Brexit - Level Playing Field Provisions

10 February 2021

Author: Emma O'Donnell
Practice Area: Corporate - M&A
Sector: Brexit

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The Trade and Co-operation Agreement agreed between the UK and the EU on 24 December 2020 (the “TCA”) dedicates a full Title, namely Title XI, to so-called “Level Playing Field” provisions.

These provisions which aim to prevent unfair competition, underpin, and are hugely important in giving effect to, the remainder of the TCA, which envisages an unprecedented level of co-operation and economic partnership between the EU and a third country, not least because of the high level of market access it affords to the UK.

Given the unique relationship between the UK and the EU in terms of their economic interdependence, the intensity of trade and investment between them and their geographical proximity, the inclusion of such provisions and commitments was considered vital in order to promote open and fair competition between the parties and to ensure sustainable development of the new EU UK relationship.

It is unsurprising therefore, that the Level Playing Provisions were a hotly contested subject during negotiations between the UK and the EU and whilst compromises were made on both sides, the EU and the UK each claim to have achieved their goal as regards the provisions.

The EU managed to negotiate more robust level playing field provisions in the TCA than it has in its Free Trade Agreements with any other third country and has therefore created stronger protections for the single market. The UK has asserted its sovereignty by refusing to be legally required to maintain equivalent legislative systems to the EU, except in respect of certain goods imported by Great Britain to Northern Ireland. In addition, the UK succeeded in the negotiations regarding state aid and will set up and independent state aid authority, rather than be bound by the EU’s state aid regime, save, to a limited extent, in respect of Northern Ireland.

What are the Level Playing Field provisions?

The Level Playing Field provisions are complex, reciprocal obligations imposed on the parties in relation to certain regulatory areas, which aim to prevent either party from seeking to obtain a competitive advantage in these areas.

The parties have agreed to treat current shared regulations on employment and workers’ rights, social protection, environmental standards, tax transparency and state aid as a common baseline. In essence, the Level Playing Field provisions require:

  1. adherence by both parties to International standards and treaties in the areas mentioned above (for example GATT and OECD); and
  2. a commitment by the UK of non-regression from existing standards in the areas of labour and social standards and environment and climate, where such regression would have the effect of undermining competition or investment as between the EU and the UK.

It is important to note that the purpose of the Level Playing Field regulations is not to require regulatory alignment or harmonisation between the parties, but to maintain and improve their respective high standards in the relevant areas.

In addition to ensuring high standards, the Level Playing Field provisions seek to prevent distortions created by subsidies or anti-competitive practices by state-owned businesses and contribute to tax transparency and counter harmful tax regimes.

What about Northern Ireland?

Whilst the autonomy of the UK government is apparent in the TCA, additional and specific provisions, incorporating EU law controls, were required in order to address the unique position of Northern Ireland and to avoid a hard border on the island of Ireland.

As such, the provisions of the TCA do not govern trade in goods between the EU and Northern Ireland. This relationship is governed instead by the Protocol on Ireland and Northern Ireland (the “NI Protocol”), which the UK government is responsible for implementing and delivering.

The NI Protocol gives effect to certain aspects of EU Law in Northern Ireland, in particular in relation to food safety and product safety of manufactured goods, as well as state aid.

It respects the status of the island of Ireland as a single epidemiological unit for food and animal health purposes. As such, Northern Ireland is aligned with EU sanitary and phytosanitary rules including those relating to the placing on the market of agri-food goods. This means that such goods coming from Great Britain into the UK are subject to identity and documentary checks and physical examination by UK authorities as required by the relevant EU rules. As regards the placing on the market of manufactured goods in Northern Ireland, Article 7 of the NI Protocol currently provides for regulatory alignment with the EU in this regard.

As regards state aid, the NI Protocol provides that EU state aid rules will apply in certain cases limited cases, namely in relation to the movement of goods and to wholesale electricity markets, where this is relevant to trade between Northern Ireland and the EU.

However, in recognition of the need for Northern Ireland’s agricultural and fishing industries to have appropriate flexibility, and to respond to any market uncertainty and disruption, the NI Protocol provides that agricultural subsidies in Northern Ireland up to a maxim of £380 million will be exempted from EU state aid rules.

What enforcement measures exist?

Chapter 9, Article 9 of Title XI of the TCA outlines the enforcement measures that each party can avail of in a case where the other party is in violation of the level playing field provisions:

  1. Panel of Experts (Article 9.2) – Either party can, if a matter is not resolved satisfactorily via a prior consultation, require a panel of experts made up of three panellists, to be convened to examine the matter. The party determined to be in breach of the Level Playing Field obligations shall, within 105 days of the final report, inform its domestic advisory group and the complaining party of its decision on measures to be implemented. It is worth noting that the panel of experts’ determination is not binding, but would have significant persuasive force.
  2. Rebalancing measures (Article 9.4) – Either party may, if material impacts on trade and investment between the parties are arising as a result of significant divergences between the parties in the areas of labour, social, environmental or climate protection, take appropriate rebalancing measures to address the situation. Any such measures shall be restricted in their scope and duration as to what is strictly necessary. It is important to note the unilateral nature of these measures and the short time frame in which a complaining party may adopt them. Such measures are likely to manifest as tariffs and sanctions on goods. The potential difficulty in availing of the rebalancing measures procedure under the TCA, however will be to prove a “material impact” and to prove causation. Article 9.4 of the TCA requires an assessment made by a party under that section to be based on “reliable evidence and not merely on conjecture or remote possibility”. Rebalancing measures exist in addition to and parallel to the panel of experts procedure.

In addition to the rebalancing measures the EU and UK may take under the TCA, article 16 of the NI Protocol provides a mechanism for each of the EU and the UK to take appropriate unilateral safeguard measures in the event that the application of the NI Protocol leads to “serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade”. If such a safeguarding measure creates an imbalance between the rights and obligations under the NI Protocol, the EU or the United Kingdom, as the case may be, may take such proportionate rebalancing measures as are strictly necessary to remedy the imbalance.

The future for Northern Ireland

Whilst Northern Ireland is currently aligned in many regards with EU rules, the bespoke provisions which apply only in Northern Ireland shall only apply for as long as the NI Protocol is in force and has the support of the people of Northern Ireland.

The UK government is required to give Northern Ireland a vote on the alignment provisions in 2024.

Conclusion

The TCA is an ambitious agreement and presents as a positive outcome for both the EU and the UK. For now, both parties have a tariff free, quota free trade deal and have the right to make their own laws, albeit subject to the constraints of the TCA and the NI Protocol, but the future of this arrangement is not guaranteed and depends inter alia on the adherence by both parties to the Level Playing Field obligations. Otherwise, rebalancing measures could see the UK’s access to the single market restricted. The current trade arrangements in Northern Ireland will be subject to a democratic consent vote in 2024.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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