Brexit – are we any clearer on the outcomes or effects?

This article was first published by Daily Cargo News.

I wrote an earlier article on Brexit for this publication and thought it may be a good time to review the situation and whether there was any further clarity on the position.

Is there any further clarity? The short answer is no.

What has been happening in the UK?

We have watched as the UK secured an extension of time to negotiate an exit from Brexit during which time the UK government and Parliament have been trying to deliver that exit and a clear map to that exit. However that hasn’t happened and we have been witnesses to the UK Parliament and political system becoming further divided while the terms of the exit are even less certain. There has been a change in the UK Prime Minister (PM) which led to a massive change to the Cabinet. As new PM, Boris Johnson wants a ‘no deal’ Brexit either to force the EU to deliver a better deal or to actually leave, even without a deal, accepting the chaos that follows, presumably as being loyal to the referendum which voted for the UK to leave the EU (even though that referendum did not set out which form of departure would be available or acceptable). The ruling Conservative (or Tory) party has splintered a number of different ways. A proposal by the PM and his party for a new election was rejected by Parliament which then passed a law stating that a ‘no deal’ Brexit was unacceptable and that the government had to go back and negotiate a new deal. Which the PM doesn’t want to do. He is on the record as saying that there is ‘no way’ he will agree to delay Brexit and the only way to force an outcome from the EU is to stand firm on that position on the basis that the EU would be equally at risk and would have to further compromise. Yet, there is no way to force the EU to give the UK a new deal. The PM and his allies have managed to ‘prorogue’ UK Parliament to limit time to vote on the terms of a new deal. That has met with protests in the UK who see that the move by the PM represents a threat to democracy. Attempts by the officials negotiating the UK’s exit outcome have been unsuccessful as the UK isn’t quite sure what it will (or can) offer.

As you would expect this has led to massive uncertainty in the UK business community and in the overseas community which trades with the UK.  That uncertainty is taking a real toll. Investors have reportedly withdrawn $4.2B from UK equity funds since late May with capital outflows of $29.7B since the Brexit referendum in 2016. According to research by the Bank of England, that uncertainty had lowered capital spending on average by about 11%. The research claims to have found a direct and causal link between Brexit and lower investment. The research estimates that the level of UK productivity has reduced by between 2% to 5% over the three years since the referendum, possibly due to work time being dedicated to post-Brexit planning. Other research by Make UK (representing UK manufacturing) has reported that UK manufacturers are halting investment in their businesses, with even stockpiling activity now being subdued, leading to concerns over whether the sector is less prepared than six months ago at the time of the last Brexit deadline. The same research indicated that domestic orders are falling and that export orders have also dropped, even though the potential weakening of the UK currency may make UK exports more attractive.

What is the likely effect of the impasse on Australia?

In the absence of any certainty over the timing or nature of Brexit, the question remains whether we can determine the future impact of Brexit on Australia. As the manner of Brexit remains uncertain then the exact consequences are uncertain. However, I make the following observations:

• Uncertainty is anathema to investment and business decisions, not just in the UK but anywhere in the world. When you add in the uncertainty of the US versus China trade war, disputes around access to the South China sea, possible moves against Iran together with adverse economic results then the Brexit issue does not actually support ongoing investment whether financial or in the purchase of goods, plant and equipment.
• Many Australian companies use the UK as a base to enter the EU or use the EU to enter the UK market. Either way, the current arrangements for movement of goods, services and employees between the EU and the UK could be cancelled or varied. Which will have an adverse impact on business continuity and financial viability. Whatever government and industry says about the need to prepare for Brexit, the ongoing uncertainty and posturing gives parties cause not to seriously prepare for Brexit. Unfortunately, the lack of preparation of those parties will also affect those who have prepared, unless some ‘two-speed’ clearance arrangements can be entered into.
• The delays and uncertainties over Brexit have a major impact on Australia’s ability to negotiate a free trade agreement with the UK or to conclude discussions on proposed new visa arrangements. Those negotiations cannot start in earnest until the UK has left the EU and there is certainty around the timing or terms and conditions of that departure. That position can worsen if there was an election in the UK followed by a change in government or change in position of the current UK government.
• The current trade negotiations with the EU may well be affected, through the uncertainty of which countries will be in the EU. That leaves open how to deal with the possibility of the deal being completed while the UK is in the EU but then leaves the EU or the UK leaves the EU without a deal and the EU is not clear on border arrangements with the UK.
• The impact of Brexit on the UK and the EU are likely to be significant. Some research suggests that a recession in the UK will follow a ‘no deal’ or ‘hard’ Brexit. At the very least there will be adverse financial and economic effects on the EU and the UK. The EU and the UK are already major trading partners to Australia so economic adversity in those countries will have an adverse effect on Australian companies relying on those markets for some or all of their revenues. It is clear that the Brexit uncertainty is already being factored into business investment decisions.
• The uncertainty is not limited to financial and economic issues. There will also be legal issues in having to manage border controls between the UK and the EU where there have not been border controls for many years. Australian companies will need to separately document entry to and departure from the UK and the EU which has not happened before. There will potentially be different standards in both markets for all manner of goods and services. There will probably be different quarantine obligations and different obligations to pay customs duties and other clearance fees. The UK has now created its own ‘trade remedies’ regime so that there could be dumping and countervailing duties imposed on Australian goods exported to the UK which are seen to cause material injury to UK industries. All of this also creates multiple new compliance obligations keeping in mind that political assurances rarely translate into legal protections.

The best advice I can provide at the moment is to remain informed from reliable sources. DFAT and Austrade are providing assistance as are the UK Government and even the NZ Government through a dedicated web presence. The Financial Times is a good source of reliable information and worth the financial investment. Stay tuned to commentary in the DCN and other trade journals. You may even wish to get legal advice here and overseas. Which myself and Rigby Cooke Lawyers can assist with.

This article was current as of 06 September 2019.