Implications of EU-UK trade agreement on the chemical industry and benefits of a potential UK-GCC FTA
By Arnoud Willems and Julia Tiskowiec of Sidley Austin LLP
The impact and challenges resulting from the fallout of the COVID-19 pandemic on global trade confirmed again that the Gulf Cooperation Council (“GCC”) chemical industry is not immune to protectionism, non-tariff barriers, and escalating competition.
In addition, the increased global political instability, of which Brexit is an example, illustrated the importance of business planning. Good and strategic planning is essential to ensure sufficient supply of raw materials to keep plants operating all over the world. Although the impact of Brexit on GCC trade in chemicals is minor in terms of sales volume, the chemical industry must deal with new regulations and policies when selling to the UK market.
The pandemic, the increased political risks, and growing global protectionism, make it indispensable to explore new markets. Free Trade Agreements (“FTAs”) can help GCC producers to enter new markets, and to diversify. FTAs result in lower tariffs and non-tariff barriers in export markets. The country that is open for an FTA with the GCC, is the UK. This article draws lessons from the agreement the UK concluded with the EU on 24 December 2020, the so called Trade and Cooperation Agreement (“TCA”), and explores the benefits a deal with the UK could bring to the GCC region.
“Free Trade Agreements (“FTAs”) can help GCC producers to enter new markets, and to diversify.”
“Compared to EU membership, however, the administrative burden for companies on both sides of the Channel has increased.”
1- TCA: what’s in it for the chemical industry?
On EU-UK trade
The TCA ended four years of uncertainty for the chemical industry, whose supply chains are highly concentrated on both sides of the Channel. The TCA brought clarity (although not simplicity): the EU-UK relationship will be downgraded from an internal market to an FTA. For the first time, the EU agreed to zero tariff and zero quota trade with a trading partner. These zero tariffs and quota, however, only apply to products originating in the EU or the UK. Products traded between the EU and UK that do not meet the origin requirements will be subject to duties. Nevertheless, from a tariff perspective, TCA is important for the EU and UK chemical industry since avoids around GBP 1 billion per year in tariffs. Compared to EU membership, however, the administrative burden for companies on both sides of the Channel has increased: import formalities have to be fulfilled, customs checks are taking place, and additional regulatory requirements have to be met.
From a regulatory perspective, the TCA Annex TBT-3, dedicated to chemicals, is important. This annex leaves the way open to regulatory divergence. To sell on the EU market, companies need to follow the EU REACH rules. To sell on the UK market, companies will need to follow the UK REACH rules. The complications are that the UK REACH rules are being developed and that Northern Ireland remains in the EU system.
The new UK REACH requires businesses to review their entire product portfolio, re-assess it for UK purposes and renegotiate data sharing agreements, which are only valid for EU REACH. The UK Chemical Industries Association (“CIA”) has estimated these duplicate registrations will cost industry around GBP 1 billion.
However, TCA commits both parties not to regress from current levels of protection, and offers a platform on which a closer partnership could be negotiated in the future.
On UK-GCC trade
The regulatory requirements are also relevant for GCC companies. Since the UK is now separate from the EU, it is developing its own regulatory framework. As a result, GCC companies that were selling to the UK will face new rules and standards, or at least different from those that apply on sales to EU countries.
“GCC exports to the UK need to conform to specific British legislation and standards.”
“As the GCC accounts for almost 90% in the UK’s annual trade with the Middle East, the post-Brexit world offers an incentive to continue negotiations with the UK and to secure a “deep” UK-GCC FTA.”
2- Importance of securing the UK-GCC trade deal: what does the post-Brexit world offer to the GCC chemical industry?
The post Brexit world brings many challenges, also for the chemical industry in the GCC. Brexit, however, also offers the opportunity for the GCC chemical industry to level the playing field with the EU chemical industry. This would require that the UK and GCC conclude an FTA that not only removes tariffs but provides for regulatory facilitation.
As the GCC accounts for almost 90% in the UK’s annual trade with the Middle East, the post-Brexit world offers an incentive to continue negotiations with the UK and to secure a “deep” UK-GCC FTA. With “deep” we mean an agreement that goes beyond tariff reductions. One area that requires attention is the sustainability ambition. It would be helpful if the FTA would acknowledge that the efforts of the GCC in the area of sustainability are comparable to those of the UK, and therefore do not require additional checks, administrative requirements, or duties. This would also allow to set own standards aimed at creating resilient value chains, diversified sustainable sourcing for chemicals, and for achieving a climate-neutral and circular economy, one that is agile in managing risks.
The benefits of a UK-GCC FTA cannot be underestimated. Concretely, such an agreement presents an opportunity for the GCC chemical industry to:
- Obtain preferential access to the UK market through tariff and non-tariff liberalisation, preferably on par with the EU chemical industry.
- Be more competitive on the UK market. To give an example, South Korean producers have an advantage in exporting products to Turkey under their FTA compared to GCC exporters that cannot rely on such an FTA.
- Reduce the costs of imported raw materials that are re-exported as finished goods.
- Address regulatory hurdles by aiming for convergence of regulatory requirements with the UK, like technical regulations and standards, technical assessment procedures, joint standards, or mutual recognition.
- Reduce compliance costs and address the sustainable agenda of the chemical industry.
“An agreement presents an opportunity for the GCC chemical industry to be more competitive on the UK market.”
“The GCC’s entry into a deep trade agreement with the UK will maintain and hopefully increase economic activity of the GCC’s chemical industry.”
For the GCC chemical industry, FTAs are not only about opening new markets for raw materials and as outlets for its products. It is about the ability to compete and be part of global value chains.
Nowadays, FTAs are a strategic tool and critical for the level playing field: FTAs provide a competitive advantage over competitors than do not enjoy these preferences. Similarly, if your competitors (e.g. in the EU, US and Turkey) are enjoying FTA benefits, you may lose out.
At the moment, the top ten export partners of the GCC have concluded an impressive number of FTAs with their trading partners. With only two active FTAs, the GCC companies are losing out.
The GCC’s entry into a deep trade agreement with the UK, that encompasses both tariff and non-tariff liberalisation of services, investment, and competition, will maintain and hopefully increase economic activity of the GCC’s chemical industry. This, in turn is key to its innovative activity.
About the authors and article disclaimer
Arnoud Willems & Julia Tiskowiec are lawyers at Sidley Austin LLP in Brussels. The views expressed in this article are exclusively those of the authors. This article has been prepared for academic purposes only and does not constitute legal advice.