Trade and Sustainable Development Obligations in the EU-UK TCA and their practical implications
The EU-UK Trade and Cooperation Agreement (TCA), which was signed on 30 December 2020 and provisionally entered into force on 1 January 2021, provides a tariff-free and quota-free trade terms between the EU and the UK, provided that relevant rules of origin are satisfied. At the same time, the TCA provides two notable features with respect to trade and sustainable development (TSD) commitments, namely (i) a possibility to impose rebalancing measures (e.g., tariffs) under Article 9.4; and (ii) obligations concerning responsible supply management under Article 8.10. These two provisions demonstrate the growing importance of sustainable development agenda in trade policy.
Possibility to impose rebalancing measures (Article 9.4)
Article 9.4 of the TCA provides that the EU or the UK may impose rebalancing measures when significant divergences arise with respect to labour and social, environmental or climate protection, and subsidy control and cause material impacts on trade and investment. A party who intends to impose rebalancing measures must notify the other party and consultations will take place to find a solution. If no agreements are reached, the party can adopt necessary and proportionate rebalancing measures after five days from the conclusion of the consultations, unless the other party requests the establishment of an arbitration tribunal. If the arbitration tribunal has not delivered its final ruling after 30 days, the party can adopt rebalancing measures. In return, the other party can also take proportionate counter-measures until the tribunal delivers its ruling.
This is a stark contrast to, and an improvement from, TSD Chapters of EU’s existing trade agreements. While the TSD Chapters provide dispute settlement mechanism where a panel provides rulings on alleged violations of sustainable development obligations, they do not include a possibility to impose rebalancing duties against non-compliant third countries. This makes the weak mechanism for enforcing TSD commitments under TSD Chapters of EU trade agreements. On the contrary, the EU-UK TCA provides, for the first time, a strong mechanism for parties to implement sustainable development obligations and not to diverge from existing rules in areas of labour and social, environmental or climate protection, and subsidy control. However, it remains to be seen how the enforcement works in practice, as the TCA does not provide the definition of “significant divergences” and specify examples of “rebalancing measures”.
Responsible supply management obligations (Article 8.10)
Article 8.10 of the TCA states that parties recognize the importance of responsible business conduct 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 supporting the implementation of relevant international instruments (e.g., OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights). In particular, the EU and the UK must 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.
This is the first time that the EU and the UK added extra language on responsible supply management, or supply chain due diligence obligations 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. 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 from 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 specific sanctions to provide strong enforcement mechanism. The Commission will present its proposal in the second quarter of 2021.
Similarly, the UK is proactive to promote and implement supply chain due diligences on human rights and 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 diligences 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 the respect for human rights and environment protection. However, some stakeholders stress that the new initiative should consider the complexity of global supply chains with often tangles and indirect sourcing relations and consider 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.
The EU-UK TCA is a front runner in the field of sustainable obligations. Article 9.4 provides a strong enforcement mechanism with a possibility to impose rebalancing duties. Further, Article 8.10 highlights the importance of supply chain 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 this area. 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. More interestingly, stakeholders need to pay close attention whether these two new provisions will be replicated in new trade agreements of the EU and the UK.