The UK this month voted to leave the European Union in a so-called Brexit referendum. This decision raises significant challenges and potential opportunities for all multinational companies that trade with and operate in the United Kingdom. We look at the key questions for the manufacturing industry.
The EU is currently Britain's biggest trade partner. More than 50% of the UK's exports go to the EU. Four of Britain's six biggest export partners are EU Member States, the other two being the US and China. The EU is also Britain's closest trade partner, and empirically (according to analysis by CityUK) trade declines with distance.
- Once the UK leaves the EU, on what terms will it be able to access EU markets? Various alternatives have been proposed, including the Norwegian, Swiss and Turkish model (of which no doubt more will be said in coming months). It is not clear whether any of these models would be as favourable as the current customs union. Britain will be hoping for a bespoke arrangement.
- Without the EU behind it, how will Britain fare at the negotiating table when doing trade deals with non-EU countries? The EU currently has 23% of world GDP - the UK only 3.5%. The US has said that it is not interested in a UK-US free trade agreement. That said, EU trade agreements are slow to negotiate and often the product of compromise - potentially Britain, a leader on the global stage, could be able to do better alone.
- What would be the effect of a post-Brexit reduction in trade? A reduction in trade has been linked to reductions in productivity and innovation on the basis that, as market size and competition shrink, productivity may do the same (again, CityUK has done the analysis).
- Will restrictions on the free movement of people from and to other Member States have a positive or negative impact? This remains to be seen, but in the immediate aftermath of the referendum, immigration is high on the agenda.
Manufacturing is highly regulated, and most of this regulation emanates from Brussels. However it is unlikely that regulation is going to lessen following a Brexit. Some EU-derived requirements reflect the perceived need in the UK in any event. Where those requirements have direct effect in the UK, through Regulations, the UK will need to decide whether to adopt these requirements or allow them to lapse on a Brexit.
If the UK wants to continue to do business with the remaining EU Member States, it will almost certainly need to comply with EU regulations in order to do so - but unfortunately without the ability that it previously had to negotiate, influence or challenge those regulations. Manufacturers may have to comply with UK as well as EU legislation, which may well diverge over time or at minimum be applied inconsistently.
Foreign Direct Investment (FDI)
According to EY (in their Attractiveness Survey), the UK attracted more FDI projects than any other European country in 2014. Many investors regard the UK's access to the EU as an important part of its appeal.
- It is possible that FDI will reduce in the period of uncertainty that now follows the outcome of the referendum, with investors understandably more cautious.
- Will international companies based in the UK (or even some domestic companies) relocate elsewhere in the EU in the event of a Brexit? Some foreign investors - such as Siemens - have already signalled the importance to their business of Britain's EU membership.
- That said, Britain still has plenty to offer investors in terms of timezone, language, skills, legal system and culture. Market forces will continue to operate and strong/innovative UK businesses would hope that European customers would still deal with them.
The UK's legal system has become tightly enmeshed with that of the EU over a period of forty years. The unravelling process will be long, complex and no doubt expensive.
- Which European legislation and regulation does the UK like or need and therefore want to keep? Regulations on jurisdiction, governing law, service of legal proceedings and enforcement of judgments, for example, are all designed to achieve certainty, consistency and efficiency in cross-jurisdictional contracts. The UK might not want to give these up.
- If European legislation is stripped out of the UK system, there will be gaps that need to be identified and filled.
- There is a risk that, over time, new UK legislation becomes incompatible with EU legislation and the systems drift apart.
There will also be an inevitable period of uncertainty in relation to existing contracts. For example:
- Will a contractual requirement to comply with a particular piece of EU legislation still be binding following a Brexit?
- Will principles of EU law continue to influence English courts?
- Following a Brexit, some counterparties may try to terminate their contracts, for example by citing force majeure, change of law or material adverse change.
Before the referendum, the Brexit debate was full of questions. Following the outcome, if anything the uncertainties have increased. Will the UK be more prosperous or poorer following a Brexit? How far will GDP fall, if at all? Will the UK become more regulated or less? What will happen to Scotland now that the UK has voted to leave the EU? At this stage no-one knows for sure. But one thing is clear. The impact will be wide ranging and will affect different sectors and particular commercial interests in different ways.
Companies which operate in the United Kingdom will need to quickly re-assess their Brexit contingency planning in order to identify core areas of interest for the exit negotiations and understand how and where to engage to influence those discussions towards their commercial objectives. Many UK companies will now be seeking to support and influence the UK Government in these vitally important negotiations.
For more information on any of the facts, figures or issues discussed in this piece, please contact the authors.