The UK-EU Trade and Cooperation Agreement: Level playing field

The commitments to a level playing field in the TCA cover competition policy, subsidy control, state-owned enterprises, taxation, labour and social standards, environmental protection and climate change.

Level playing field provisions in trade agreements are there to ensure competition is open and fair and that businesses from one trading partner do not gain a competitive advantage and undercut rivals from another. The TCA has the most extensive provisions seen in any free trade agreement to date.

Level playing field negotiations
The divergent positions of the EU and UK Government led to the level playing field being one of the most contentious areas of the negotiations.

Referring to UK-EU geographical and economic proximity, the EU proposed that legally binding commitments be included in the agreement, with EU rules and standards as a reference point, and a commitment to strong domestic enforcement mechanisms. The UK Government said the UK would maintain the highest standards in the level playing field areas, but the ability to set its own laws was central to its vision. It would not accept alignment with EU rules and obligations that go further than commitments in standard free trade agreements.

The most substantial disagreements arose over subsidies, where the EU proposed that the UK follows EU state aid rules as they change over time. The UK proposed to base its commitments on World Trade Organization anti-subsidy rules with weaker enforcement mechanisms.

The differences on environmental and climate, labour and social standards, concerned how far the parties should remain “dynamically aligned.” The UK and EU disagreed over whether they be prohibited from lowering labour and environmental standards (non-regression clause), and whether one party should have to raise its standards if the other party raised theirs (the ratchet clause).

The Agreement
The resulting provisions in the TCA represent a compromise to find a balance between sufficient guarantees that future divergence of regulations would safeguard fair competition and the freedom of the parties to set their own rules for social and environmental protection and subsidy policy.

The main level playing field provisions are set out in Title XI of Part Two of the TCA. The EU and UK recognise that to prevent distortion of “trade or investment” between the parties, conditions are required to ensure a level playing field for open and fair competition. The TCA says that while the UK and EU are committed to maintaining and improving their respective high standards, they reaffirm their right to regulate and recognise that the purpose of the commitments is not to harmonise those standards.

Subsidies
The TCA requires both the UK and EU to have an effective system of subsidy control but neither has to comply with the rules of the other. Both subsidy control regimes must follow common “broad principles”. These principles have to ensure that subsidies are proportionate, transparent and contribute to public policy goals.

A distinct feature is that one of the parties can take unilateral remedial measures if there is evidence that a subsidy of the other party risks creating a “significant negative effect” on UK-EU trade and investment.

The TCA provisions on subsidies do not amend the state aid provisions of the Withdrawal Agreement Protocol on Ireland and Northern Ireland. This means that EU state aid rules apply to subsidies affecting trade in goods between Northern Ireland and the EU.

Non-regression
The Agreement’s provisions on labour and social protection, the environment and climate, recognise that both the UK and EU may establish their own levels of protection, without harmonising their rules. Non-regression provisions are there to ensure that protections are not reduced below the levels at the end of the transition period if that would affect trade or investment. The UK and EU both commit to maintaining effective oversight and enforcement systems, with administrative or judicial means of challenge and redress.

In the chapter on competition, both sides agree to maintain a domestic system that addresses anti-competitive business behaviours. A chapter on state-owned enterprises focuses on preventing anti-competitive practices among companies where governments are involved. Provisions on taxation include commitments to have good tax governance.

Dispute settlement provisions
The TCA has complex and bespoke provisions for dispute settlement between the parties. This involves consultations, recourse to an independent arbitration tribunal, and temporary cross-retaliation. The Court of Justice of the EU (CJEU) has no role in the dispute settlement provisions. The provisions on competition policy and taxation are excluded from the dispute resolution.

The most innovative aspect of the Agreement’s dispute settlement is a rebalancing mechanism for the level playing field. If significant divergence in subsidy policy, labour and social policy, or climate and environment policy, arises between the UK and EU, and this has material impacts on trade or investment, both parties have the right to take countermeasures, subject to arbitration. In simple terms, if one side raises its standards and the other does not, the former can take reciprocal action. These rebalancing measures could include temporary suspension of parts of the Agreement or tariffs, but are not defined beyond that.

Further provisions allow for a review of the ‘Trade’ heading of the TCA. This is in case of a persistent dispute, including on the application of the relevant level playing field commitments. This mechanism opens up the possibility of the entire trade part of the agreement being suspended.