Most Favoured Nation: Trade Beef in 2023, UK-EU Edition

Things that could cause a trade war, USMCA rules of origin, and some other things

Welcome to the 81st edition of Most Favoured Nation. The full post is for paid subscribers only, but you can sign up for a free trial below.

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One of the things I do in my day-job is think about stuff that *could* happen. Note: this is slightly different from making educated guesses about what *will* happen, but of course the two do bleed into each other on occasion.

On Wednesday, as a follow on from a Parliamentary evidence session that got cut short at the end of last year, I discussed (alongside my doppelganger, Lorand Bartels and Shanker Singham) what *could* trigger a trade dispute between the EU and UK under the provisions of the Trade and Co-operation Agreement.

This gave me an idea for a new MFN series for paid subscribers, looking at what *could* lead to trade beef between different countries/blocs in 2023. And where better place to start than the EU and UK. (The next will probably be EU and US.)

So, in no particularly order – and I should stress that I actually think the EU-UK political relationship is in a better place than it has been for quite a while, making most of these quite unlikely – here are some things that could create trade beef between the EU and UK in 2023:

1.    Northern Ireland

Surprise. While the EU-UK negotiations on how best to implement the Northern Ireland protocol seem to be going okay at the moment, that could easily change. A failure to reach an agreement, or at least an agreement to agree in future, in the coming months could lead to tensions quickly rising again.

The UK is still technically in breach of a number of its obligations under the Protocol – for example its [sensible, imo] refusal to apply customs formalities to parcels sold by Great British businesses to consumers in Northern Ireland and non-application of adequate SPS controls. The paused infringement proceedings could easily be restarted which could lead to ECJ, tariffs, etc.

You can never rule out Article 16 being brought back into play [by either side] which can lead to safeguards/retaliation. The legal routes are often a bit tenuous, but if things really go south you can be pretty certain that the EU would, for example, find a justification to slap UK car or processed salmon exports with tariffs. Such is life.

2.    Fish

The EU/France and the UK just really love arguing about fish, what can I say.

3.    Regulatory divergence

The TCA includes provisions that guard both against divergence from existing rules, and future regulatory divergence. With the caveat that the divergence must have a meaningful impact on trade/investment (which is kinda subjective), both parties have committed not to regress from the levels of labour (Article 386) and environmental (Article 390) protection that existed when the UK exited the transition period. However, this does not necessarily mean retaining the exact same rules. The UK or EU can change their rules without penalty, so long as the level of protection is retained or increased. But the UK’s decision to review all retained EU law, with the idea it will fall away unless an active decision is taken to retain or tweak, is causing some raised eyebrows in Brussels. You also just have the vibes element of it. Either the EU or UK could introduce some new rules that they think are great but the other thinks are regression.

The consequence of breaching these commitments, assuming the arbitrators agree, is the possible reimposition of tariffs and loss of market access.

You then have rebalancing. The EU and UK could simply end up on different regulatory trajectories. Were this to happen, and it were significant enough to be deemed to alter the delicate balancing of access/obligations, then either side could move unilaterally to reimpose tariffs. There’s a whole process to this, but it’s not difficult to see how this could quickly spiral out of control. If these disagreements can’t be resolved by the end of the review period, then it could lead to the total suspension of the trade elements of the TCA. Bad.

4.    Subsidy war

MFN readers are probably aware that the US is in the process of breaching its WTO obligations, and throwing a load of money at green industry on the condition that companies make the stuff in America. Given every action has an equal opposite reaction, or something like that, then it is quite likely the EU does something similar, albeit with a bit more lip service to its international obligations (note: the US really does not care).

There is question re: how such a move would interact with the TCA’s subsidy control provisions, which are pretty stringent, particularly if the measures obviously discriminate against UK-based firms. We’ve already seen this sort of grumbling play out a little bit in the other direction, when the EU accused the UK of making local content a condition of receiving government money for offshore wind development (this was deal with via discussion in the WTO context). But y’know, it’s the sort of thing that could escalate quickly, particularly given the UK could very easily become collateral damage in a US/EU green subsidy race.

In the other direction, the EU has a passing interest in the UK’s freeport developments, where most of the benefits to industry stem not from the freeport elements (customs suspension etc.), but rather tax relief.

5.    Digital protectionism

This one goes slightly under the radar, but the EU (and some member-states *cough* France) is doing some things that, perhaps, breach the terms of the TCA in the digital space. For example, the EU cloud sovereignty agenda, and French efforts to force public sector data to be stored locally, are … maybe … in breach of the TCA provisions on the free flow of data.

You see, Article 201 says:

Cross-border data flows

1.   The Parties are committed to ensuring cross-border data flows to facilitate trade in the digital economy. To that end, cross-border data flows shall not be restricted between the Parties by a Party:

(a)requiring the use of computing facilities or network elements in the Party's territory for processing, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of a Party;

(b)requiring the localisation of data in the Party's territory for storage or processing;

(c)prohibiting the storage or processing in the territory of the other Party; or

(d)making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Parties' territory or upon localisation requirements in the Parties' territory.

2.   The Parties shall keep the implementation of this provision under review and assess its functioning within three years of the date of entry into force of this Agreement. A Party may at any time propose to the other Party to review the list of restrictions listed in paragraph 1. Such a request shall be accorded sympathetic consideration.

Now normally, states can just wriggle out of their FTA digital commitments by pointing to a broad public policy exemption. (This is what, for example, ensures that UK GDPR (a privacy measures) remains compatible with its obligations in UK-Japan preventing restrictions on the cross-border transfer of data.) However, the TCA public policy carve-out is slightly odd, in that it is very specific. It lists “legitimate policy objectives, such as the protection of public health, social services, public education, safety, the environment including climate change, public morals, social or consumer protection, privacy and data protection, or the promotion and protection of cultural diversity” and y’know what, maybe none of these are good enough reasons to force public sector data to be moved out of the UK.

You also just have the lingering risk of someone in the EU bringing a legal case against the EU-UK data adequacy decision and the whole thing falling apart, which would be bad.

6.    CBAM

2023 is the year that CBAM lands. Or at least the reporting requirements of CBAM. And the UK is one of the most exposed countries. This means that anyone in the EU buying steel from the UK will need to account for the carbon intensity of production, document it, etc. Basically lots of new admin (although there will probably never be much need to actually purchase CBAM certificates, due to the UK having a similar domestic carbon price to the EU). This could be fairly easily resolved – by the UK linking its ETS to the EU’s – but politics and all that.

Where things could get quite messy is Northern Ireland. As I’ve written before, the CBAM is arguably [by which I mean, “is”] Northern Ireland protocol relevant, which means the EU and the UK having a discussion about how it could apply to goods entering Northern Ireland from Great Britain or the rest of the world. The UK will probably say “go away no” … which, as always seems to be the case, could lead to tariffs.

Again, I don’t necessarily think any of this will happen, just that it could.