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Managing Brexit : Doing nothing is not an option

Three months on from UK’s landmark referendum, for many businesses, the complexities of Brexit are just beginning to unravel. With numerous opinions for every decision, any answers currently being suggested to the crucial ‘what’ ‘when’ and ‘how’ questions are just conjectures. Accepting such wisdom or insight as the definitive outcome is risky; with far too many moving parts, the array of options are numerous and can quite easily become fairly complex and overwhelming. Fuelling the climate of uncertainty further, the continued lack of clarity discourages businesses taking strategic decisions and becoming uber-cautious with their investments.

On a recent BBC Newsnight programme, Sir Martin Sorrell, Chief Executive, WPP pointed out that while the fall in the exchange rate has turned out well for export oriented businesses such as his; those businesses depending on imports to UK have had a very different experience. As he elegantly explains on the programme, businesses want certainty and a quick fix, but, the current uncertainty and accompanying complexity may well mean that trade matters remain unsettled for the next ten years.  

Uncertainty, lack of clarity and fluidity could well become the new normal and it becomes increasingly impossible for businesses to wait this out adopting a passive wait and see approach. So how should a business approach Brexit? Before attempting to answer this question, let us briefly explore two crucial milestones.

Triggering Article 50 and withdrawal from EU is the first.  No longer if, but more a question of when, the UK government first needs to generate internal consensus on what sort of an exit is in the best interests of Britain and ensure it has the negotiation capability and resources to lead such complex trade discussions. Timing of the Article 50 notice is further complicated by 2017 elections, over the summer in France and early autumn in Germany where, any indication that Britain may get a deal with EU better than its current arrangements with the EU could adversely tilt public opinion in favour of nationalist anti EU interests. However, what remains clear is that there will be a 24 month period once Article 50 is invoked during which Britain’s terms for withdrawal from the European Union would be confirmed.

Assuming an orderly and timely withdrawal agreement, the second milestone is about agreeing future trade arrangements with Europe and other countries. These negotiations would be anything but easy and straightforward. The European Union’s commitment to the four freedoms – goods, capital, services and people are likely to put it at loggerheads with UK negotiators, especially, as the freedom of movement of people has been the burning platform of the referendum vote. Existing templates with Norway and Switzerland are unlikely to address all of UK’s concerns and a specific UK agreement would need to be worked out and approved by the different EU members, at present count, around 27. These countries have their own range of interests in dealing with UK e.g. some are net importers, some are exporters, some like Poland have numerous nationals in UK, others employ a significant number of UK nationals, and all of them would want to safeguard their interests. So these discussions are likely to be long, perhaps fractured and slow.  

While all of this is being worked out, interim arrangements covering vital trade issues would need to be drafted and ratified. Failure to reach agreement with EU on future trading arrangements would mean that UK follows WTO arrangements. Following WTO is not automatic or guaranteed as UK would need to re-enter full WTO membership for trade issues and trade relationships with countries outside the EU. Countries unsympathetic to the UK could object and obstruct this process.

Recent assertions by USA and Australia prioritising conclusion of their trade agreements with EU over those with UK reinforce the complexity and these are reaffirmed by the recent difficulties between USA and EU agreeing TTIP, despite discussions going on for the better part of three years. There is also a growing concern following the Japanese government’s detailed memo to the UK government, just on the eve of the September G20 Summit in Hangzhou, that other countries could follow suit and send similar detailed wish list missives to the UK adding further pressure and building expectation.

 These reasons, among countless others add to the complexity and they simply cannot be wished away. Each aspect would require diligence and careful attention and will take the time it takes. So, coming back to the main question, what should businesses do during this time?

Waiting and watching is certainly an option but there is every risk that businesses lose their competitiveness. At the other end of the spectrum, they can behave as though nothing has changed, confident that new pieces to the post Brexit reality puzzle would eventually emerge and require consideration.  Doing nothing is definitely not an option especially as it will be quite a few years before clarity finally emerges and when it does, there will likely be little time to comply and adapt to the new requirements and arrangements.

There is definitely a substantial middle ground where businesses can continue to operate successfully, make sensible investment decisions and focus on their commercial interest while at the same time preparing themselves for change by understanding every aspect and nuance of how they do business and explore the impact of different scenarios on their supply chain, access to capital, customers and market and their access to capable people and talent.  

The Dynamics of the EU-UK Brexit Negotiations

The View from Europe is that the official British direction towards the EU following the June Brexit vote and the formation of a new UK government remains unclear. In early September, the UK does not appear ready to enter into negotiations with the EU since its own priorities have not been clearly spelt out yet.

Speculation on the commencement of the start of negotiations by the UK government from the EU by triggering clause 50 (the clause to formally commence exit negotiation from the EU by any existing EU member state) remains unclear. Recent indications have now hinted that clause 50 may not be triggered in 2016 and instead a March/April 2017 trigger date period may now be a more realistic timeframe.

Many British politicians do not seem to appreciate how complex and protracted the various negotiations will be that the UK will need to undertake after triggering clause 50. Negotiations will not only take place with the EU and six set of separate negotiations will need to take place with the timeline for completion long. These six principal negotiations are:

1.      Formal exit negotiations from the EU once clause 50 has been triggered.

2.      A new FTA to be negotiated with the EU.

3.      An interim FTA with the EU before the new FTA takes force.

4.      The UK will have to negotiate a new WTO entry agreement. Any current and existing member of the WTO can block the UK’s access to the WTO during the negotiation period (for example by Russia or Argentina for purely political reasons).

5.      53 FTA’s are currently in place with the EU, the UK will need to re-negotiate these agreements.

6.      An agreement with the EU will also need to be negotiated on future defence, security and foreign policy co-operations.

The UK government appears to be divided on the type of negotiated outcome it wants to achieve with the EU and it is not unthinkable that a “hard” Brexit could occur depending on outcomes from current divided UK cabinet meetings.

The debate and position within the EU is that both the EU and the UK will need to maintain a flexible position in-order to secure a best outcome for both parties. However, increasingly the EU position is that it wishes the UK to trigger clause 50 sooner rather than later. The UK will likely need to negotiate a specific deal that has not yet been replicated in other EU agreements such as those negotiated with countries such as Norway or Switzerland. For the EU, the free movement of capital and people is essential.

The future financial services access for the UK is likely to be contentious. The City of London will wish to continue to act as a prime financial services centre for the EU on a variety of financial products. However, given that the UK is already neither part of the Euro zone or the Schengen zone and now wants to entirely exit the EU, it seems unrealistic that the City’s point of view will prevail. The existence of and sophistication of several EU financial centres combined with new technological advances will likely mean that the City will need to find new conduits to develop future business opportunities.

The EU dynamics will increasingly see the larger EU countries such as Germany, France and Italy assume leadership roles towards working on the future EU integration process i.e. a post-Brexit Europe. The fact that countries such as the Netherlands, Poland, the Nordic countries and many of the Central European countries are dynamic pro-market economies may ensure a more balanced outcome in further integration discussions and outcomes for the EU.

For more details, please contact the following consultant

Charles Nishikawa
Tel: +44 (0)7810 545023