After the UK and EU reached the Trade and Cooperation Agreement (TCA), businesses should now be aware of a number of changes in the way they trade with the EU. We’ll continue to update this page over the coming weeks to reflect the queries we receive.
If you haven’t done so already as part of your Brexit planning, we recommend auditing your supply chain to identify vulnerabilities and consider pricing. It’s important to future-proof existing supply chain contracts; considering the ability to change suppliers, flexibility around pricing and managing ongoing trade relationships.
Again, if you have not already done so, you should think about your routes to market (i.e. distribution and agency agreements) and the impact of competition law on them.
Our lawyers have provided answers to some common questions about how Brexit will impact trade. If you’d like to speak to an expert, get in touch with us on 0370 1500 100.
Are there any changes in how we trade with the EU?
There are a number of added complexities that UK businesses may need to comply with, depending on the goods or services the business is trading. Part 2 (along with the relevant annexes) of the TCA outlines the key changes in this regard, and we will shortly be updating this page with FAQs around the headline changes. If you require any advice in the interim, please contact us on 0370 1500 100.
Are there any changes in how we trade with the rest of the world?
Previously, through its membership of the EU, the UK benefitted from free trade agreements with over 50 other countries globally. The UK has agreed a number of trade agreements (and continues to agree further) with non-EU countries which govern how the UK can trade with these countries outside of the EU from 1 January 2021. Agreeing new free trade agreements typically takes years, so it is anticipated that many more trade agreements will be reached in the coming years. If no free trade agreement exists, the UK will trade with that non-EU country on “WTO terms”.
What is the World Trade Organisation (WTO), and what does trading on WTO terms mean?
The WTO lays down the rules of trade between member nations. Its aim is to reduce tariffs (and other barriers), and eliminate discriminatory treatment in international trade.
The three main agreements cover trade in:
- Goods (General Agreement on Tariffs and Trade (GATT));
- Services (General Agreement on Trade in Services (GATS)); and
- intellectual property (Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)).
The UK is a member of the WTO in its own right, but the UK will no longer benefit from the EU’s WTO schedule.
The two key concepts behind the WTO’s agreements are:
- Most favoured nation (MFN) treatment – if a WTO member grants another member favourable market (i.e. reduced tariffs), then it must grant the same favourable treatment to all other members unless the favourable treatment comes from a customs union (e.g. the EU) or a free trade agreement; and
- national treatment – WTO members must treat foreign products, services and service supplies no less favourably than domestic equivalents.
For goods, these two principles are included as general commitments by each country. For services, the commitments are far more specific with market access conditions (and, in particular, exemptions from these general commitments) being set out in schedules of specific commitments that are divided by sector and mode of supply.
The UK has submitted drafts of its commitment to the WTO, which are pending certification.
It’s likely that trading under WTO rules will present new barriers (such as additional costs and anticipated delays) to international trade where a free trade agreement hasn’t yet been reached or where the UK previously benefited from existing trade agreements with non-EU countries.
What are the implications of the UK Government’s proposed UK Global Tariff (UKGT)?
The UKGT applies to any goods imported into the UK from countries that the UK does not have a trade agreement with (providing such goods are not “at risk” of onward movement to the EU). The Government website offers an online service to check whether the UKGT applies to goods being imported from 1 January 2021 (see link).
What should we be doing to understand the impact of Brexit on our supply chains?
Many businesses are beginning to experience the impacts of the ending of the transition period, such as short-term disruption from a less free-flowing border between the UK and EU when transiting goods. Such disruption may also be affecting direct supplies to consumers, as well as supplies of components to manufacturers.
If your business hasn't done so already, you should audit your supply chain for vulnerabilities, in order to take steps to avoid any adverse impacts on the business:
- Identify where you receive supplies from the EU, and consider whether an alternative supply route is available
- Check the legal basis upon which you are receiving supplies – do you have an up-to-date contract in place with your suppliers, and does it deal with any risks from 1 January 2021?
- Identify how tied-in you are to EU suppliers
- If the supply is of services, will the regulatory treatment of the provision of those services change?
- Establish any likely regulatory changes to the products being supplied, and identify which party bears the risk and cost of regulatory change
- Where there is risk of disruption, do you have sufficient stock in the UK to minimise the impact on your business?
The above issues will equally apply to your customer relationships, but you will be considering them from the opposite perspective.
What contracts should we review?
You should review any contracts with key suppliers and customers where there are operational and financial implications on your business (e.g. supply of goods and services, support and maintenance contracts, outsourcing, and other long-term financing arrangements).
What key terms in our existing supply chain contracts should we review to protect against uncertainty?
- Flexibility regarding pricing mechanisms – can prices be changed to reflect regulatory/ legal change, or simply the underlying cost of supply?
- Pricing - if pricing is fixed, are there assumptions, exceptions or thresholds that will open up the price to change or re-negotiation?
- Force majeure – can the supplier be excused from performing if goods are delayed at the border or if it cannot, itself, receive supplies on time?
- Term/ termination/ break clauses – are there any rights to terminate for convenience?
- Hardship clauses – can a party terminate the contract if it is deemed not commercially viable?
- Future reorganisations - is there flexibility to transfer the contract to an affiliate, or any flexibility around customer geographies/ or volumes of supply?
- Restrictions on staffing changes – are there requirements for key people that may be difficult to meet if free movement of people is restricted?
- Delivery – which party bears the cost of tariffs (if applicable), and the risk of delivery delays?
- Territory - what is the territorial scope of the contract? Does it assume the whole of the EU and, if so, does that include or exclude the UK?
- Governing law and enforcement - what is the governing law of the contract, and how can it be enforced?
How can we future-proof any key trading relationships?
Once you’ve identified any risks and opportunities from your contract review you’ll need to assess how the contract can be changed to deal with them. Possibilities include:
- a full contract amendment – this could be a lengthy process;
- a short-form amendment just picking up the key commercial issues;
- a letter of intent, or memorandum of understanding, setting out the intentions of each party (but be clear if this is intended to have legal effect or not); or
- if you trade on standard terms, have these been amended to reflect any legal or regulatory changes from 1 January 2021?
Do we need to prepare for any changes in competition law?
From a competition law perspective, a notable change will be that the UK competition authorities will only be concerned about breaches of UK competition law.
It is also worth noting that the block exemptions that are important for structuring commercial arrangements will remain as “retained exemptions”; meaning the exemptions will continue to be available under UK competition law.
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