Brexit issues for UK risk managers to consider
- Details
- Published: Friday, 10 June 2016 09:57
By Jim Preen
The United Kingdom’s EU referendum is nearly upon us with the result impossible to call. A recent Daily Telegraph headline summed it up: ‘Leave campaign closes gap to narrowest margin yet as the latest poll shows Brexit vote will go down to the wire.’
Whether you back Leave or Remain, and this article won’t be attempting to persuade you either way, there is no question an upheaval is possible. So let’s imagine we wake up on the 24th June and the Brexiters have won the day. How would British business fare outside the EU and where are the potential bear traps that risk managers need to consider?
Trading nation
We live in a world of trading superpowers dominated by the US, China and the EU. Being outside the EU could put the UK in a weak negotiating position. If we were to negotiate with the WTO, they would be bilateral talks, we would not be speaking as part of a big block. President Obama, when in the UK, made it clear the US likes to negotiate on a regional basis not with individual countries.
For 40 years the UK has relied on EU negotiators to strike deals; we don’t have many trained trade negotiators, a disadvantage at least in the short term.
But being outside the EU umbrella might give us the edge when it comes to talking with emerging markets. An example is Brazil; they are keen to sell more agricultural produce overseas and it might well be easier for the UK to negotiate with them rather than the EU, given the clout French farmers wield over the Common Agricultural Policy (CAP).
We could also negotiate successfully with traditional partners in the Commonwealth and might be able to act more swiftly not being part of the EU monolith. Working alone, so the theory goes, would make us more nimble.
The big prizes, as far as trade deals go, would be China and India, but they would want something in return such as favoured nation status, something we might be a little queasy about given China’s human rights record.
It might also get tricky when negotiating with countries with which we have a frosty relationship: Argentina and Russia spring to mind.
Switzerland struck a trade deal with China in 2013 and initially 99 percent of Chinese exports to Switzerland were tariff free, that was true of only 77 percent of goods going the other way. So in the short term not so good for Switzerland, but that’s set to rise to 90 percent very soon so it just shows effective deals can be done and quickly too.
Mobility of labour
Switzerland is an interesting case for another reason. Post Brexit, free movement of labour could be suspended. It wouldn’t happen overnight and certainly there would be transitional arrangements put in place and concessions negotiated. For many in the Brexit camp, migration and the stopping of free movement within the EU is a major reason for saying goodbye.
In 1992 the Swiss were concerned with migration, wanted to restrict free movement and didn’t join the EEA. Latterly this proved a problem to successful trade; the Swiss joined the single market but not the EEA and had to accept free movement, though like the UK, are not part of the Schengen Agreement.
Mobility of labour is so tied to international trade that a post Brexit government would be caught between a rock and hard place. If we didn’t join the EEA or the single market, we might suffer skill shortages though those voting to leave would say the shortfall would be filled from the UK workforce or possibly the Commonwealth.
Regulations and directives
So what laws and regulations would change following our departure? Here it’s important to understand the difference between regulations and directives. In simple terms regulations are laws drafted by the EU that we have to follow. Directives from the EU have to be given force under UK law. So once we disentangled ourselves the directives would remain in place, subject to change, but the regulations would evaporate and new laws would need to be implemented.
Here’s the rub, many of those laws would have to mirror what we currently have in place otherwise we would be very unlikely to negotiate a successful trade agreement with the EU. Take waste management where strict rules apply, for trade to take place on substantive law the UK would have to replicate what we currently have in place. Devolution could confuse matters here. What if Scotland enacted different environmental laws from the rest of the UK? This could further complicate negotiations.
Taxation is another area of interest, not direct taxation as the EU has no sway there, but rather VAT. There has been VAT harmonisation since 1972 to promote free trade throughout the EU. Post-Brexit what would that legal framework look like and how would it be managed?
On 25th May this year the European Council put together a package on tax avoidance. This mostly affects large multinationals, but any UK company that has subsidiaries in the EU would have to buy in.
Just this month the EU reached an umbrella agreement with the US touching on data protection. It puts EU citizens on the same footing as US citizens if they want to challenge or seek redress in US courts. After leaving the EU we would likely fall out of that agreement and have to negotiate directly with the US.
Data protection will be a key issue and the UK would need to work with the EU on this very quickly. Questions would need to be answered as to what would constitute workable enforcement, together with a whole host of human rights issues. To take just one industry; Internet service providers would want clarity to ensure their business model is both legal and workable.
Security risk
As far a general security goes it is highly likely there would be a pragmatic arrangement between the UK and the EU on matters such as sharing information, cross border investigation, terrorism, organized crime and evidence gathering. Being part of the European Arrest Warrant (EAW) is the piece of the jigsaw that might prove tricky.
The EAW was put in place in 2004 in an effort to speed up extradition from one member state to another. Extradition was a notoriously long process, with the UK having one of the worst records in returning people wanted in other EU states. In the past this process sometimes took as long as 10 years with cases taken all the way to the House of Lords and then the European Court of Human rights. By that time evidence had often deteriorated, was lost or witnesses had died. The EAW cut through the red tape and has proved effective. Once out of the EU we can’t be part of the EAW and would have to negotiate, but what sort of warrant would be acceptable to both the UK and the EU?
Norway has been engaged in such negotiations for years and there is still no end in sight. This might prove easier for the UK as we have been involved with the EAW since 2004. One option would be to return to the European convention on extradition, but then speedy extradition would be a thing of the past.
Business hates uncertainty so on leaving the EU, the UK government would have to go into overdrive. What is now a very emotive debate would need to be transferred into something much more pragmatic and hard headed. The government would have a huge legislative program on its hands that would have to be enacted quickly to enable business to adapt to the new world order.
The author
Jim Preen is head of media at Crisis Solutions (www.crisis-solutions.com)
