The Legacy of Covid-19: Looking Beyond Brexit

On 12 December 2019, UK Prime Minister (PM) Boris Johnson’s Conservative Party convincingly won the country’s parliamentary election, which in turn ended the previous parliamentary deadlock on Brexit. The Withdrawal Agreement (WA) was then ratified by both sides and the UK departed the EU on 31 January 2020. Even though the UK is legally no longer a member of the EU, there is a transition period in place until 31 December 2020, whereby the UK will effectively remain in the EU’s customs union and single market but will be excluded from the EU’s political institutions.

Under the WA , there is an option to extend the transition period, however, the UK government has, thus far, ruled out any form of extension. Thus, the EU and the UK have until the end of the year to conclude an agreement on the future relationship. Although negotiations have commenced with the aim of reaching such an agreement as quickly as possible, it is widely believed that it will be all but impossible to negotiate all aspects of the UK’s future relationship with the EU within such a tight timescale. This is especially true in light of the coronavirus pandemic, as the pace of negotiations between the EU and the UK has already slowed significantly.

On 24 April 2020, the EU’s chief negotiator, Michel Barnier, stated he was “disappointed” and “worried” after a week of talks via video link between his team and their British counterparts. The discussions are said to have been the first formal negotiations since the coronavirus crisis forced the cancellation of face-to-face talks in March. It may be recalled that Barnier has himself spent much of the past few weeks in self-isolation after contracting Covid-19.

On 24 April, Barnier accused the UK of failing “to engage seriously” with certain topics and of seeking to “slow down discussions”. He also warned that the talks may be in trouble by June this year unless the UK government changes course. However, the UK, for its part, insists that it is fighting its own national interest, with officials maintain that Britain has done what Brussels has so often asked it to do during the Brexit process – explain exactly what it wants. In essence, Britain wants to negotiate a standalone trade agreement, with separate agreements then put in place with regard to aviation (including the safety of air transport) and, among others, cooperation on civil nuclear power..

Barnier’s position is that the EU’s negotiating stance includes access to the UK’s fishing waters and for the UK to sign up to a binding “level playing field” agreement with regard to competition, employment policies and environmental rules. By contrast, the UK’s position is that it wants a trade deal along the lines of the existing EU-Canada agreement, while being willing accept the kind of fisheries agreement that the EU has with Norway – one that leaves access to waters up for annual negotiation. In short, it seems clear from the recent round of virtual discussions that the UK and the EU have fundamentally different objectives.

Only two more rounds of virtual talks - the next scheduled for 11 May - are expected to take place prior to a planned EU / UK summit June. It should also be noted that the deadline for the UK to seek an extension beyond 2020 is 30 June, which is also the date by which the two sides must agree on fishing rights, something the EU has made a pre-condition for any overall deal.

It will be recalled that the EU published a draft legal agreement for the future EU-UK partnership on 19 March 2020. The proposed agreement compiles the previous negotiating directives approved by Member States and is in line with the Political Declaration concluded between the EU and the UK in October 2019.

The EU is seeking to establish a zero-tariffs area for goods with the UK with “a favourable climate for the development of trade and investment". However, the EU agreement also proposes strict clauses on the so-called level playing field to safeguard equal social, environmental and competition standards. It emphasises that the future EU-UK relationship “can only deliver benefits in a mutually satisfactory way if it prevents distortions of trade and unfair competitive advantages.”

This seems incompatible with the UK’s stance, which opposes such alignment with the EU in order to operate its own independent trade policy. As noted above, the UK is thus seeking a looser relationship with the EU and is aiming to conclude a ‘Canada-style’ trade deal – a Comprehensive Economic and Trade Agreement, which is arguably the most ambitious trade agreement that the EU has ever concluded.

Under the WA , an extension of up to two years is possible if both sides agree before 30 June 2020. Nonetheless, despite the gap that remains between the two sides and setbacks to negotiations, as well as advice by the IMF and an increasing number of UK voters, the UK is still refusing to consider any extension to the transition period. On the EU side, however, the European People’s Party, the most powerful political group in the European Parliament, has called on the UK Government to request an extension, saying that the threat posed by coronavirus means that common sense should prevail.

With a hard Brexit remaining a distinct possibility, the UK is likely to continue to prepare for a potential no-deal scenario, in parallel with EU trade negotiations. As a no-deal Brexit is likely to lead to new trade barriers and delays at borders, Hong Kong traders with operations in both the UK and EU markets will be aware that such a scenario, coupled with the coronavirus shakeup could result in a significant disruption to supply chains. Hong Kong traders should have proper procedures and planning in place in order to reduce the potential impact of Brexit, wherever possible.

The information below is designed to help Hong Kong traders make the preparations needed, in both the case that the forthcoming negotiations lead to a trade deal that guarantees the UK-EU relationship after 2020 or should a more disorderly Brexit come to pass, one in which the UK leaves the EU without any such deal.

When Trading with the UK but Distributing to the EU27

For a trader wishing to keep any increased costs and delays to a minimum in a post-Brexit scenario, it will be especially important to pay attention to: a) customs clearance compliance and the possibility of import tariffs (i.e. customs arrangements and payments), and b) product standardisation requirements and product safety issues (i.e. regulatory compliance).

As discussed above, there is a transition period in place until the end of 2020. Distribution of imported goods from the UK into the EU27 market continues on the existing basis during this period. In other words, a standstill is in place until the end of this year, in which the existing trading and regulatory arrangements between the EU and UK continue unchanged for Hong Kong sellers. If there is no UK-EU FTA in place by the end of 2020, and there is no extension to the transition period, a hard Brexit could still occur at the end of the transition period.

With a hard Brexit, there will be no orderly UK departure after 2020. Goods to be distributed in any of the EU27 market would be deemed as “imported” into the EU from the UK. Goods which are brought into the EU customs territory from the UK will be subject to customs supervision and may be subject to customs controls in accordance with the European Union Customs Code. This implies that customs formalities will apply, declarations will have to be lodged and customs authorities may require guarantees for potential or existing customs debts.

Goods brought into the EU customs territory from the UK will also be subject to the EU’s Common Customs Tariff. This means that, in principle, the relevant customs duties will be applied. Authorisations granting the status of Authorised Economic Operator (AEO) and other authorisations for customs simplifications, issued by UK customs authorities will no longer be valid in the EU customs territory.

Long delays for cargo traffic at the UK border will be likely for several weeks or months, or even longer, as both cargo and administrative documents will become subject to inspections.

Goods imported into the EU from the UK after a hard Brexit will have to comply with EU regulations. As a consequence of Brexit, an economic operator established in the EU27 who previously (including during the transition period) was considered an EU distributor will become an importer for the purposes of EU product legislation. In the case of imports into the EU from the UK, the imported products will always have to comply with EU product standardisation, product safety and environmental legislation.

For some products, EU legislation requires the intervention of a qualified third party, known as a Notified Body, in the conformity assessment procedure. When the UK leaves the EU, its Notified Bodies will lose their status as EU Notified Bodies and will be removed from the Commission's information system on notified organisations (the NANDO database). As a result, UK Notified Bodies will not be able to perform conformity assessment tasks relating to EU product legislation after Brexit.

When Trading with the EU27 but Distributing to the UK

After the transition period, goods distributed to the UK from the Dutch port of Rotterdam or the German port of Hamburg will be deemed imports into the UK. Goods which are lawfully placed on the market in the EU before the end of the transition period may continue to freely circulate between the EU and the UK, without new customs arrangements applying, until they reach their end-users. During the transition period, there will also be no need for product modifications or re-labelling, as the EU product standardisation and product safety rules will continue to apply.

In the event of a disorderly Brexit, with no FTA agreed after the end of the transition period, imports into the UK from the ports of Rotterdam or Hamburg will become subject to new UK-imposed tariffs. It may be that under a Temporary Tariff Regime, classification of goods could remain the same in order to provide continuity to companies currently interacting with the EU system, so as to minimise disruption for traders, and that most import duties might be set to 0%.

On 13 March 2020, as part of the UK’s no-deal preparations, the UK Treasury and the Department for International Trade published details of the UK’s temporary tariff regime. This regime allows 87% of imports by value to enter the UK without being subject to tariffs and will come into force in the event of a no-deal Brexit. It will thereafter be replaced by a permanent tariff regime developed in light of consultation with stakeholders within 12 months. Please be aware that this updated regime could be subject to change.

As regards regulatory compliance, goods imported into the UK from the ports of Rotterdam or Hamburg after a hard Brexit will have to comply with UK regulations. As regulations may diverge from EU regulations, it is advisable to check the UK Guidance on this (including future updates).

When Entering Contracts Running beyond the Transition Period

The EU-UK WA has been ratified by both sides and there is currently a transition period in place that effectively keeps the UK in the EU’s customs union and single market until the end of the year. Therefore, when receiving orders from customers for goods and services that are expected to enter the UK market before 31 December 2020, these should be processed according to current operating procedures.

However, it is by no means certain that an FTA will be agreed by the end of the transition period. It is therefore a good idea to prepare for the possibility of a hard Brexit from 1 January 2021. Hong Kong sellers should check whether their operating procedures will, at that time, cover the following issues:

• Customs Formalities: For imports into the UK, you would need an Economic Operator Registration and Identification ( EORI ) number from the UK. Traders from Hong Kong will therefore need a UK EORI number (the EORI number starts with GB) if they: (a) trade goods into the UK, (b) lodge a customs declaration in the UK, or (c) apply to be authorised for customs simplifications and procedures in the UK. You do not need to apply for a UK EORI if you already have one. HMRC (the UK authority for customs revenue) will use this number to identify you and collect duty on your goods. Please click on the UK Guidance on EORI numbers for more information.

• Contractual Terms: Hong Kong traders are advised to check their existing contracts to determine the extent to which they address the implications of Brexit and provide sufficient protection of interests. Traders should also consider the possibility of amending or renegotiating contracts whose terms are insufficient or ambiguous in addressing potential concerns or liabilities post-Brexit.

• Be specific: Hong Kong traders should check whether the sales contracts refer expressly to the consequences of Brexit. Instead of using general terms such as ‘ force majeure’ or ‘financial hardship’, use should be made of express provisions which cover specific eventualities of Brexit.

• Clarify references to EU law: Instead of simply referring to EU Member Countries as “the EU”, Hong Kong traders should go further in clarifying that the UK is excluded in this description and/or list the relevant countries individually.

• Payment: Contracts should be checked for provisions on payment. To mitigate a hard Brexit scenario, Hong Kong traders may wish to insert flexible contractual provisions to amend prices or payment mechanisms if faced with unforeseen cost increases (such as currency fluctuations or additional duties).

• Dispute settlement: Traders should check the contract for provisions on ‘dispute settlement’ and ‘applicable law’. For example, in the case of a hard Brexit, the EU-wide rules for the enforcement of judgments in civil and commercial matters will cease to apply to the UK. Should this happen, the English courts will no longer automatically be obliged to recognise and enforce the judgments of EU-27 courts, while courts in the EU-27 will no longer automatically be required to recognise and enforce the judgments of the English courts. Instead, both the English and EU courts will, in general, apply their own individual domestic rules in order to determine whether the judgment should be recognised and enforced. If necessary, in any such instance, it is advised that local attorneys should be consulted with regards to enforcement advice and details of any wider implications.

• Termination: Traders should examine whether it is necessary to include a right to terminate a contract upon Brexit, if appropriate. For example, termination could be triggered by an event such as a hard Brexit, or the loss of any EU-wide rights, or the sudden application of UK law. It should also be checked whether the drafting is clear in relation to: (a) whether the right to termination is bilateral or unilateral, (b) the timeframe for when a contract no longer becomes binding following termination, (c) whether there is an obligation to compensate or a penalty to be paid for termination, and (d) whether there is an obligation on parties to renegotiate in good faith prior to termination being finalised.

• Insurance: Traders should check whether existing insurance policies apply to goods and services shipped to a non-EU Member State, and if not, a broker should be asked to arrange additional cover.

• Product compliance: At the point of UK exit, it is possible that UK rules on packaging and labelling will mirror EU rules – but it will be necessary to monitor compliance with UK standards, as adopted by the British Standards Institute ( BSI ), and UK regulatory laws. The BSI has published various updates on its website and BSI guidance for no-deal planning.

When Safeguarding Trademarks

Currently, there are two parallel systems for obtaining registered trademarks which cover the UK: UK registered marks, which are obtained through and administered by the UKIPO, and European Trademarks (or “EUTMs”) which are obtained through and administered by the EUIPO. The UK registered marks are national and will not be affected by Brexit.

On 29 January 2020, the UK Government website updated its information on intellectual property rights. During the transition period, the UK will remain part of the EU trademark system and EUTMs will continue to extend to the UK during this time. Additionally, the Intellectual Property (IP) system will continue as it is until 31 December 2020 and there will be no disruption to the UK IP Office (IPO) services or changes to the UK IP system during the transition period.

At the end of the transition period, EUTMs will no longer protect trademarks in the UK. Instead, on 1 January 2021, the UK IPO will create a comparable UK trademark for all rights holders with an existing EU trademark and the territorial scope of protection of EUTMs will be limited to the territory of the remaining 27 EU Member States.

According to the website, existing EUTM holders will not have to pay for the equivalent or comparable UK trademark and there will be as little administration involved as possible. However, the UK Government will only create a comparable UK trademark for EUTMs registered before 1 January 2021. Furthermore, there will be no changes to UK-registered trademarks as a result of the UK leaving the EU.

In the event that applications for EUTMs are still ongoing by the end of the transition period, Hong Kong companies or any other businesses, organisations or individuals that have pending applications will have a period of nine months from 1 January 2021 to apply in the UK for the same protections. If the person or organisation applies to register for a comparable UK trademark, the application must relate to the same trademark that was the subject of the EUTM application, and seek protection in respect of goods and services that are identical to, or contained within, the corresponding EU application. The Government will then treat the pending EUTM application as a UK application, and examine it under UK law. The usual UK fees of £170 will apply, including one class of goods or services, and an extra £50 for each additional class.

Traders should also note that before applying for a UK trademark in the 9 months after 1 January 2021, they should use the EU Trade Mark Register to check whether any EUTM applications were pending on 1 January 2021, or hold an earlier filing or priority date.

Protection for the rest of the EU will be possible by filing an EUTM as before. UK companies will not be prevented from applying for and owning EUTMs. A large number of existing EUTMs are held by companies from outside the EU, including companies established in Hong Kong. As such, companies and individuals will still be able to cost-effectively protect their trademarks across the remaining Member States of the EU through a single EUTM application post-Brexit. They will also still be able to enforce these rights against third parties.

Under EU trademark law, a trademark can be invalidated if it is not used. At present, genuine use of an EUTM in a single Member State is sufficient to maintain an EUTM registration. Use of the EUTM in the UK before end of the transition period will constitute, in principle, such use ‘in the EU’ for the purpose of maintaining the rights conferred by the mark. Post-Brexit, use of the EUTM in the UK will no longer qualify as use ‘in the EU’. Therefore, the trademark holder could lose its EUTM if it is not used in the EU27 post-Brexit.

It is also recommended to review existing licensing agreements to clarify their scope and to ensure the terms continue to apply in the UK post-Brexit. Most agreements relating to trademarks will simply refer to “the EU”. Other agreements in the trademark world include undertakings and co-existence agreements to settle disputes, as well as distribution agreements. In future agreements, it is recommended to include a specific reference to the UK and not just the EU.

For further details on intellectual property rights during the transition period and beyond, it is advisable to check the relevant GOV.UK website.

When Protecting Personal Data and Privacy

The GDPR came into force on 25 May 2018 and standardises EU data protection rules across all Member States. The UK has already reformed its own data protection law in line with the GDPR and thus implemented these strict data protection rules.

During the transition period the GDPR continues to apply in the UK. Once the transition period ends on 31 December 2020, the UK will no longer be regulated by the GDPR; however, the GDPR will be brought into UK law as the UK-GDPR, with adjustments to tailor its provisions for the UK.

According to the UK Information Commissioner's Office (ICO), the body that will enforce the UK GDPR , there will be little change to the core data protection principles, rights and obligations after the transition period. The EU GDPR may still apply directly to companies that operate in Europe, offer goods or services to individuals in Europe, or monitor the behaviour of individuals in Europe. Additionally, the UK GDPR will also apply to controllers and processors based outside the UK if their processing activities relate to offering goods or services to individuals in the UK, or monitoring the behaviour of individuals taking place in the UK.

Nevertheless, the UK’s departure from the EU could cause GDPR compliance issues. Currently, it is still not clear whether – if there is a no-deal Brexit after the transition period – these issues will be addressed in an agreement covering data protection or not.

The current situation is that once the UK leaves the single market (i.e. after any transition period), the UK will be considered a ‘third country’ for international data transfers. In principle, the GDPR only allows personal data to be transferred outside the European Economic Area (EEA) to white-listed countries (e.g. Canada, Japan, Switzerland and the US) recognised as providing an “adequate” level of protection for personal data.

The UK is currently seeking an adequacy decision from the European Commission in order to maintain the continued free flow of personal data between the EU and the UK. On 13 March 2020, the UK published its Explanatory framework for adequacy discussions, providing an overview of the UK’s comprehensive legal framework underpinning high data protection standards.

However, for the moment, the UK is not currently on this list, and it will take some time before an adequacy finding can be made to add the UK. In the meantime, data controllers or data processors that process data falling under the GDPR should take measures to compensate for the lack of data protection in that third country by way of appropriate safeguards for the data subject. Such appropriate safeguards may consist of, for instance, making use of binding corporate rules (“BCR”) or model contracts, including the standard data protection clauses adopted by the European Commission. It is recommended to adopt such standard data protection clauses when transferring personal data about EU citizens to the UK.

It is also important to note that companies that have their sole EU establishment located in the UK may still need to comply with the GDPR after the UK leaves the EU single market. Indeed, the absence of an establishment in the EU does not necessarily mean that a data controller or processor established in a third country would be excluded from the scope of the GDPR. This is because the GDPR also applies to the processing of personal data of data subjects who are in the EU by a controller or processor not established in the EU, where the processing activities are related to: (a) the offering of goods or services, irrespective of whether a payment of the data subjects is required, to such data subjects in the EU, or (b) the monitoring of their behaviour as far as their behaviour takes place within the EU.

Finally, Brexit may have an effect on the application of the GDPR one-stop-shop mechanism. The one-stop-shop mechanism means that companies with establishments in multiple EU countries are regulated only by the data protection authority of the location of their “main establishment”, which is usually their EU headquarters. If the main establishment of a group of companies is located in the UK, the whole group may no longer be able to benefit from the one-stop-shop mechanism after Brexit. This means that it could receive inquiries from, and have to conduct proceedings with, the local data protection authorities of each Member State in which the group is established.

For more information on data protection during the transition period and thereafter, it is recommended to check the ICO website which publishes guidance and updates on data protection rules after Brexit.

When Considering Relocation

Currently, the UK benefits from its position inside the EU by allowing SMEs registered in the UK to sell throughout the EU with very little administrative difficulty. With the transition period in place, the situation continues “as is” for the moment, at least until the end of the transition period. That is likely to change in the case of a hard Brexit, as the UK will no longer benefit from being part of the EU Customs Union or Single Market.

In a no-deal scenario, the UK would immediately become a ‘third country’ for EU trade and customs purposes. This means that if you export goods to the EU, or move goods from Hong Kong through the UK for later export into the EU, new rules will apply. In fact, companies or individuals exporting goods from the UK to the EU would have to fall back on World Trade Organization (WTO) trading terms, which only provide a very basic degree of protection and recognition.

In the case of a no-deal Brexit, SMEs established in the UK will find it more burdensome than is currently the case to sell from the UK into the EU. At the same time, it is not essential for an SME based in London to move outside the UK to elsewhere in the EU in order to sell into the rest of the EU. As it is, the EU and Hong Kong enjoy a fairly stable trading relationship, but do not yet have in place a deep and comprehensive FTA.

However, it is not uncommon for Hong Kong SMEs to establish a regional administrative centre within the EU, and many prefer to do so currently in the UK. Therefore, for certain goods and services, it may make business sense to move operations and open a branch office or legal registration in another EU member state.

This will depend on a variety of factors. It is, for example, more likely to be advisable if the core activities of the SME that take place in the UK (such as importation, finance and administration) are mainly to facilitate sales from Hong Kong to the EU. Locating in the EU (rather than selling into the EU from the UK) would in this case help to avoid duplicating the cost and administrative burden associated with first importing into the UK and then into the EU.