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UK/EU: New year, new deadlines, new (slow-moving) drama

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As anticipated, both sides agreed on a zero tariffs/quota trade deal just in time for Christmas. But the limited nature of the deal leaves many questions unanswered, chief among them the outlook for the (financial) services sector. Respective talks began this week, as a first deadline looms in March. Given the underlying political fluidity in the UK, however, uncertainty in this area is likely to persist for many years to come.

The 2020 deal deviated from previous expectations in only two aspects. First, it contains even less ambitious provisions on regulatory cooperation; second, it introduces exceptions from an overall tight rules-of-origin regime specifically for electric vehicles. Regarding the first point, UK regulators will not be able to assess the compliance of UK goods with EU regulatory standards. Unlike in other EU trade agreements, this will therefore require separate certification processes for goods exported into the EU.

In contrast, electric vehicles will enjoy some exceptions. They will be considered as UK-made goods (thus qualifying for zero tariffs/quotas) although significant parts – especially their batteries – tend to be made in Asia before being shipped to (Japanese) carmakers’ sites in the UK for assembly and subsequent export to Europe. This is another example of the EU making strategic concessions in an area where it has a strong interest in maintaining current levels of economic exchange. As a result, Japanese tech leadership in the area of e-mobility will continue to facilitate the green transition in Europe.

On services, meanwhile, both sides began talks this week towards a so-called memorandum of understanding, as previously agreed. However, the ambitious labelling should not distract from the actually limited room for maneuver in this area. As discussed repeatedly over recent years, the ability for UK companies to sell services into the single market will ultimately depend on equivalence decisions taken (and potentially revoked within 30 days) unilaterally on the European side. Whatever the UK promises during MoU talks regarding the required, continued compliance with EU regulation, is ultimately merely a political statement that cannot be enforced by the Court of Justice of the European Union.

Anything beyond quickly revocable, unilateral EU equivalence would require membership in the very single market the UK finally left on 31 December 2020. One looming political question is therefore what incentive there is for the UK government to publicly promise continued compliance with EU rules – presenting itself yet again as a rule-taker – if the result is still merely unilaterally granted EU equivalence. It is also unclear how keen the EU is to grant equivalence, for instance, for share trading, parts of which have, since 1 January, already moved to the EU.

A conclusion of a substantially meaningful MoU by March is, therefore, unlikely. Rather than dramatic deadlines, a slow-burning process akin to EU-Swiss talks is more likely in the years to come. Temporary equivalence has already been granted for Irish securities trading (until June 2021, when transfer to Belgium is expected to be complete) and for euro clearing (until June 2022). The latter will be the most interesting aspect in the months and years to come: the EU faces a difficult balancing act between an obvious interest to get these operations to move into the Eurozone over the medium term and the short-term fear of market disruption.

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UK/EU: New year, new deadlines, new (slow-moving) drama

As anticipated, both sides agreed on a zero tariffs/quota trade deal just in time for Christmas. But the limited nature of the deal leaves