The future UK-EU relationship
Published 17 November 2022
With news that the UK economy has shrunk by 0.2% and a recession looming 1 coupled with a cost-of-living crisis, a negative impact on UK-EU trade, is it now time to look at how the UK-EU relationship could be improved?
It’s close to one year since the EU–UK Trade and Cooperation Agreement (TCA) was signed on 30 December 2020, coming into force from 1 January 2021, however, economic relations between the UK and the EU are poor. In terms of the impact on UK-EU trade following the introduction of the TCA, UK exports and import of goods and services have been negatively affected. In addition, about 25% of UK exports now pay tariffs on exports to the EU.
Opportunities for change
Whilst the TCA is functioning largely as foreseen, there is scope for improving the terms of the TCA both through the existing institutional framework and the wholesale review of the TCA after five years which allow for modification of the arrangements between the UK and the EU. However, the built-in possibilities for enhanced cooperation or for amendments / improvements are not currently taking place.
The UK should seek to improve the terms of the TCA both by working proactively within the existing institutional structures, and also as part of the built-in 5-year review. Key areas to focus on include: regulatory cooperation and equivalence, rules of origin, mutual recognition of professional qualifications, and the further liberalisation of services.
In addition, the UK should seek to negotiate an SPS/Veterinary agreement with the EU, and improved access with regard to financial services. To support long term investment in the UK car sector, the UK could use the mechanisms of the TCA to bindingly commit itself not to diverge from UNECE standards.
The EU and UK share common interests, such as global health and environmental protection, and to cooperate to address urgent challenges posed by climate change. However, the possibilities of frictions exist concerning environmental law and climate policy arising from the lack of ‘dynamic alignment’ of regulations as well as for example, different authorisation and notification policies on issues such as insecticides. To date, the official avenues for cooperation on climate change and the environment within the TCA have been used very sparingly and is likely to worsen considerably.
Take, for example, the EU’s proposed carbon border adjustment mechanism (CBAM), despite the UK’s similar policy orientation and the lack of significant direct charges, its introduction will likely lead to significant pressure from UK firms for the UK to take policy action to offset negative impacts of CBAM and the administrative burden on UK firms in covered sectors exporting to the EU will be considerable.
We strongly recommend the full alignment of the UK emissions trading scheme and any border carbon adjustments with the EUs ETS and CBAM. Doing so should entail no need for border adjustments on UK-EU trade. Trade in either direction would merely bypass the CBAM altogether and a major potential source of friction would be obviated. While forgoing discretion in its own CBAM, this disadvantage would be dwarfed by the advantages of reducing the frictions on UK-EU trade (in both directions).
Furthermore, greater coherence between the UK Government legislative approach to delivering Brexit (REUL Bill), the UK Government’s environmental agenda and cooperation with both the EU and devolved administrations could help to address joint climate and environmental challenges.
The long-term relationship
In the longer-term, relations between the UK and the EU will depend both on the resolution of the Northern Ireland Protocol (NIP), and improved cooperation over the TCA, but also on legislative and regulatory changes in both the UK and the EU. This can be seen, for example, in the potential implications on the EU side of the proposed CBAM, the Foreign Subsidies Regulation, or the CHIPS act, and on the UK side, for example, on whether or not the Northern Ireland bill, and/or the EU Retained EU bill gets passed. The more EU and UK rules diverge from each other, the more Northern Ireland is placed in a position where trade with the rest of the UK is rendered more difficult.
There are also questions surrounding a system that requires the UK, in relation to Northern Ireland, to comply with EU rules without having an input in the decision-making process. Further consideration should be given to the establishment of institutional frameworks that would allow UK/Northern Ireland to have a role in the decision-making processes that underpin the adoption of EU laws in Northern Ireland.
With regard to labour mobility, EU citizens must now comply with UK visa and immigration regulations and there are now much greater restrictions for UK nationals working in the EU. This has, for example, directly impacted on EU applications to UK universities and according to UCAS, EU citizen applications to UK universities fell by 40% in 2021, and a further 19% in 2022. There has also been a drop in EU academic staff and sectors such as the cultural sector including musicians appear to have been particularly affected.
With increased barriers for EU nationals to visit the UK, there has been a reduction in short term travel to the UK. According to the ONS, there were an estimated 69.5 million travellers arriving from outside the Common Travel area in the year ending June 2022. This is compared to 146.3 million in 2019. Some of this reduction may be related to other factors such as Covid, and these figures do not distinguish between EU and non-EU visitors.
With regard to business mobility there are several changes the UK Government should pursue and which will require negotiation either with the EU or bilaterally with Member States. Employers are concerned about the process, the cost and qualifying criteria when it comes to business travel or mobility. Currently, the system is dominated by high levels of administration, high costs, and lengthy timeframes. With the end of freedom of movement, the UK now relies on a demand-led immigration system - and given the high costs and administrative burden, it is making it increasingly difficult for UK businesses to attract / retain international talent.
This blog draws on written evidence submitted by members of CITP and our partner EY to the
House of Lords European Affairs Committee inquiry on the Future of the UK-EU relationship.