Nikos Lavranos analyses the EU UK Trade and Cooperation Agreement’s much-discussed level playing field, governance and dispute settlement provisions, with a related detour via climate change and energy.
Level Playing Field – much EU alignment in practice for the UK
A close look at the provisions in this much-discussed chapter shows that UK has indeed been forced to stay very close to EU law principles and jurisprudence.
Competition policy and subsidy control
The competition policy provisions contained in the agreement are copied and pasted from the EU treaties, such as the prohibition of cartels and the abuse of a dominant position. Enforcement of these competition rules will be in the hand of the UK competition authorities and the European Commission, which will cooperate very closely – as is indeed already the case today.
In addition, EU law-style provisions have been included regarding subsidies and ‘services of public economic interest’, including specific thresholds of amounts for subsidies which indicate a presumption of compatibility with this agreement.
The agreement further includes an obligation to establish effective systems for the recovery of incompatible subsidies – which is very similar to what EU law demands from member states.
Remedial action and rebalancing
As far as subsidies are concerned a party may swiftly adopt “remedial measures” unilaterally if there is evidence that the subsidy has or will cause a significant negative impact on trade or investment between the parties. In the end, an arbitration tribunal may be called upon to decide whether the remedial measure was consistent with the agreement.
Of particular interest is a specific ‘rebalancing’ mechanism, which allows one party to impose unilateral ‘rebalancing’ measures against the other party, if divergences with respect to labour and social, environmental or climate protection or subsidy control have become so significant that they are “capable of impacting trade or investment between the parties in a manner that changes the circumstances that have formed the basis for the conclusions of this agreement”.
An arbitral tribunal can be called upon to decide within 30 days whether such a rebalancing measure is consistent with the agreement. If the arbitral tribunal fails to deliver its final ruling within 30 days counter-measures may be adopted by the aggrieved party.
These mechanisms are not unique in trade agreements of the EU – for example a simplified version of the EU-UK rebalancing mechanism can be found in the EU-Ukraine DCFTA.
Nonetheless, this mechanisms gives the parties significant room of manoeuvre to self-judge whether a certain situation justifies unilateral corrective measures. This could be an invitation to threaten to trigger these mechanisms, which in turn could provoke numerous small-scale trade wars.
The agreement also locks the UK into the existing OECD efforts to fight tax evasion. The agreement incorporates the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and related country-by-country reporting requirements by companies as well as extensive information sharing between tax authorities.
This will make it more difficult for London to play the tax card in order to attract companies into the UK.
The agreement includes a ‘non-regression’ provision as regards environmental – including climate change – and labour and social standards. A panel of experts is foreseen for dispute settlement provision, which can be concluded with an arbitration procedure in case one of the parties fails to implement the panel of expert report.
No EU law and no European Court of Justice
Even if the content of EU law in the area of competition is largely maintained, the UK managed to hold on to one of its ‘red lines’ in the negotiations, which was to exclude any role of the European Court of Justice and indeed EU law generally from the scope of the agreement.
One of the first provisions text explicitly states that it shall be interpreted in accordance with customary rules of interpretation of public international law. The same provision continues to stress “for greater certainty” that any interpretation of this agreement given by courts of the either party, (e.g. the European Court of Justice) shall not be binding on the other party (e.g. the UK).
Consequently, the European Court of Justice will not play any role regarding the interpretation or application of this agreement.
Note that that regarding certain aspects covered by the separate EU-UK Withdrawal Agreement – which is already in force – the jurisprudence of the European Court of Justice will continue to have an impact for the next several years.
No ‘direct effect’ but WTO-style arbitration
The role of the European Court of Justice as well as the domestic courts is further excluded by the fact that this agreement explicitly states that it shall have no ‘direct effect’. This means that individuals and companies cannot invoke this agreement before domestic courts, nor do they derive any rights directly from it.
This is not unusual for international trade agreements. However, it prevents individuals and companies to rely on this agreement against a treaty party, which means an effective tool for enforcing the agreement remains unavailable.
Instead of the European Court of Justice and the domestic courts, the parties agreed on WTO-style panel arbitration system as the preferred dispute settlement system.
The EU-UK arbitration system is to some extent crafted on the WTO dispute settlement system, although without an Appellate Body. Accordingly, if consultations fail, a three-member arbitration panel can be established to resolve a dispute. For this purpose, three lists of fifteen potential arbitrators are to be drawn up by the EU and the UK within six months entry into force. These individuals shall be independent and impartial and must comply with a Code of Conduct.
It is noteworthy that the arbitration tribunal is required to deliver its final report within 130 days, which is significantly shorter than under the WTO practice. As is the case under the WTO, if a party fails to comply with the arbitration ruling, the ‘winning’ party is entitled to suspend certain advantages until the other party complies with the ruling.
The prohibition of any direct effect of the agreement is also explicitly extended to the rulings of the arbitration tribunal.
Role of the Partnership Council
Of particular note is the Partnership Council with its wide-ranging powers that is established by the EU-UK agreement. This Partnership Council is co-chaired by a member of the European Commission and a member of the UK government and has the main task of overseeing the implementation and application of the agreement.
It can adopt decisions by mutual consent in respect of many matters of this agreement and is assigned by different chapters of the agreement to be the sole body which shall find mutually acceptable solutions to any disputes.
It also has the power to adopt decisions that are binding on the arbitration tribunal.
Accordingly, it can be expected that most of the disputes will be resolved within the Partnership Council before reaching the arbitral tribunal.
In addition, a whole range of Specialised Committees and Working Groups will be established to deal with particular aspects of the agreement, such as for trade, level playing field, energy etc.
No ISDS and no investment protection provisions
Although it was often suggested that the EU-UK free trade agreement would be very similar to CETA, in respect to investor-state dispute settlement (ISDS) and investment protection, the EU-UK deal falls markedly short.
Indeed, there is no ISDS – and essentially no investment protection provisions in the agreement, other than the obligation imposed on the parties to accord to investors national treatment and most favoured nation treatment for investors in ‘like circumstances’. This essentially mirrors the already existing WTO obligations.
The agreement further explicitly prohibits the possibility to import via the most favoured nation treatment provision any ISDS provisions from other existing bilateral investment treaties.
Consequently, while Canadian investors will have access to some form of ISDS under CETA in the EU27, UK investors will not.
At the same time, it is noteworthy that the EU-UK agreement does not mention how to deal with the dozen existing bilateral investment treaties – BITs – between the UK and the former Eastern and Central European member states, such as Poland, Hungary, Bulgaria or Romania.
Since the EU-UK agreement does not contain any ISDS provisions nor substantive investment protection standards, these BITs remain – for the time being – untouched and thus fully applicable.
However, the European Commission has initiated infringement proceedings against the UK (and Finland) for not having signed a ‘termination agreement’ which was signed in May this year. So until the European Court of Justice decides against the UK, UK investors could still bring claims against Hungary, while Dutch investors will soon be unable to do so since these intra-EU BITs are to be terminated shortly.
In this context, it is interesting to note that investors need to have ‘substantive business operations’, which effectively excludes letterbox companies from the scope of the agreement.
Energy and climate change
The agreement contains extensive chapters dedicated to energy and climate change.
The energy chapter aims to ensure that the intensive transmission of energy – be it in the form of gas, oil or renewable – between the UK and EU remains stable and smooth. Close cooperation between the UK and EU and member states energy regulators is of central importance – and foreseen in the agreement. At the same time, it is noteworthy that the energy chapter is meant to cease to apply on 30 June 2026.
However, it is interesting to note that the Energy Charter Treaty (ECT) is also not mentioned with a single word. Accordingly, the ECT provisions, including its ISDS provisions, remain fully applicable in EU UK relations. This means that an UK investor could bring a claim against for example Spain on the basis of the ECT, whereas a German investor may soon be unable to bring a similar case against Spain – if the European Court of Justice declares such intra-EU ECT disputes to be incompatible with EU law, which seems likely.
Moreover, both parties reaffirm their commitment to meet the 2030 targets for renewable energy and to achieve “economy-wide climate neutrality” by 2050.
The importance to fight climate change and the protection of the environment is also reflected in a detailed dedicated chapter.