Level playing field provisions in the EU-UK TCA

My previous post discussed the general background to the EU-UK Trade and Cooperation Agreement (TCA) and specifically its provisions on tariffs and non-tariff barriers.  An innovative part of the Agreement concerns what are called ‘level playing field’ provisions in various areas including state aids, taxation, competition policy, labour standards, and environmental protection and climate change.

By demanding that the Agreement address these issues, the EU wanted to avoid a situation where the UK could use government subsidies, a more beneficial tax regime or more lenient regulatory standards to give its producers an advantage in competing with EU producers in the tariff-free free trade area which might be seen as unfair.

The Agreement includes reciprocal commitments not to reduce the level of environmental or climate protection or fail to enforce laws in a manner that affects trade or investment (the so-called ‘non-regression’ clause). Both sides have the right, in certain circumstances, and subject to arbitration, to take countermeasures if they believe they are being damaged by measures taken (or not taken!) by the other party in subsidy policy, labour and social policy, or climate and environment policy. These provisions go further than in any previous EU trade agreement although their practical significance remains to be tested (for a deep dive, see this presentation by René Repasi of the Erasmus School of Law Rotterdam to a webinar organised by Green MEPs).

The notion that countries have the right to protect themselves against unfair trade is well recognised in WTO rules. Countries can resort to trade remedies to protect against imports that are subsidised or dumped (sold below their normal price), or if a rapid rise in imports threatens serious injury to domestic production (safeguard clause), provided certain procedures are followed. Pressure has been growing to add other justifications such as social or environmental dumping to these economic factors justifying the use of trade remedies.

The United States recently circulated a text for a draft WTO Ministerial Decision on ‘Advancing sustainability goals through trade rules to level the playing field’. This would recognise that failure of a government to adopt, maintain, implement and effectively enforce laws and regulations that ensure environmental protections at or above a threshold of fundamental standards shall constitute an actionable subsidy which could trigger countervailing duties by a country adversely affected.

The level playing field provisions with respect to environmental protection in the TCA set this ‘threshold of fundamental standards’ for future EU-UK trade at the existing level of protection at the end of the transition period (the non-regression clause) but also go beyond this minimum standard by seeking to limit the extent of future regulatory divergence between the two parties.  

For UK and EU farmers, these are not abstract issues. Regulatory divergence is bound to emerge in the future. Already at this year’s Oxford Farming Conference, the Defra Minister George Eustice announced a public consultation on easing the regulatory framework for gene-editing at least in England. We may also see a situation where pesticides that are banned in the EU may be permitted for use by arable farmers in the UK if the authorities there take a different interpretation of the scientific evidence. One could equally well imagine a scenario in which UK farmers face higher animal welfare standards or more demanding greenhouse gas emission reduction targets. The level of agricultural subsidies might also diverge over time, giving rise to complaints about an unlevel playing field.

Against this background, this post reviews the TCA level playing field provisions particularly for environmental and climate protection and agricultural subsidies and considers how they might work in practice.

Comparison of level playing field provisions

To assess the significance of the level playing field provisions addressing environmental and climate protection in the TCA, the following table compares such provisions in four different trade arrangements: the European Economic Area as the trade arrangement with the greatest level of integration, and the standard provisions in the Trade and Sustainable Chapter in the EU’s free trade agreements as the lowest level of integration.

In between, we have the provisions in the TCA. These are compared to the text of the so-called ‘backstop’ in the abortive draft Withdrawal Agreement agreed with UK negotiators under the Theresa May premiership which in some respects were more far-reaching. The backstop was intended to come into play if negotiations on a free trade agreement failed to deliver a solution that would prevent the need for a border on the island of Ireland. It would have required the UK to have remained within a customs union with the EU until such an agreement was reached. As we know, this draft Agreement was voted down three times in the UK House of Commons, perhaps in part because the level playing field provisions were seen as going too far. The draft Political Agreement attached to the May Withdrawal Agreement in November 2018 stated that the level playing field provisions in the future trade relationship would build on that Agreement. This reference was removed in the Political Agreement attached to the Johnson Withdrawal Agreement in October 2019, which simply stated that “The precise nature of commitments should be commensurate with the scope and depth of the future relationship and the economic connectedness of the Parties.

Each of these trade arrangements is compared under two headings (a) the scope of the provisions and (b) the mechanisms for enforcement and dispute settlement, and with respect to  two dimensions (i) provisions regarding non-regression and (ii) provisions regarding future alignment.

The environmental and climate level playing provisions in different trade arrangements

Trade arrangement and coverageScopeEnforcement and dispute settlement
Single market (e.g. European Economic Area)
Non-regression clauseCovered by environmental legislation with single market relevanceEnsured by the EFTA Surveillance Authority and ultimately the EFTA Court.
Future alignmentRegulatory alignment through adoption of relevant EU laws, agreed by unanimity in Joint CommitteeEnsured by the EFTA Surveillance Authority and ultimately the EFTA Court.
Environmental backstop November 2018 draft Withdrawal Agreement
Non-regression clauseCommitment that level of environmental protection should not be reduced below the common standards applicable within the EU and UK at end of transition period, no link to trade or investment.Not subject to dispute settlement, but effective domestic enforcement required. Ultimately, EU could take remedial measures where it believed UK non-compliance threatened equal conditions of competition within the single customs union, subject to arbitration
Future alignmentNo provisionsNot relevant
EU-UK TCA Level playing field provisions
Non-regressionCommitment not to weaken or reduce, in a manner affecting trade or investment between the Parties, its environmental levels of protection or its climate level of protectionDispute settlement applies to provisions on the right to regulate, precautionary principle and access to scientific and technical information. Other commitments are not subject to standard dispute settlement. Temporary remedies are available in case of non-compliance, subject to arbitration.
Future alignmentCommitment to continue to strive to increase their respective environmental levels of protection or their respective climate level of protection.If significant divergences in future environmental and climate policies emerge with material impacts on trade or investment, either Party can take rebalancing measures.
EU ‘standard’ FTA Trade Sustainable Development (TSD) chapter
Non-regression clauseParties should not weaken levels of protection afforded in domestic environmental or labour law with the intention of encouraging trade or investment  Not subject to standard dispute settlement. Disputes to be resolved through consultation and arbitration panel can be asked for recommendations. No provision for trade remedies in event of non-compliance.
Future alignmentNo provisions  Not relevant
Source:  Own construction.. The TSD Chapter in the EU-Mercosur draft free trade agreement is taken as the case study for the TSD provisions.

The EEA model.  The EEA model represents the highest level of integration and maintenance of a level playing field apart from EU membership itself. Environmental legislation that affects competitiveness within the single market is deemed to have ‘EEA relevance’ and should be transposed into national law in the EEA countries. Not all environmental legislation is deemed to be relevant (see this list reproduced in the House of Commons report The Future of the Natural Environment after the EU Referendum, 2016). Enforcement is ensured by the EFTA Surveillance Authority which plays the role that the Commission plays within the EU. The Authority can take infringement proceedings against an EEA State that does not implement EEA rules or does so incorrectly, which may ultimately be adjudicated by the EFTA Court. New EU standards are adopted by the EEA countries through a process of regulatory alignment, where a decision on ‘EEA relevance’ is made by a Joint Committee through consensus.

The TSD chapter model. The Trade and Sustainable Development (TSD) chapter in EU free trade agreements is the lowest level of integration and guarantees little by way of a level playing field, apart from a commitment to non-regression. Parties should not weaken the levels of protection afforded in, or fail to effectively enforce, domestic environmental or labour law with the intention of encouraging trade or investment. There is no requirement to raise standards in line with a greater level of ambition in the other party. Other environmental commitments are generally best endeavour commitments to, inter alia, implement the Paris Agreement on climate change and multilateral environmental agreements to which it is a party, tackle illegal trade in wildlife, implement measures to combat illegal logging and illegal fishing, and support responsible management of supply chains. All these commitments are excluded from dispute settlement (meaning that trade sanctions cannot be applied in case of non-compliance). Instead, the EU’s FTAs emphasise a cooperative approach relying on softer measures such as pressure from civil society groups in the other party and recommendations from a panel of experts to bring about compliance. Nonetheless, the Commission insists that the commitments in the TSD Chapter are legally binding. Even if a breach does not necessarily render the Agreement invalid, it is up to the parties to consider whether the Agreement is considered to be invalid and to terminate it.  

There is a vigorous academic debate whether the sanctions or cooperative approaches are more effective at ensuring compliance. The US has introduced sanctions in some of its FTAs for specific issues including labour standards. However, in a well-known case it took against Guatemala, the panel found against the US not on the grounds that Guatemala had fulfilled its obligations under the FTA (where the US claimed it failed to enforce its labour laws) but because the US could not prove that this failure materially affected trade and investment. This can also be an issue in the TCA, as we will see in a moment.

The backstop provisions. Before looking at the TCA text, we first take a look at the provisions in the backstop agreement (set out in Annex 4 to the Northern Ireland Protocol in the November 2018 draft Withdrawal Agreement). The scope of the legislation covered by the no-regression clause is striking, not only because it covers nearly all environmental legislation (including nature and biodiversity legislation which is not covered in the EEA) but also because it is the substantive legislation itself regardless whether it affects trade and investment that is covered. There is no need to show an effect on trade. Furthermore, targeted commitments were made in three areas: the reduction of national emissions of certain atmospheric pollutants; a maximum sulphur content of marine fuels; and minimum commitments for best available techniques, including emission limit values, for industrial emissions.

Among the other environment commitments was the standard one to implement effectively the multilateral environmental agreements to which they are party. Both parties agreed to respect the following principles in their environmental legislation: (a) the precautionary principle; (b) the principle that preventive action should be taken; (c) the principle that environmental damage should as a priority be rectified at source; and (d) the “polluter pays” principle. Both parties also agreed to take the necessary measures to meet their respective commitments under the Paris Agreement, while the UK undertook to implement a system of carbon pricing with at least the same effectiveness and scope as the EU ETS.

Of interest also is the mechanism for monitoring and enforcement. Dispute settlement provisions would not apply. Instead, the draft Agreement provided for domestic enforcement through (a) an independent and adequately resourced body, (b) by ensuring that administrative and judicial proceedings are available to public authorities and members of the public against violations and c) by providing for effective remedies and sanctions that are effective, proportionate and dissuasive and have a real and deterrent effect. This mechanism again reappears in the TCA.

Significantly, the EU (but not the UK) was given the right to take appropriate remedial measures where the EU deemed that UK non-compliance with these obligations threatened to undermine equal conditions of competition between the parts of the single customs territory. The UK could appeal this decision to an arbitration panel whose decision would be binding.

The environmental and climate level playing field in the Trade and Cooperation Agreement. The level playing field provisions are set out in Title XI of Part Two of the Agreement. The non-regression text does not go beyond the standard provision in the TSD chapter of the EU’s FTAs. Specifically, parties commit not to “weaken or reduce, in a manner affecting trade or investment between the Parties, its environmental levels of protection or its climate level of protection” and this applies to protections as they stood at the end of 2020. This explicitly includes specific environmental targets that may be included in environmental legislation at the end of the transition period. As drafted, this clause would prevent environmental regression in the UK only if it affects trade and investment. It also does not require the UK to maintain the same legislation that it has inherited from the EU, only that changes to this legislation should not weaken the overall level of environmental protection in a way that affects trade or investment.

The other environmental commitments also include standard text on trade and sustainable development, including sections dedicated to multilateral environmental agreements, forests, fisheries, biodiversity and responsible supply chains. Each Party reaffirms its ambition of achieving economy-wide climate neutrality by 2050. There is a specific commitment to cooperate on carbon pricing and to give ‘serious consideration’ to linking their respective carbon pricing systems.

Disputes over non-regression and other environmental and climate commitments should be resolved through consultation and dialogue including through the Trade Specialised Committee (TSC). If no satisfactory resolution is reached, a Panel of Experts can be established to make recommendations considering the commitments in the level playing field Chapter. The TSC Committee will follow up recommendations and a complaining party can ask the panel of experts to review the measures taken by the responding party if it deems these insufficient.

Temporary remedies are available in case of non-compliance. Temporary remedies can take the form of an offer of compensation requested by the complaining party from the responding party if the latter claims that it is not possible to comply with a ruling of the arbitration body. Alternatively, the complaining party can suspend the application of obligations under the Agreement. The suspension of obligations should not exceed the level equivalent to the nullification or impairment caused by the violation, and this amount can also be subject to arbitration. The obligations suspended (in the case of violation of level playing field commitments) are not confined to commitments in the same area but can be any obligation under the TRADE heading, e.g. suspension of tariff concessions. Temporary remedies do not apply to the net zero by 2050 commitment, although it is subject to standard dispute settlement.

The rebalancing mechanism in the TCA. One of the more contentious areas of the negotiations was the extent to which the agreement would bind the UK to future changes in EU rules. To address this, while underlining the sovereignty of each party, they have agreed to “continue to strive to increase their respective environmental levels of protection or their respective climate level of protection”. If the future divergences are significant and have a material impact on trade or investment, then either Party can have recourse to ‘rebalancing measures’. These would be similar to the temporary remedies that can be introduced in the case of non-compliance with the non-regression principle, although subject to special conditions. “Such measures shall be restricted with respect to their scope and duration to what is strictly necessary and proportionate in order to remedy the situation. Priority shall be given to such measures as will least disturb the functioning of this Agreement. A Party’s assessment of these impacts shall be based on reliable evidence and not merely on conjecture or remote possibility.” The complaining Party must first seek consultations. If these are unsuccessful, the complaining Party can introduce the measures unless the responding Party seeks arbitration. The findings of the arbitration panel will be binding.

This rebalancing mechanism is a far cry from the regulatory alignment that the EU originally sought, but it is an innovative element that may help to give a push to raise standards in the Party that is seen as lagging behind. How it will work in practice remains to be seen. It would only apply where there is ‘significant divergence’ in standards that have actually caused a material impact on trade or investment. The complaining Party will have to persuade a neutral tribunal that this is the case. And the measures taken must be strictly necessary and proportionate in order to remedy the situation. Given these constraints, it may be difficult to prosecute a successful rebalancing measure.

However, the Parties themselves envisage that it could be effective. Either frequent recourse to the rebalancing mechanism by either or both Parties, or if a measure that has a material impact on trade or investment between the Parties has been applied for a period of 12 months, can lead to a review of the TRADE heading in the Agreement even before four years of its entering into force. The review would address whether the Agreement delivers an appropriate balance of rights and obligations between the Parties, in particular within the TRADE Heading and whether, as a result, there is a need for any modification of the terms of this Agreement. If consultations on amending the Agreement sought by one Party are not successful, then that Party can terminate the TRADE heading of the Agreement (with consequential termination of the clauses affecting road transport and, under certain circumstances, aviation as well).  

Agricultural subsidies

The TCA contains an extensive section on state aid disciplines as part of the level playing field obligations. However, these disciplines explicitly do not apply “to subsidies that are subject to the provisions of Part IV or Annex 2 of the Agreement on Agriculture” (Part IV refers to domestic support commitments usually referred to as the Amber Box and Annex 2 refers to measures usually referred to as the Green Box).  This implies that the limits on UK support to its farmers are those set in its Schedule of Concessions notified to the WTO and there are no additional constraints foreseen in the TCA.

This is a very different situation to that envisaged for agricultural subsidies in the backstop in the November 2018 version of the Withdrawal Agreement. Disciplines would apply to state aid in general, but that draft Agreement exempted from these disciplines agricultural subsidies up to a determined maximum overall annual level of support, provided that a determined minimum of that exempted support complied with the provisions of Annex 2 (the Green Box) to the WTO Agreement on Agriculture. The maximum exempted overall annual level of support and the minimum percentage would be determined by the Joint Committee established under the Agreement.

Specific guidance on setting these thresholds was laid down. The initial maximum exempted overall annual level of support would be informed by the annual average of the total amount of CAP expenditure in the UK under the Multi-Annual Financial Framework (MFF) 2014-2020. The initial minimum percentage would be informed by the design of the United Kingdom’s agricultural support scheme as well as by the percentage to which the overall CAP support complied with the WTO Green Box. The Joint Committee could adjust these thresholds to any variation in the overall amount of support available under the CAP in each future MFF.

Two things are notable about that draft text. The first is that the UK’s allowed level of support was linked to its actual level and use of support under the CAP in the MFF 2014-2020, and not to its WTO obligations in its Schedule of Concessions notified to the WTO. This was a much stricter provision intended to keep support to UK farmers in line with support in the EU. A second feature is that the text embodied a commitment to dynamic alignment with EU support levels in the future. It implied that if support to EU farmers increased in a future MFF, the corresponding thresholds in the UK would also increase, but also vice versa. If the EU CAP budget were reduced in a later period, this would also require a reduction in support to UK farmers. There was no reciprocal obligation.

The November 2018 backstop text no longer has any relevance, but it is worth recalling simply to highlight that the provisions on agricultural support in the TCA do not constrain UK support beyond what it has committed to in its WTO obligations. As a result, the UK has greater flexibility to alter (increase) its agricultural support, including trade-distorting support. Even if such support caused a material impact on EU exports, the EU cannot retaliate with rebalancing measures as agricultural support within the UK’s WTO obligations is not covered by the level playing field provisions. Conversely, the UK cannot complain about EU agricultural support levels, again provided that the EU remains within its WTO commitments.

Conclusions 

The level playing field provisions in the TCA of most interest to farmers are those covering environmental and climate protection. The Agreement does not require both parties to have harmonised standards, and divergence in regulations can be expected over time. If regulations are weakened below the 2020 baseline in a way that affects trade or investment, then the other party can have recourse to temporary remedies, subject to arbitration, if consultations fail to bring about a satisfactory solution.

If higher standards in the future in one party create a ‘significant divergence’ that ‘results in’ a ‘material impact’ on trade or investment, then that party can have recourse to rebalancing measures, subject to arbitration, if consultations fail to bring about a satisfactory solution. These measures must be ‘strictly necessary and proportionate’. In either case, the complaining party would be entitled to seek compensation or to suspend equivalent obligations if the arbitration panel upheld its complaint. Rebalancing measures cannot be applied to counterbalance agricultural support that is consistent with either party’s WTO commitments.

There are various hurdles to be crossed to gain authorisation for sanctions and how high these hurdles will prove to be in practice remains to be seen. Nonetheless, these procedures appear to be modelled closely on the procedures already approved for use in the case of existing trade remedies under WTO rules.

The level playing provisions were an offensive interest of the EU in the trade agreement negotiations with the UK. The implicit presumption has been that the UK would use its new-found regulatory freedom to create a bonfire of regulations and turn itself into ‘Singapore on the Thames’. However, at least with respect to climate protection, protection of natural capital, and animal welfare, it could well be the case that the UK is a leader rather than the laggard. It would surely be ironic if in the first case taken under the rebalancing provision of the TCA it was the UK that was the complainant.

This post was written by Alan Matthews

Image credit: Image by Conolan, via Pixabay licence.

Update 19 Jan 2021: The statement that the US claim against Guatemala in the original post was its failure to sign relevant international conventions was corrected to note that the US claim was that Guatemala failed to effectively enforce its labour legislation. In addition, it is noted that the net zero emissions by 2050 commitment, although not subject to enforcement under the level playing field provisions, is covered under the standard dispute settlement (see Lydgate et al., 2021).

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *