UK-EU Evolving Relationship Bulletin: Friday, March 19

Although the UK-EU trade agreement has been concluded, it has become clear that there are still many issues to resolve and many areas left for the UK and EU to discuss further. At Instinctif Partners we will continue to track the evolving UK-EU relationship and monitor major changes in regulations the UK may adopt post-Brexit on a fortnightly basis. We will also include in the bulletin other post-Brexit trade deals to keep you informed of the most important political and regulatory developments between the UK and the rest of the world going forward.

If you have any questions or requests, please contact jason.esi@instinctif.com

The EU has formally launched legal proceedings against the UK after it unilaterally extended the grace period on some goods moving from mainland Britain to Northern Ireland for six months

• The notice of legal action was issued with an accompanying letter from the European Commission Vice-President Maroš Šefčovič to the new Brexit minister David Frost.
  • It calls on the UK to “rectify and refrain from putting into practice” its decision on 3 March to extend grace periods for checks on supermarket goods crossing the Irish Sea.
  • The UK has been given one month to submit its observations under the formal notice. If it fails to enter into consultations in good faith the EU can launch a dispute settlement mechanism which, if not solved, could ultimately result in the imposition of financial and trade sanctions.
  • The EU hopes the legal action will register their discontent over the unilateral decision, and believe the matter can be resolved through further negotiations on the Northern Ireland protocol.
  • The UK has instead that the unilateral decision is just a technical issue and said it looked forward to “discussing the issues within the joint committee framework in a constructive fashion”.
  • The EU has insisted that in exchange for an agreement on grace periods, the UK should provide a ‘road map’ detailing how it would implement the Northern Ireland protocol and the milestones that could be met through behind the scenes technical work and grace periods.
  • EU member states have backed the legal action against the UK. However, the legal proceedings could take years and some EU diplomats have raised the prospect of more far-reaching retaliation by refusing to grant the UK “equivalence” in financial services. (The UK financial services industry has been awaiting a host of “equivalence” decisions, not included in the Brexit trade deal, that will determine the ease with which it can access EU markets. A decision was meant to be made in March.)

The Government has delayed the introduction of further post-Brexit import checks by six months as a network of 30 border posts being built to process incoming goods would not have been ready on time

• Exports to the EU from Britain have been subject to controls since 1 January, but the Government opted for a phased approach on EU imports to give hauliers and business more time to adapt.
  • Checks were due to be introduced in stages from 1 April and from 1 July, but traders and ports have warned they were not ready, and that the introduction of processes could lead to empty supermarket shelves.
  • This is partly as a result of complications with the Government’s funding of the new infrastructure. In addition, several of the inland facilities being built by the Government are running behind schedule, those at locations where there is not enough space available for a border control post next to the port.
  • Most import checks have now been pushed back to 1 January 2022, meaning Britain will begin these processes a year later than the EU.
  • Physical SPS checks on animal products, as well as foods and plants considered high risk, which were meant to start on 1 July 2021 will not take place until 1 January 2022. From this date these checks will take place at designated border control posts rather than at their destination, as is currently the case. Checks on live animals and low-risk plants will only take place from March 2022 at border control posts.
  • In addition, traders will be able to continue submitting deferred customs declarations, whereby paperwork can be provided up to six months after goods have been imported, until the start of 2022.

The UK has set out its global trade and international priorities in an ‘Integrated Review’ of security, defence, development and foreign policy

• The Government’s vision for the UK’s role in the world over the next decade states that the security focus will remain in the Euro-Atlantic region but there will be a tilt to the Indo-Pacific region.
  • The review emphasises existing strong links with the US, Australia, Canada and New Zealand, while also setting out plans to deepen its economic connections with the Indo-Pacific, Africa and the Gulf.
  • This includes seeking to boost trade links and alliances via participation in the Association of Southeast Asian Nations and the Trans-Pacific trade deal. A decision on whether the UK can join the Trans-pacific partnership will be made in May with the UK expected to formally join the bloc in January 2022.
  • On India, the UK hopes to expand its relationship over the coming decade with India across a range of areas including trade investment rooted in Science and Technology; enhanced defence cooperation and UK-India leadership to tackle global challenges like climate change, clean energy and global health.
  • In Africa, the UK will seek an enhanced economic partnership in particular with Nigeria and South Africa, and in the Middle East will seek to increase trade and investment with the Gulf states, to support the levelling up agenda in the UK, and enhance collaboration in areas such as life sciences and green technology with Saudi Arabia, the UAE, and Israel.
  • In Latin America, the UK will seek to deepen ties with Brazil and Mexico, strengthening partnerships on trade, innovation, climate, security and development as well as working with Argentina, Chile and Colombia to support UK interests.
  • The review identified Russia as the greatest threat to the UK, and took a more nuanced position on China, setting out an intention to treat China as a “systemic competitor” but seeking to preserve “space for co-operation where our interests align”. It states that co-operation with China will be “vital” to tackling global challenges such as climate change and biodiversity loss. But it also warns that China’s military modernisation and growing assertiveness will pose an “increasing risk to UK interests”.
  • Sensitive sites such as critical national infrastructure, including hospitals, power plants and water systems, as well as technology, will be made more secure to allow the UK to trade with an increasingly powerful China.
  • The Government will introduce a new Investment Security Unit to safeguard British intellectual property and companies against national security risks, intervening in inward investment where necessary and proportionate.

The UK is considering overhauling of capital market rules and enabling the Financial Conduct Authority to shape rules rather than make changes by Parliamentary legislation

• Changes being considered include scrapping EU rules that determine where investors can trade stocks, known as the share-trading obligation.
  • Officials could also ditch the cap on the amount of trading that investors can execute on private marketplaces known as “dark pools”, change transparency requirements for stock and bond markets, and revamp position limits or the amount of trading that can be done in one commodity.
  • The UK is also considering changing rules to make it easier for banks to hold capital, which serves as insurance for thousands of derivatives trades, in London,
  • The Government has already committed to opening up the IPO market by adopting reforms recommended by the Lord Hill review into UK listings.
  • The Treasury will launch a consultation on a set of detailed policy proposals this summer, with legislation likely to be ready before the end of the year.

UK exports of goods to the EU plunged by 40.7% in January, the biggest monthly decline in UK trade for more than 20 years

• The Office for National Statistics (ONS) said goods exports fell by £5.6bn, while imports fell by 28.8% or £6.6bn.
  • Exports of food and live animals to the EU were the hardest hit, collapsing by 63.6% in January. Consignments of fish and shellfish collapsed by 83% from the level a year ago to only £16m. However, food and live animals account for only 7% of total UK exports.
  • Many experts said the scale of the decline in January trade was unlikely to be permanent because there was evidence companies stockpiled goods before the Brexit deadline, meaning they would not need to send as many shipments as usual in January. The ONS said there were signs trade had started to pick up at the end of the month.
  • Notably, UK goods exports to Ireland fell 47% in January.
  • Separate figures from Ireland’s Central Statistics Office showed the trade in food and live animals was hit hardest, with a 75% decline in trade, resulting in imports to Ireland falling from €187m to €62m year on year this January.
  • Exports of food and live animals from the Republic of Ireland to Great Britain fell by 30%, with exports of machinery and transport equipment in January dropping 50% year on year.
  • However imports to the Republic from Northern Ireland were buoyant by comparison, and increased to €177m from €161m in January last year.

Other post-Brexit news

• It has been reported that the Government is considering blocking imports of mineral water in retaliation for the EU’s decision to refuse to take certain British shellfish.
• Leaders of the European Parliament’s political groups have postponed for a second time a decision of when MEPs will vote on the post-Brexit trade deal. The EU-UK future relations agreement entered provisionally into force at the beginning of the year but it still needs to be approved by MEPs. Theoretically, the European Parliament can wait until the end of April, when the provisional application of the agreement runs out.
• It has been reported that senior Ministers and City lobby groups have held discussions over a plan to create a global trade agreement in services that would allow countries including the UK to export services such as banking, insurance and legal advice to fast-growing economies in Africa, Asia and the Middle East. UK representatives are expected to launch negotiations later this year at the WTO.
• The UK and EU have clashed over the EU’s fishing rights in UK waters after the UK announced it would consider a total ban of fishing off the Dogger Bank area of the North Sea for environmental reasons. NGO’s and environmental groups welcomed the announcement but the EU member states view it as a cynical British step to reduce the EU’s fishing rights under the guise of environmentalism.