Brexit update: UK-Japan free trade agreement, HMRC guidance, Internal Market Bill

By September 23, 2020News

Brexit and the Agreement in Principle of a UK–Japan Free Trade Agreement

On 11th September 2020,  the UK  Government Department of International Trade (DIT) announced that agreement had been reached in principle between the UK and Japan for a free trade agreement (FTA) to take effect between them with effect from the end of the UK-EU Withdrawal Agreement transition period due to expire on 31st December 2020.

It seems clear from the UK Government announcement that the final text of the new FTA has not yet been finalised but that agreement in principle has been reached on all substantive issues. The new UK- Japan FTA would be based on the current EU-Japan Economic Partnership Agreement (EPA) and would be of a comprehensive nature covering areas of trade policy such as trade in goods, trade in services, investment liberalisation, e-commerce, intellectual property, government procurement, competition and subsidies.

The DIT has, however, indicated that the UK-Japan FTA will differ from the EU-Japan EPA in a number of ways, including by the inclusion of more ambitious commitments in relation to intellectual property protections, financial services, digital trade and data flows, movement of natural persons for visa purposes, and tariff reductions.

Apart from being significant in itself, the UK-Japan FTA will also be seen in some quarters as an important step towards the UK’s accession to the Comprehensive and Progressive Agreement for Trans- Pacific Partnership (CPTPP), to which Japan is a party.

Because of the importance of Japan as the world’s no. 3 economic power, the announcement of a prospective FTA between the UK and Japan is something of a landmark event but the detail will need to be carefully studied when the legal text of the new FTA is finalised and published.

In his public pronouncements on Brexit in September 2020, the UK Prime Minister has stated that if no deal is reached between the UK and the EU on a post-transition period deal the UK will trade with the EU in the same way as Australia does (which currently has no FTA with the EU and currently trades with the EU on World Trade Organisation rules).  In line with this Australian theme, Tony Abbott, a former Australian Prime Minister, has been appointed to the UK Board of Trade as a trade adviser –  perhaps significant in the present context in that during his time as Australian Prime Minister in 2013-15, Australia signed trade deals with South Korea, China and Japan.

The biggest prize in economic terms for the UK, however, would be a free trade agreement with the EU and perhaps the announcement of a prospective FTA with Japan will go a little way to “encourager les autres”.

Brexit, the Ireland/Northern Ireland Protocol and the Duty of Good Faith

The acknowledgement by the UK Government that provisions in the initial version of the UK Internal Market Bill may contravene the Ireland/ Northern Ireland Protocol to the UK-EU Withdrawal Agreement has led to allegations from both the UK and EU sides that the other side is in danger of breaching its “good faith “ obligations under the Withdrawal Agreement – in the UK’s case, by the offending provisions of the UK Internal Market Bill and, in the EU’s case, by the possible threat of a food blockade in response.  In an Article for The Times of 14th September 2020, a former UK Attorney – General, Geoffrey Cox QC, draws attention  to this issue.

Whilst the duty of “good faith” in international law and the scope of any such duty may be open to some question, there is no doubt that Article 5 of the UK-EU Withdrawal Agreement provides expressly the EU and the UK “shall, in full mutual respect and good faith, assist each other in carrying out tasks which flow from this Agreement”.

Article 164 of the Withdrawal Agreement sets up a Joint Committee of the EU and the UK to try and resolve disputes that might arise concerning the interpretation and application of the Withdrawal Agreement and Articles 167 – 181 (“Dispute Settlement”)  of the Withdrawal Agreement contain arbitration mechanisms to deal with disputes under that Agreement (albeit with the express caveat under Article 174 that issues of EU law shall be determined the European Court of Justice).

The Ireland/ Northern Ireland Protocol itself (which is part of the Withdrawal Agreement) contains additional mechanisms to deal with issues that may arise between the UK and the EU under the Protocol – in particular through the setting up of a Specialised Committee and Joint Consultative Working Group.

Article 16 of the Protocol is a “Safeguards” provision which states that “if the application of this Protocol leads to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade, [the EU or the UK] may unilaterally take appropriate safeguard measures…”. This is a provision that is hedged around with conditions to ensure that it is exercised in a targeted and proportionate way but its existence does lend support to the argument that the Withdrawal Agreement (including the Protocol) contains the necessary protections for both sides to ensure that the legitimate interests of each side are protected.

There is concern that the disagreements emerging from the UK Internal Market Bill may taint the trade relationship between the UK and the EU for some time to come.

Brexit and HMRC Guidance on Trading with the EU

Her Majesty’s Revenue and Customs (HMRC) , the UK Revenue and Customs authority, has written to all Valued Added Tax (VAT)–registered businesses in Great Britain trading with the EU and/or the rest of the world, highlighting the steps that they need to take to continue trading with the EU from 1st January 2021 following the end of the UK-EU transition period.

On 14th September 2020, HMRC published the form of letter that it had sent and the guidance that the letter gives to relevant VAT-registered businesses in Great Britain includes advising them i) to ensure that they have a Great Britain (GB) Economic Operator Registration and Identification (EIORI) number ; ii) to decide how they will make UK customs declarations; and iii) to check if their UK imported goods are eligible for staged UK import controls.

The guidance letter draws attention to the new free Trader Support Service (TSS) that is being set up  to advise on the customs and tax processes necessary to support the transfer of goods between Northern Ireland and Great Britain and generally on the transfer of goods under the terms of the Ireland/ Northern Ireland Protocol and the letter states that further information about movement of goods between Great Britain and Northern Ireland will be available soon. The nature of such further information may well depend on the outcome to the UK Internal Market Bill, currently before the UK Parliament.  The TSS in any event is not available for goods moved between Great Britain and the EU.

HMRC has a website (www. gov.uk/hmrc/business – support) through which further UK – EU transition period–related information may be obtained (by clicking the appropriate link) and it is worth keeping in touch with HMRC  publications and pronouncements in this field.

Brexit and the Environment

The UK Government has been focusing on some environmental issues as part of its preparations for life after the UK-EU transition period, particularly in circumstances where there is no post-Brexit deal between the UK and the EU.

On 8th September 2020, the Cleaner Road Transport Vehicles (Amendment) (EU Exit) Regulations 2020 (SI 2020/964)  were passed into UK law as secondary legislation, which corrected deficiencies in the Cleaner Road Transport Vehicles Regulations 2011 (SI 2011/ 1631) ( the implementing Regulations in the UK for EU Directive 2009/33 on the procurement of cleaner vehicles by the public sector) as the 2011 Regulations are intended to apply in the UK  after the transition period under the terms of the UK’s  European Union (Withdrawal) Act 2018. The 2020 Regulations are evidently intended to ensure that the legal framework that requires procuring entities to take into account energy and environmental impacts when purchasing or leasing road transport vehicles applies properly in the UK after the end of the transition period.

On 9th September 2020, the UK Department for Business, Energy and Industrial Strategy (BEIS) updated its guidance on meeting climate change requirements after the end of the transition period, particularly with regard to eco-design and energy labelling requirements for energy-related products from 1st January 2021.

These are two examples of the attention to detail that the UK Government appears to be giving to the implications of Brexit for environmental issues.

Brexit and Part 5 (Northern Ireland Protocol) of the UK Internal Market Bill

Clauses 40-45 of the UK Internal Market Bill (“the Bill”) deal with the implementation of the Northern Ireland Protocol in UK domestic law and, in particular, give UK Government Ministers the right to make secondary regulations for that purpose as to the way in which the Protocol is implemented into UK law. This includes the power under Clause 42 of the Bill for a UK Government Minister to disapply or modify export declarations and other exit procedures.

Clause 45 of the Bill states that these ministerial secondary legislative powers have effect “notwithstanding any relevant international or domestic law with which they may be incompatible or inconsistent”.

These legislative proposals have incited the ire of many both in the EU and in the UK who are very critical of any suggestion that the UK might be prepared to breach international law or domestic law for whatever reason, including a desire to maintain the integrity of the UK internal market.

Sir Bob Neill, Chair of the Justice Select Committee of the House of Commons, is reported to have suggested that, before invoking these ministerial powers in the context of the Northern Ireland Protocol and as a way of alleviating public concerns, the UK Government seeks the approval of the House of Commons and to include that as a requirement within the Bill itself. It has been reported in The Times of 17th September 2020 that this suggestion has been accepted by the UK Government.

It may be a matter of debate whether Sir Bob Neill’s helpful suggestion represent a real solution to the illegality problem or whether it is tantamount to kicking the can down the road.

Of course, at this stage, the Bill is only a bill and is not yet law as an Act of the UK Parliament and so hopefully there is still a little time for a solution to be found.

Brexit and Prospects for Reforming the World Trade Organisation (WTO)

If a free trade agreement is not agreed between the UK and the EU to take effect after the end of the UK-EU transition period on 31st December 2020, the UK and the EU will almost certainly be forced to trade with each other on WTO terms from that time on.

It, therefore, seems important from the UK and EU standpoints that any agreed reforms to the WTO structure and rules are put in place as soon as possible.

Chatham House, the UK-based political Think Tank, has published a timely research paper in September 2020 entitled “Reforming the World Trade Organisation – Prospects for transatlantic cooperation and the global trade system”. The author is Marianne Schneider – Petsinger, a Senior Research Fellow, US and the Americas programme, at Chatham House.

In its Summary, the research paper highlights the challenges posed to all three main functions of the WTO – namely the functions of providing a negotiation forum to liberalize trade and establish new rules; monitoring trade policies; and resolving trade disputes between the WTO’s 164 members.

The Summary notes, in particular, the need for a permanent solution to the crisis of the WTO’s Appellate Body and dispute settlement system. This is a reference to the fact that the Appellate Body’s operations have effectively been suspended since December 2019, as the US’s  blocking of appointment has left the Body without a quorum of adjudicators needed to hear appeals.  The US’s stance seems to have a lot to do with US allegations of too much Chinese influence over the WTO and the Summary refers to the need to deal more effectively with Chinese trade policies and practices.

The Summary also refers to the need to update its rules to deal more effectively with digital trade and e-commerce and modern ways of trading.  This is part of the perceived need to update the WTO’s role as a negotiation forum in trade matters. The question of the legitimate role of state subsidies  (not least in the light of Covid-19) needs to be addressed, according to the research paper, in the context of modernising the WTO’s rules. Progress in solving these challenges can perhaps be made through “plurilateral” negotiations between different subsets of WTO members focusing on particular sectors.

The Summary highlights the importance of trying to get an agreed definition of “developed” and “developing” countries, bearing in mind the “special and differential treatment” that can be accorded by the WTO to “developing” countries.

The Summary stresses the advisability of the US and the EU co-operating with each other to try and make progress on all these issues.

As far as the UK is concerned, the research paper contains a separate section headed “What role for the UK?”, which makes it clear that the UK has an active role to play in helping to modernise the WTO and strengthen the multilateral rules-based world trading system, particularly given the added importance to the UK of the WTO in the light of Brexit and the possibility that a free trade agreement might not be reached between the UK and the EU which, if it were reached, would have the effect of overriding the WTO’s default rules in their application to UK-EU trade. The section lists the various forums (including the G7, G20 and the Commonwealth) through which the UK can advance the cause of reform of the WTO.

There is potentially a lot of things that need to be addressed within the WTO, at a time in which a new Director General  for the WTO is the course of being selected.

Brexit and Civil Jurisdictional and Enforcement Issues

In the absence of new agreed arrangements between the EU and the UK, the principles of EU legislation on civil jurisdiction and the enforcement of judgments particularly as set out in the Recast Brussels Regulation 1215/2012 will no longer generally apply to the UK after the end of the UK- EU transition period and the determination of such issues may fall back to ancient and ill-defined principles of private international law.

The UK has applied to join the Lugano Convention 2007 which extends the principles of EU legislation in this field to certain other European countries but so far the EU has not acceded  to this application.

In addition, the UK has indicated an interest in joining the Hague Convention on Choice of Courts Agreement 2005 as an independent signatory but this is unlikely to be a complete solution to the problems raised by the UK’s departure from the Brussels Recast Regulation and related EU legislation.

The UK-EU Withdrawal Agreement does provide for the current EU- based jurisdictional and enforcement rules to continue to apply to proceedings commenced but not concluded before the end of the UK-EU transition period and this does provide some interim help  towards solving the deeper problems  posed by the UK’s exit from the Recast Brussels Regulation framework.

It is also worth bearing in mind that international arbitration proceedings governed by the New York Convention 1958 remain largely unaffected by the UK’s departure from the EU and may increase the popularity of arbitration clauses as a result.

The lack of legal clarity around this very important subject  of civil Jurisdiction and enforcement in the light of Brexit needs to be addressed.

Brexit and a UK Government Clarification on the UK Internal Market Bill

On 17th September 2020, the UK Government issued a statement clarifying the circumstances in which it might seek to exercise its powers under the controversial overriding “notwithstanding” provisions of the UK Internal Market Bill (and in particular Clauses 42, 43 and 45 of the Bill), when enacted, to limit the effectiveness of the Ireland /Northern Ireland Protocol on transfers of goods between Northern Ireland (NI) and Great Britain (GB) and on state aid affecting the UK and its different regions.

The UK Government statement makes it clear that that these overriding provisions would only be invoked where, in the UK Government’s view, the EU is in material breach of its duties of good faith or other obligations. The statement goes on to list examples of such behaviour on the part of the EU:-

>>> An insistence that GB- NI tariffs and related provisions such as import VAT should be charged in ways that are not related to the real risk of goods entering the EU single market;

>>> Such insistence as above leading to a failure to agree on the part of the UK–EU Joint Committee, with the result that the default provisions on tariffs between GB and NI apply;

>>>An insistence on paperwork requirements (export declarations) for NI goods going to GB, compromising the principle of “unfettered access” in the Protocol;

>>> An insistence that the EU’s state aid provisions should apply in GB in circumstances when there is no link or only a trivial link to commercial operations taking place in NI;

>>> A refusal to grant 3rd country listing to UK agricultural goods for manifestly unreasonable or poorly justified reasons.

The UK Government statement confirms that “in parallel with the use of these provisions it would always activate appropriate formal dispute settlement mechanisms with the aim of finding a solution through this route”.

The UK Government statement also confirms that further measures relating to tariffs on GB-NI movements will be set out in the forthcoming UK Finance Bill, including the same Parliamentary process to which the UK Government has committed itself for the UK Internal Market Bill.

One wonders whether, if it is the case that UK Government action under the UK Internal Market Bill were limited to dealing with such egregious examples of apparent bad behaviour on the part of the EU, there is really any need to have UK counteracting powers framed in terms of overriding “notwithstanding” provisions in the UK Internal Market Bill at all or whether the UK Government could rather have confirmed that these  UK Internal Market Bill provisions were entirely consistent with the Ireland/ Northern Ireland Protocol after all.

Has the UK Government missed or a trick or has it taken a deliberate wrecking ball to the current negotiations with the EU for a new post-transition period relationship with a view to stimulating a more concessionary approach on the part of the EU? The stakes are high and the risks of a zero sum outcome are not inconsiderable.

 

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