The possibility of a UK exit from the EU (colloquially known as a Brexit) is high on the political, business and media agenda. What are the key questions for the manufacturing  industry?

TRADE

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.

  • If the UK left the EU, on what terms would it be able to access EU markets? Various alternatives have been proposed, but would any of them be as favourable as the current customs union?
  • Without the EU behind it, how would 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 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 – shouldn’t Britain, a leader on the global stage, be able to do better alone?
  • If a Brexit caused a reduction in trade, what might be the broader effect? 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).
  • Would restrictions to free movement of people from and to other Member States have a positive or negative impact?

RED TAPE

Manufacturing is highly regulated, and most of this regulation emanates from Brussels. Perhaps, the argument goes, a post-EU UK would be less constrained by red tape.

  • Will regulation lessen in the event of a Brexit? Or are regulators and regulation now a fact of life for business across the globe, with the UK no exception?
  • If the UK wants to do business with the EU following a Brexit, won’t it have to comply with EU regulations in order to do so, but in circumstances where it can no longer negotiate, influence or challenge those regulations?

FOREIGN DIRECT INVESTMENT (FDI)

According to EY’s 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 an important part of its appeal.

  • Will FDI reduce in the run-up to the referendum as investors become 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.
  • Or will Britain still have plenty to offer investors in terms of timezone, language, skills, legal system and culture? Wouldn’t market forces continue to operate?

LEGAL  FRAMEWORK

The UK’s legal system has become tightly enmeshed with that of the EU over a period of 40 years. The unravelling process would 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, 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, where are the gaps?
  • Is there 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?
  • Would any principles of EU law continue to influence English courts?
  • In the event of a Brexit, will some counterparties try to terminate their contracts, for example by citing force majeure or material adverse change? Will some contracting parties want to specify Brexit expressly in their contracts as being a termination event?
  • How would a judgment from the English courts be enforced in the EU?
  • In light of the uncertainty, will some parties move away from choosing English law and jurisdiction to govern their contracts?

COMMENT

The Brexit debate is full of questions, as this brief analysis shows. 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 if the UK votes to leave the EU? It may be that the outcome of the referendum is decided (as the Scottish referendum is said to have been) on the basis of just this uncertainty, with voters choosing the status quo over fear of the unknown. What is clear is that there is still everything to play for, on both sides of the Brexit debate.