Ahead of the vote in the UK Parliament, Prime Minister Johnson confidently praised the new UK-EU Trade and Cooperation Agreement (TCA) for allowing the UK to have its cake and eat it. The reason why the PM thinks this is that the deal does indeed establish the principle of continuing duty- and quota-free export of goods between the UK and the EU even after the end of the transition period on December 31st, 2020 11pm UK time. At the same time, the UK is not subject to the (direct) jurisdiction of the European Court of Justice (ECJ) – an important red-line in the UK government’s negotiation brief. So, in principle the Deal guarantees continuing tariff-free access to the common market, while delivering on the promise for the UK to be able to deviate from EU regulation. This would indeed seem like a major victory for the UK government – delivering both access to the common market and the end of jurisdiction of the ECJ in Britain.

One will immediately wonder: Why did the EU accept to give the UK such a preferential trade deal, which – if PM Johnson is right – allows the UK access to the common market like before without having to subject to EU legislation? The answer is that of course the EU did not do such a thing! Indeed, if this were the case, the TCA may very well encourage other member states to consider whether they could have a better deal outside the EU, undermining the cohesion of the remaining EU member states further.  Rather, what looks at the surface like the best of both worlds for the UK, turns out – upon closer inspection – to be a very cunning solution for the EU to avoid a no-deal Brexit with new tariffs between the common market and the UK without undermining the integrity of the common market. This was possible thanks to three different mechanisms and the very special situation in which the two markets are.

The Starting Point: 40+ years of regulatory alignment

The first thing to note is that the TCA - contrary to most trade agreements in the world – was not about reducing trade barriers but about avoiding the erecting of new ones. Indeed, the starting point was two markets that have been following very largely the same rules and regulations for the past forty-seven years. There is therefore a very far-reaching alignment between the two regulatory regimes. Brexit will potentially put an end to this, but for now the two regulatory regimes are equivalent. This allowed the EU to use the following trick to let the British government think (or pretend) it could have its cake while also eating it: The principle of continuing tariff- and quota-free access to the single market is conditional on the continuing alignment of UK rules on EU standards in practice. The TCA contains three mechanisms that will guarantee that regulatory divergence from EU standards will result in cutting off UK goods from the common market and thus prevent the UK undermining EU standards.

Level Playing Field Provisions: A new regime of enforcement of social and environmental standards

The first mechanism to keep the UK regulatory regime aligned with EU standards are the so-called level playing field (LPF) provisions (Title XI of the TCA) concerning social and environmental standards. While the TCA allows the UK in principle to diverge from EU regulation, problems will emerge if the UK decides to start deviating from EU regulations in practice. The LPF provisions introduces an innovative enforcement mechanism of social and environmental standards, which goes far beyond any other trade agreement the EU currently has with other countries. Article 9.4 entitled ‘Rebalancing’ gives either party the right to use ‘rebalancing measures’ if trade is materially impacted by significant deviance of the other party from labour, environmental, and climate protection standards. In other words, were the UK to decide to use its newfound freedom and significantly undercut the current standards in these areas, it would face the threat of the EU imposing rebalancing tariffs on its goods.

To be sure, the party brining the case would have to provide evidence of a material impact on trade from such divergence, which has proven a high barrier in other TAs. Yet, while the provisions may not become widely used in practice, they will hover over both parties as a Sword of Damocles that strongly discourages divergence from the current common standards.

Product Quality and Standards: Non-tariff trade barriers

The second mechanism to incentivise close alignment of the two regulatory regimes is through the regime of quality and health certification for exports. Indeed, while trade in goods between the UK and the EU remains duty- and quota free, there is – contrary to the PM’s false statements – a whole host of new non-tariff trade barriers in the form of customs declarations, export health certificates (EHCs), rule of origin checks, conformity check etc. which will be imposed on UK goods going to the Continent. These checks create another strong incentive for the UK to respect EU standards not only in the areas falling under the LPF provisions (Labour, environment, and state subsidies), but also in terms of quality and health standards. Any attempt to deviate from EU standards, while allowed in principle, will potentially be punished by a loss of access for British exporters to the common market.

The Elephant in the Room: Financial Services

Finally, the TCA is focused on goods and only contains minimal provisions on services. Here a third mechanism encouraging regulatory alignment kicks in, namely the so-called ‘equivalence’ system that will govern financial services – at least until an agreement on services is concluded. This essentially means that both sides will decide unilaterally whether the other sides financial regulations can be deemed equivalent to one’s own standards and market access can be granted on that basis. The decision is still outstanding on the EU’s assessment of UK financial service providers. It is likely that access will be granted, because, –   as noted above – due to over forty years of membership, the two regulatory regimes are currently aligned. However, any future departure of the UK from EU standards in financial services may very well be punished with the loss (or threat of loss) of access to the common market for UK financial service providers. Given the importance of financial services for the City of London and hence the UK economy and given the insecurity this second Damocles Sword creates, it is likely that the UK Parliament will think twice before deviating from EU regulations. This limits the extent to which the UK can reasonably be expected to engage in regulatory competition with the EU over financial services.

As a result of the triple safety-net built into the TCA (LPF provisions, export health certification, equivalence system for services), the situation the UK and the EU find themselves in after Brexit is perhaps best described as a mutual hostage situation: the deal creates a regime where any deviance from regulatory alignment can be punished by the other side with the imposition of “rebalancing tariffs” or cutting the other side off its market by removing the acknowledgement of ‘equivalence.’ Therefore, while the UK has taken back control over its laws and regulations, exercising that control by deviating from EU standards will come at the cost of being cut off from the common market. The TCA therefore establishes a conditionality regime for duty- and quota free trade.

Dispute resolution: Indirect ECJ jurisdiction

While the TCA only delivers partially on the economic promise of frictionless trade with the EU, it also falls short in terms of ‘sovereignty.’ The fact that the ECJ is not mentioned in the TCA as ultimate enforcement authority is somewhat surprising, given that the EU increasingly insists on this in discussions with other trade partners such as Switzerland. So, why was the EU willing to drop this important claim?

Again, a cunning new dispute resolution architecture provided the solution: The TCA establishes a new ‘Partnership Council’ composed of representatives of the EU Commission and the UK Government. It is this committee which will oversee the implementation, application and interpretation of the TCA – including the settlement of disputes in some cases.

It is this device that allowed it the EU to concede on explicitly mentioning the ECJ as final arbiter of disputes under the agreement and giving the UK the impression it is cutting itself lose from the influence of EU regulation. Indeed, while the EU Parliament and the UK Parliament only have a right to be informed about the Council’s deliberations (most likely because the UK side would have rejected any deal mentioning the EU Parliament) and the ECJ Is not mentioned, the EU representatives on this committee will of course always be bound by the decisions of the EU Parliament and the interpretation of EU law by the ECJ. The EU representatives on the Partnership Council have no authority to alter EU legislation or jurisprudence, which means its decisions need to be in line with EU law. In other words, all the committee does is interposing an intermediary between the EU institutions and the British side, without removing the EU legislation as the ultimate backstop for any decisions taken.

Ironically, ‘taking back control’ over our laws was hence bought at the price of establishing a new body who meets behind closed doors, uses arbitration tribunals – rather than the court system – to settle trade disputes, and does not grant the UK Parliament any influence or control.

 Whether or not the British government was indeed tricked into signing this deal; and the extent to which this was indeed a conscious cunning strategy by the EU to make the UK believe it could have its cake and eat it, is of course impossible to tell. But to people familiar with trade negotiations and agreements all this comes as no surprise. The claim of the Brexit campaign and the Johnson Government to be able to deliver on the double promise of ‘taking back control’ while continuing frictionless trade with the common market always seemed like an impossible conundrum to solve. Especially in relationship with the EU, market accesses will always have to be bought at the price of regulatory alignment. The EU common market is large and attractive enough for the EU to be able to insist on that. That’s not different for the UK.  The Brexit promise of “taking back control” can hence only be realised at the cost of losing access to the common market.

So, ultimately, Brexit has delivered the theoretical possibility to deviate from EU regulations. The TCA makes sure that the incentives to do so in practice are massively stacked against the British side.