The EU-UK TCA: A Front-runner in Trade and Sustainable Development

Ann-Evelyn Luyten is an Economic Affairs Manager at an EU trade association. Previously, she worked at the World Trade Organization. This post has been adapted from an earlier post in European Views.

Image courtesy of Shutterstock

The EU-UK Trade and Cooperation Agreement (TCA), which was signed on 30th December 2020 and provisionally entered into force on 1st January 2021, establishes a tariff-free and quota-free trade relationship between the European Union (EU) and the United Kingdom (UK), provided that relevant rules of origin are satisfied. At the same time, the TCA includes two notable features regarding trade and sustainable development (TSD) commitments, namely (i) the possibility to impose rebalancing measures (e.g., tariffs); and (ii) obligations concerning responsible supply management. The language in these two provisions demonstrates the growing importance of the sustainable development agenda in trade policy.  This makes the EU-UK TCA a front-runner in sustainable development obligations, which could serve as a template for future TSD chapters in trade agreements. 

The two special provisions of the TCA regarding TSD commitments 

There are a number of novel contributions regarding TSD obligations in the TCA. One is Article 9.4 which regulates the ability of the parties to impose rebalancing measures, and the other one is Article 8.10 regarding the importance of responsible supply chain management. I address each in turn.

First, Article 9.4 under “Title XI: Level Playing field for open and fair competition and sustainable development” of the TCA allows the EU or the UK to impose rebalancing measures when significant divergences regarding their policies and priorities with respect to labour, social, environmental or climate protection, or with respect to subsidy control, arise and cause material impacts on trade and investment between them. A rebalancing measure is a sanction (e.g., tariffs) which is designed to compensate one side for an unfair disadvantage.  In such a scenario, the party who intends to impose rebalancing measures must notify the other party and consultations will take place to find a solution. If no agreement is reached, after five days from the conclusion of the consultations, the party can adopt necessary and proportionate rebalancing measures to remedy the situation, providing that the other party has not requested the establishment of an arbitration tribunal. If an arbitration tribunal is established, but  does not deliver its final ruling after 30 days, the party is allowed to adopt rebalancing measures. In return, the other party can also take proportionate counter-measures until the tribunal delivers its ruling. In enacting measures, the aim is to craft something so that disruption to the trading relationship is minimized. 

This provision represents an improvement from the TSD chapters of the EU’s existing trade agreements. While those chapters include different types of dispute settlement mechanisms, they do not include the possibility to impose rebalancing measures against non-compliant third countries. On the contrary, the EU-UK TCA provides, for the first time, a strong mechanism for parties to implement sustainable development obligations. However, it remains to be seen how enforcement of this chapter will work in practice, as the TCA does not provide a definition for “significant divergences,” and neither does it specify examples of appropriate “rebalancing measures.” 

Second, Article 8.10 of the fair competition and sustainable development chapter of the TCA states that the parties recognize the importance of responsible supply chain management and corporate social responsibility (CSR) practices. In this regard, the EU and the UK must encourage responsible business conduct by providing supportive policy frameworks and by supporting the adherence and implementation of relevant international instruments (e.g., OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, among others). In particular, the EU and the UK obliged themselves to implement measures to promote the uptake of the OECD Due Diligence Guidance for responsible supply chains of minerals from conflict-affected and high-risk areas. 

But this is not the first time that the EU refers to corporate social responsibility in its trade agreements and the use of international guidelines. For instance, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) has a similar provision in its TSD and environment chapters. However, it is the first time that the EU and the UK added extra language on responsible supply chain management in its trade agreements. This reflects the growing importance of supply chain due diligence obligations with respect to environment and human rights in the EU as well as in the UK. 

The EU and UK’s internal regulations on supply chain due diligence

Both the EU and the UK are in favor of adopting internal regulations on supply chain due diligence. In the EU, the  Conflict Minerals Regulation, which establishes supply chain due diligence for trade in certain minerals and metals to minimize the risk of financing armed groups in conflict-affected and high-risk areas, entered into force on 1 January 2021. Moreover, the European Commission is currently preparing a legislative proposal that includes mandatory human rights and environmental due diligence obligations for companies in the context of sustainable corporate governance. The EU’s new Supply Chain Due Diligence Regulation is likely to elaborate on specific sanctions to provide a strong enforcement mechanism. The Commission will present its proposal in the second quarter of 2021. 

Similarly, the UK is proactive in promoting and implementing supply chain due diligence on human rights and the environment. In October 2015, the UK’s Modern Slavery Act, which requires businesses to report on slavery and human trafficking in their supply chains, entered into force. It was the first of its kind in Europe and one of the first in the world. In addition, in November 2020, the UK submitted a separate legislative proposal for supply chain due diligence on deforestation, which is currently being debated in the House of Commons. Under the new rules, which are expected to be passed by mid-2021, companies would face substantial fines if they cannot prove that their commodity supply chains are not linked to illegal deforestation.  

It is important to note that companies in the EU and the UK broadly support this new initiative on strengthening supply chain due diligence obligations. In a public consultation for the EU’s new Supply Chain Due Diligence Regulation, which ended on 8 February 2021, stakeholders generally supported this initiative and urged the Commission to implement effective and mandatory rules to ensure respect for human rights and for the protection of the environment. However, some stakeholders stressed that the new initiative should consider the complexity of global supply chains, for example, indirect sourcing relations,  and the differences between companies and sectors. In the UK, companies like Marks & Spencer called for action on human rights abuses in the cotton fields of Xinjiang, for instance. 

The relevance of the TSD obligations under the EU-UK TCA

The EU-UK TCA is a front-runner in the field of sustainable development obligations. While Article 9.4 provides a strong enforcement mechanism with a possibility to impose rebalancing measures, Article 8.10 highlights the importance of supply chain management and due diligence obligations for human rights and environmental protection, and provides that the EU and the UK must work together to strengthen their cooperation in these areas. Considering the growing importance of TSD obligations in trade policy, the EU-UK TCA could provide a good example of a strong TSD chapter for future trade agreements, which could be used as a template. 

At the same time, it would be important to monitor whether and how the EU and the UK will impose rebalancing measures, as well as how the two parties implement their own supply chain due diligence obligations and internal regulations. More interestingly, stakeholders need to pay close attention to whether these two new provisions included in the TCA will be replicated in the EU’s or UK’s future trade agreements. While much remains to be seen, the TSD chapter in the EU-UK TCA is a promising step forward. 

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