no longer trade on EU terms – with any of the 27 EU member states or more than half of the existing trade deals with non-EU countries, British businesses face  disruption to as much as £80bn of global trade.

According to the Gov.UK website on 11 November 2020, 15 agreements remain to be re-negotiated and signed with the UK as a standalone sovereign state.   Countries such as Mexico, Singapore and Canada.  The list, below, details the countries and the 2019 trade volumes.  Without a specific agreement in place, trade with these nations relies on the baseline ‘World Trade Organisation’ terms.

Shadow International Trade Secretary, Emily Thornberry, has written to Trade Secretary, Liz Truss, pointing out that unless these deals are concluded and published by today, 11 November, there is insufficient Parliamentary time under the law for MPs to ratify them.

WTO terms means imposition of tariffs and quotas amounting to £38bn of British exports – and £41bn of imports.  The deficit – 5.5% of UK total trade – comes on top of the hit of leaving the EU single market and customs union.  There is no official estimate of the impact of no-deal with the EU, as goods flow freely today without reporting and recording.

Table 1: 2019 value of UK trade with countries with which EU deals not yet rolled over – £m

Source: UK Government, ONS

The Government has negotiated ‘rollover’ for 24 EU trade deals totalling £146bn of UK trade – around 10% of total.  Note that ‘rollover’ has not been like-for-like in some cases, for example, Switzerland – to the disadvantage of UK businesses.

The Government has ‘extolled the virtue’ of rollover deals, whilst industry bodies – and Parliamentary scrutiny committees – have been expressing increasing concern about the Government’s tendency to exaggerate their economic benefits.  Liz Truss hailed the UK – Japan trade deal as a “landmark moment for Britain” which “shows what we can do as an independent trading nation”.  On examining the detail, her department’s own economists found it would deliver a long-term boost to UK GDP of just £1.5bn – or less than 0.07” of the UK GDP.

Table 2: The ‘trade gap’ as at 11 November:

Source: ONS

The Conservative manifesto claimed that new post-Brexit trade deals would allow Britain to “enrich ourselves” – and cited ambitions to do free trade deals covering 80 per cent of UK trade within the next three years, starting with the USA, Australia and New Zealand.

It is generally accepted that the global trade benefits from Brexit will be small.  More importantly, with so many deals coming to a sudden end at 23:00 GMT on 31 December – is business continuity.   Speaking for the Institute of Directors, Allie Renison is reported as saying that business priority is not new deals – rather it is preserving existing arrangements.  “Most company directors consider an EU agreement their top trade priority – but rank continuity with others as more important than new trade deals, particularly in manufacturing with countries like Turkey where we have enjoyed longstanding preferential access through the EU customs union.”

We are posting this article on 11 November 2020 because it is a significant date in the Brexit timetable

Under the 2010 Constitutional Reform and Governance Act, International Treaties have to be laid before Parliament for 21 ‘sitting’ days before they can be ratified.  Emily Thornberry, in her letter to Liz Truss, said Labour had been informed by the relevant Parliamentary authorities that – as the House of Commons is due to break for Christmas on 17 December – 11 November is the last day that the deals can be submitted and still receive the minimum 21 days of scrutiny.

She added in her letter that: “What makes this abysmal and shambolic state of affairs all the worse is that when we look at the length of time your department has had to get these agreements in place, ensure proper parliamentary scrutiny, and protect our continued free trade, it has been so totally avoidable.”

Reference: (website updated to 11 November 2020) https://www.gov.uk/guidance/uk-trade-agreements-with-non-eu-countries#trade-agreements-that-have-been-signed

The UK joined the EU on 1 January 1973.  From that day forward, the EU has been the overarching authority formatters of: trade; competition; the environment; agriculture; fishing; security; data; and much more – governing the daily political, business and personal lives of all the bloc’s 450 million citizens – including 67 million across the United Kingdom.

The UK is empowered to make policy decisions in these areas – but must remain compliant to all EU directives, regulations and case law.

Westminster alone legislates for matters such as trade and competition law.  Neither of these – together with some other defined ‘reserved’ or ‘excepted’ matters – have been ‘devolved’.

In 1999, non-reserved matters were devolved by Westminster to Wales, Scotland and Northern Ireland.  In this sense, the UK’s four governments presently share these competencies with the EU, legislating in their respective territories.

The Scottish and Welsh Parliaments, for example, can pass laws relating to agriculture and the environment as ‘devolved’ matters – irrespective of what Parliament legislates for England, so long as they comply with EU laws.

At the end of the Brexit ‘transition period’ – 23:00 GMT on 31 December 2020 – the ‘reserved’ and ‘devolved’ competencies of the UK and ‘devolved administrations’ will remain the same.  However, their all have discretion to make policy within their remit – but free of the EU Treaty requirement to comply with EU law.

Discussions were held to avoid ‘potentially disruptive policy differentiation between the four nations’ once EU legal frameworks ‘fell away’.  With 60 days until the end of the ‘transition period’, there remain disagreements as to how differences would be managed.  The devolved administrations have all accepted the need for common policies in certain areas – but argue they should be ‘negotiated and agreed’ between the four nations rather than ‘imposed’ from London.

The situation is even more fraught for UK ‘Overseas Territories’ – listed below – including Gibraltar and the Falkland Islands.  Neither the Channel Islands, nor the Isle of Man were part of the ‘devolution’ of powers process – and they, too, have largely been excluded from post Brexit-transition discussions.  This despite most of them returning majority vote in favour of remaining part of the EU – in the case of Gibraltar 96% voted ‘remain’.

The Conservative Government made a clear choice – and has legislated – for a ‘hard’ Brexit.  This means opting to leave both the ‘single market’ and the ‘customs union’ at the end of the ‘transition period’.   Remaining in one or both would have ensured no friction across the borders in the island of Ireland and between Gibraltar and Spain.

This decision is now highlighting both practical and political difficulties with mounting tensions that have the potential to challenge the very concept of a ‘United’ Kingdom.

As Great Britain exits the EU from 1 January, Northern Ireland will stay in the EU ‘single market’ for goods.  The shared border on the island makes it impractical to do otherwise – and ‘Good Friday’ agreement that enshrines the ‘peace process’ demands that there shall be no border checks.  Instead, there will be new checks and controls and requirements for all goods entering Northern Ireland from Great Britain.

The City of Birmingham University established a specialist ‘Brexit’ faculty in 2017 to study and forecast impacts of Brexit.  They have, amongst many other in-depth analyses over the last 3 years, recently published findings on devolution, with a specific focus on attitudes and trends in Gibraltar and Scotland – and attitudes towards Westminster in the English regions, using West Midlands as an example.

Their finding adds academic weight that underpins the general feeling that the United Kingdom is drifting apart.  Consider the voices in Parliament from the ‘red wall’ constituencies – Tory MPs that  now represent long-held Labour seats.  Unless there are strong forces and clear direction that begins change perceptions about levelling the playing field, the forces that will lead to fragmentation of the United Kingdom will grow.

The ‘Internal Market’ Bill, presently passing through Parliament is proving to be both divisive at home and potentially damaging to the UK’s reputation Worldwide – Presidential candidate, Joe Biden, making it clear that there can be no preferential US-UK Trade Agreement possible if the Bill becomes an Act.

Devolution – the final irony

One requirement on the UK when joining the Economic Community in 1973 was to ‘devolve’ the power of Westminster into 8 UK ‘regions’ – including – for example – Scotland, Wales and Greater London.  Given complexity of the task a ‘transition period’ of 30 years was allowed.

In the early 2000’s – with little evidence of progress – Tony Blair’s government received a formal warning from the European Commission of default on the agreement and required to get on with it.  John Prescott was the Minister responsible – setting up regional assemblies and, for instance, trying to bring 43 county police forces and fire brigades into 8 ‘regional’ forces.

Westminster has simply continued to be the single overarching legal authority – still with 650 MPs rather than the envisaged much smaller ‘coordinating body’ sitting between the 8 regions and the European Parliament – a regional model similar to many across the rest of Europe.

It is curious to think that Brexit – given in the manner of implementation driven by the present Government – is fuelling the devolution debate…

…and if that happens – we may yet end up with the 8 autonomous regions proposed by Brussels nearly half-a-century ago!

References:

https://commonslibrary.parliament.uk/eu-powers-after-brexit-power-grab-or-power-surge/

UK Overseas Territories: Anguilla; Bermuda; British Antarctic Territory; British Indian Ocean Territory; British Virgin Islands; Cayman Islands; Falkland Islands; Gibraltar; Montserrat; Pitcairn Islands; St Helena, Ascension and Tristan da Cunha; South Georgia and South Sandwich Islands; Turks and Caicos Islands.

Photo: Flags of the nations of United Kingdom in Parliament Square, 2019