So now we know: a trade deal has been agreed between the UK and the EU, and it is every bit as thin as we expected. Everyone has now had a chance to digest, over their Boxing Day turkey sandwiches, what the deal means for their sector or business, at least in headline terms. We know that there will be no tariffs on goods – as long as exporters can show compliance with the local content ‘Rules of Origin’. We know that mutual recognition of standards is very limited – with only mutual recognition of factory inspections for medical devices. Customs checks will generally apply, mitigated only by mutual recognition of trusted trader schemes – to start with, at least.
What should the pharmaceutical industry focus on now? Here are five key questions.
1.Can the immediate implementation challenges be mitigated?
This was a last-minute deal which has left exporters and road hauliers struggling to ensure compliance with the new rules straightaway. The borders have worked fairly smoothly so far, partly because freight traffic is down over half on usual volumes, due to a mixture of Brexit stockpiling, fears of early border chaos and COVID. Customs authorities, too, have been relatively lenient so far, but that may be about to change, particularly in France. How strictly will the rules be applied as freight volumes creep up again? Will the European Commission (EC) grant any temporary easement on rules of origin for regulated goods moved from the Continent to the island of Ireland via distribution centres in GB, or will they insist on tariffs being applied? If its imports are affected, life sciences firms and trade bodies will need to engage with the government (HMRC and the Cabinet Office, as well as DHSC) and the Commission on removing operational blockages.
2. Can the deal be improved?
For highly regulated sectors such as medicines and medical products, the deal is not much of an improvement on WTO terms. Could that be improved? If we take mutual recognition of assessments – a key sector ask which Switzerland, for example, secured with the EU – might the EC agree that before the next UK general election, say? It feels unlikely. The EU position reflects mercantilist motives, to lure business from the UK to the EU over time. It also, however, reflects the UK prioritisation of sovereignty, defined as regulatory freedom and the removal of the role of the European Court of Justice, in the deal – which made it easy for the EU to claim that it was acting in defence of its Single Market. To secure mutual recognition of testing now, the industry would need to persuade the government to put something on the table, and show backbench MPs what the impact might otherwise be, for investment and jobs in their constituencies.
The government will also be very sensitive to the risk of job losses linked to the new barriers to trade with the EU. Our recent Lexington report suggested that many of the new ‘Blue Wall’ seats have many more jobs potentially at risk from a thin trade deal than the size of current Conservative majorities in those seats. This concern should be addressed in industry engagement with the government over divergence.
Improving the deal feels like a medium- to long-term project, involving engagement with Labour as well as the government. Keir Starmer wants the deal to work, and has no interest in reopening it this side of an election – he is determined to deny Boris Johnson the election slogan of ‘keep Brexit done’. In power, Labour might work for closer economic ties with the EU, and for that reason engagement is a good investment.
In the short term, however, the industry should prioritise supporting a fully independent, powerful regulator, who can take science-led decisions on approvals, and engage seriously with the EMA. That might be the quickest and most effective way of building trust and cooperation during this UK parliament.
3. How will ‘managing divergence’ work in future, and how can business make its voice heard?
The deal gives the UK the freedom to diverge from evolving EU rules and standards, but at the potential cost of tariffs and limited market access if it diverges ‘significantly’ enough to ‘materially’ affect trade or investment. How much tolerance will there be, on the EU side, of UK divergence before tariffs or other market restrictions are triggered? The key here is likely to be whether the two sides broadly share a strategic goal – for example reducing carbon emissions, or promoting faster global responses to pandemics – which create an incentive to overcome mutual suspicion.
In the post-COVID world, the life sciences industry has an opportunity to engage with both the UK government and EU leaders and institutions to stress the value of managing divergence effectively in priority areas for the sector. Encouraging both sides to set up the sectoral cooperation committees, where officials could get on with looking at practical cooperation, away from the political spotlight, would help – and those committees should have business input. We should not be relying on the trade deal’s arbitration mechanisms – globally, trade deals offer little guidance on how effective these could be; if we get to that point, mutual suspicion will already have won.
The industry should also engage within the UK to help manage divergence among the devolved governments. An SNP-dominated Scottish government, in particular, will look for opportunities to align with EU rules where it can, if the UK starts to diverge from these, especially in areas such as patient safety or access to medicines. That could make trading within the UK internal market more expensive. Overall, the industry needs to look carefully at emerging new EU legislation, and weigh the advantages of possible UK divergence with the risks of losing EU market access and extra barriers being raised to trade with Scotland.
4. How will the sector supply Northern Ireland in the long term?
Northern Ireland (NI) is also a factor. NI will generally continue to follow EU rules for regulated goods, and offers some advantages – since NI goods will be accepted in GB, meaning only one set of standards need be followed – to businesses who locate production there.
The industry has a year to adapt to the new regulatory requirements. However, it is clear that the background assumption of the EC in agreeing a set of implementation flexibilities for GB to NI goods is that, over time, the sourcing of regulated goods for the NI market will shift towards local or, more likely, EU sources (probably via the Republic of Ireland).
5. What should the industry prioritise now?
Given the new trade barriers, and the lack of political appetite in Westminster to renegotiate, the sector should focus now on arguing for:
– Smoother customs procedures, with fewer checks, practical cooperation and greater use of technology (which could all be done without renegotiation)
– Maximum flexibility in minimising checks on regulated goods from GB to NI – while recognising the longer-term sourcing implications of the Protocol
– Making the long-term case, with the government and Labour, to improve the terms of trade (eg an MRA). The UK would have to bring something to the table to make this ask negotiable
– Set up the official-level machinery for practical cooperation in life sciences as a priority, and start to take evidence from business
– Perhaps most of all, promote a genuinely independent, science-led regulator, able to take account of how major trading partners like the EU are regulating, and follow them if appropriate. This regulators’ relationship will probably matter more than any other for the UK and EU trade in the years immediately ahead.
Paul McGrade is senior counsel on Brexit and Trade at Lexington Communications, having spent nearly two decades working on Europe policy at the Foreign Office, Cabinet Office and the European Commission
