UK-EU trade deal addresses food, energy and defence

The new “strategic partnership” announced on Monday also provides for the potential participation of Britain in the EU electricity market, closer collaboration between the UK and EU on defence funding and procurement, and the linking of the UK and EU’s respective emission trading schemes (ETSs).

Other measures provided for in the deal include an extension of existing reciprocal fishing rights in each other’s territorial waters until 30 June 2038, and an agreement to work towards “a balanced youth experience scheme” that would let young people in the UK work or study in the EU more easily, and vice-versa.

The prospective new arrangements are still to be agreed, but the partnership announced represents a significant step towards the resetting of post-Brexit UK-EU trading arrangements, which are governed by the UK-EU Withdrawal Agreement and the accompanying Northern Ireland Protocol as well as the subsequent Trade and Cooperation Agreement negotiated in late 2020.

It is the third trade deal the UK has struck this month, after earlier agreements with India and the US.

In relation to food and livestock trade, the new UK-EU strategic partnership provides that the parties should work towards the establishment of a new ‘common sanitary and phytosanitary area’ underpinned by a UK-EU Sanitary and Phytosanitary (SPS) Agreement, providing for “the vast majority of movements of animals, animal products, plants, and plant products” between Britain and the EU, and between Britain and Northern Ireland, “without the certificates or controls that are currently required”. This arrangement would involve the “dynamic alignment” of related UK rules on matters such as food safety and consumer protection with all relevant EU laws.

The two sides have also agreed to “explore in detail the necessary parameters” for UK participation in the EU’s internal electricity market. The move could support increased investment in renewable energy projects and enhanced competition between electricity producers, which bid to supply the electricity needs of businesses and homeowners across the EU currently through the marginal pricing system.

A link between the UK’s Emission Trading Scheme (ETS) and the EU’s own ETS is also envisaged. Both schemes are similar, in that they impose caps on carbon emissions that reduce over time, with specific allowances in different sectors and the ability for businesses to trade those allowances between one another via secondary markets. Those arrangements are based on goods being calculated as having a particular ‘carbon price’. However, the scope of each scheme is different.

“The sectors falling in the scope of the ETS linking agreement should be clearly defined to avoid risks of carbon leakage and competitive distortions,” according to the new agreement. “Among others, this scope should include the sectors of electricity generation, industrial heat generation (excluding the individual heating of houses), industry, domestic and international maritime transport and domestic and international aviation. The agreement should provide for a procedure to further expand the list of sectors to be covered by the linking agreement.”

The UK and EU have agreed that any deal to link the UK ETS and EU ETS should provide for mutual exemptions from the carbon border adjustment mechanisms (CBAM) each is putting in place.

The UK government intends to introduce a new CBAM from 1 January 2027 – one year after the separate EU CBAM is due to become fully operational. Under both the UK and EU CBAM systems, a levy will be imposed on the importation of certain goods from other countries where the goods have been produced via more carbon-intensive means. The mechanisms are designed to ensure that domestic businesses that incur costs of producing goods sustainably are not under-cut by foreign competitors that do not face as stringent climate and sustainability duties in their home jurisdictions.

On defence, the strategic partnership agreed provides for the UK to potentially participate in a €150 billion loans-for-arms scheme, backed by the EU budget. This will allow the UK, alongside the EU member states, to borrow and spend funding on weapons systems and platforms through joint procurement. The UK would be expected to contribute to the EU fund in order for UK defence companies to be able to bid in the joint procurements that the loan-for-arms scheme will enable.

Dr Totis Kotsonis, trade expert at Pinsent Masons, said: “The 19 May announcements provide for a step change in the post-Brexit relationship between the UK and the EU, deepening and widening the relationship and the connections between the respective markets without crossing the UK government’s ‘red lines’ of not rejoining the EU Single Market, the Customs Union, or providing for freedom of movement.”

“On the defence front, if the UK’s collaboration with the EU’s loans-for-arms scheme is confirmed this will be a great boon for our defence industry that would otherwise be excluded from the opportunities that joint procurements under the scheme will create,” he said.

“At the same time, it is notable that some of the proposed arrangements, including in relation to the establishment of a common SPS area, the UK’s participation in the EU internal electricity market, as well as in relation to linking the UK and EU ETSs, will involve the UK committing to aligning dynamically its laws with related EU legislation as well as recognising the Court of Justice of the EU’s role as the ultimate arbiter of all questions that relate to EU law,” he said.

“Under the proposed arrangements, the UK would also be involved at an early stage and contribute ‘appropriately’ as a non-EU country to the ‘decision-shaping’ process of EU legislation in the fields that are subject to dynamic alignment. Ultimately, most businesses will welcome the potential for closer trading links between the UK and the EU, not least at a time of great economic uncertainty and unpredictability as to the wider global trading conditions,” Kotsonis added.

According to Kotsonis, the trade barriers introduced after Brexit have made trading with the EU – the UK’s largest trading partner – more complex, more time-consuming, and more costly. He said that doing away with at least some of these barriers “can only be good for businesses and consumers”.

Kotsonis said: “The establishment of a common SPS area is particularly significant in this regard as it promises to do away with the need for certificates and controls on the movement of animals, plants and products derived from them. This will also have the additional benefit of effectively removing the need for similar controls between Great Britain and Northern Ireland, a somewhat thorny issue since Brexit, given that the same SPS rules will apply in Great Britain as they will in the EU and Northern Ireland.”

“An important consequence of this arrangement would be that the UK would have to ensure that its trade deals are compliant with the rules of the common SPS area, meaning that the option of lowering food safety standards, for example, in order to accommodate the demands of another trade partner, would not be possible,” he said.    

Kotsonis said that of particular interest in the context of the potential participation of the UK in the EU internal electricity market is a reference by the parties to EU state aid rules. He said: “At this early stage, it remains unclear as to whether, and if so how, the UK’s subsidy control regime might need to be adapted to ensure a level playing field in relation to UK subsidies that might affect competition in the EU’s internal electricity market.”

On the possibility of linking the respective ETSs of the UK and the EU, Kotsonis said it is as yet unclear how this would be achieved and whether this might have an impact on the drafting of UK primary legislation for the introduction of a CBAM. He said: “What is clear is that once the two schemes are linked, goods from the UK and the EU that fall respectively within the scope of the EU and UK CBAMs would benefit from exemptions.”

Kotsonis added: “

"It is important to stress that the commitments set out in the parties’ 'Common Understanding' statement for a renewed agenda for EU-UK cooperation will require further consideration and delicate negotiation before they materialise into legally binding agreements. There is no indication, for the moment, as to when to expect agreements on all of these issues to be concluded and it might well be that some issues are dealt with more quickly than others," he said.