Vol 13 (2016) - Issue 4

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Br‘Exit’ to Br‘Entente Cordiale’: Strategies for International Business

So Brexit becomes a reality. The pundits got it wrong and the bookmakers’ odds got it wrong (but if one analysed the volume of bets, the majority were for Brexit), but will the markets get it wrong too and succumb to a 'Project Fear' mentality.
We have already seen political torpor and bloodletting on both sides of politics in the UK, a new Prime Minister in Theresa May and a state of permanent crisis in the opposition Labour Party, not to mention the prospects of another Scottish independence referendum.
This begs the question, what strategies should international business located in the UK pursue to ‘hedge’ or take advantage of the challenges posed by Brexit?

We are in a new reality – just deal with it as life must go on
Regardless of the reasons as to why, it is a fact that most Australian businesses doing business in the EU, and approximately 30% of all foreign direct investments ('FDI') into the EU, base their EU operations in the UK through subsidiaries or JVs or via distribution and sales trading relationships with UK businesses. A UK subsidiary of an Australian (or other international) business makes that part of the business British and so European. These UK-centred operations then take advantage of the EU four freedoms to access the 500 million EU consumers and businesses. The four freedoms are:
– free movement of goods;
– freedom of establishment and services;
– free movement of capital; and
– free movement of workers and citizens.

Once formal Brexit is negotiated (and the new Prime Minister is committed to this) between the UK and EU following formal notification by the UK under Article 50 of the EU Lisbon Treaty, that free access to the EU market and those freedoms will cease. No one knows what sort of deal the UK will end up with but pending any Norway-style settlement, which would involve accepting free movement of workers from the wider European Economic Area, the UK becomes as foreign to the EU as Australia, and Australia is currently first in line for a Free Trade Agreement with the EU. Importantly, negotiations on that potential development have already commenced.

Do the CBA (the cost benefit analysis)
While the full legal transition of the UK out of the EU will inevitably take some time over the next two years, existing relationships in the UK will need to be reviewed and a cost benefit analysis done of the practical and economic effects of Brexit for non-EU businesses to see whether it makes sense to stay in the UK or base alternative or additional operations elsewhere in the EU itself.

Principal benefits of being based within EU
The principal benefits of having an EU-based entity as part of a group structure are simple – access to the four freedoms.

Are there 'free movement' workarounds in a post-Brexit world for UK-based businesses
In short, technically no; there is no work around such as taking advantage of pre-existing UK trade treaties with other European Member States which the UK had prior to its accession to the EU in 1973. For example, some commentators felt the Irish-UK Free Trade Agreement 1965 could be a back door into the EU market but that is not the case as the EU has the competency for trade arrangements affecting all EU Member States, hence the current EU drive to finalise the Canada-EU FTA and to negotiate a full Australia-EU FTA negotiations.
However, there are structures, analyses and strategies which can be undertaken to preserve full EU market access to both EU and UK markets.