EU, UK Reach Brexit Trade Deal, but Logistical Issues Still Expected

Although the European Union and the United Kingdom reached a last-minute trade deal Dec. 24 to avoid a hard Brexit, the agreement will not necessarily translate into a smooth U.K. exit, law firms said, and companies still should prepare for a host of trade issues come Jan. 1. “Important changes and some logistical disruption will remain inevitable,” White & Case said in a Dec. 28 alert.

Under the agreement, trade between the EU and the U.K. will remain tariff- and quota-free when the U.K.’s Brexit transition period expires year-end, though U.K. exports will remain subject to some border checks, according to a report in The New York Times. Traders will also be able to “self-certify the origin of goods sold and enjoy ‘full cumulation’ (i.e. processing activities also count towards origin, not just materials used), making it easier to comply with requirements and obtain zero-tariff access,” the EU said in a fact sheet. The deal also provides for mutual recognition of trusted trader programs, ensuring “lighter customs formalities and smoother flow of goods,” the EU said.

But despite avoiding the possibility of a “chaotic Brexit,” the deal “falls well short of ensuring the continuity of frictionless trade between the EU and the U.K.,” Cohen & Gresser said in a Dec. 24 alert. Companies will need to comply with new content origin requirements, including a provision that will not allow U.K. manufacturers “to count products from countries with which both sides have a deal as ‘products of British origin’, as the UK initially wished,” the firm said.

Industry also should prepare for challenges that will arise from the U.K. no longer being part of the EU Customs Union or the EU single market, White & Case said. Cohen & Gresser said U.S. companies that operate in both the EU and the U.K. will need to comply with “increasingly divergent trade rules” in both markets. “None of it amounts to the regulatory harmonisation that currently exists under the EU Single Market,” the firm said. “There will be increasing regulatory divergencies between the EU and the UK in most sectors.”

The deal also does not touch on sanctions or other foreign policy concerns because the U.K. “did not want to negotiate” those matters, the European Commission said in a guidance. The EU said there will be “no framework” to “develop and coordinate joint responses to foreign policy challenges,” including sanctions on other countries or third parties. The lack of coordination may lead to a divergence in U.K. and EU sanctions regimes over time, according to a Dec. 23 alert from the law firm Latham & Watkins. Although the U.K. will keep many of the same EU sanctions targets and regulations, including the EU's “blocking regulation” (see 2002190038), the U.K.'s regime contains textual differences and will operate independently of EU decisions, the firm said, including with its own set of general licenses.

The deal still must be approved by the U.K. and EU parliaments, as well as the parliaments of each of the EU’s 27 member states, though the EU plans to let the deal take effect provisionally until Feb. 28 to allow time for approvals.