Originally published by Air Cargo Magazine, July 2016
The tagline for many horror films is that "in the vacuum of space, no-one can hear you scream". Well, the Brexit vote and our own Federal election has created a political and commercial vacuum and we are hearing significant screaming!
With Brexit, it raises a wide variety of legitimate fears and concerns in terms of potential outcomes. There is even uncertainty as to how it will be effected. Article 50 of the EU 2007 Lisbon Treaty contains a very general exit mechanism which suggests that it will be done by negotiation and agreement, but as there is little further detail, the process may be difficult to achieve by this means. This has created an associated uncertainty regarding Australia's proposed FTA with the EU given that Australia's largest trading partner within the EU is the UK which will not actually be in the EU when the negotiations are taking place and are completed.
The outcome of our Federal election has also created doubt in particular for the FTA agenda. While the two major political parties shared similar positions on our FTA agenda, they differed on important items. This could compromise their ability to compromise. While the FTAs themselves do not need to be "approved" by Parliament, they are still subject to review by the Joint Standing Committee on Treaties (JSCOT) and require the passage of some implementing legislation. This process will pose real issues for the Government if the new JSCOT is critical of the FTA or the new Senate requires large compromises to pass the enabling legislation. So, on the basis that there is to be ongoing political uncertainty in many important areas affecting trade, what will be some of the consequences?
- Political and economic uncertainty is the kryptonite to investment and trade. In the absence of certainty, many parties will elect not to proceed with their investments or transactions. The position becomes even more difficult if the area of uncertainty arises during the course of an investment or a transaction (such as with Brexit) in which case parties may need to make an assessment of their ability to withdraw from their investments.
- One traditional response to uncertainties in politics and trade is to adopt defensive responses. This has been reflected internationally in a recent report by the WTO that there has been a significant increase in protectionist trade measures by G20 member countries apparently in response to ongoing economic and political uncertainty.
- A lot of companies and their lawyers will be carefully looking at Article 50 of Brexit to determine whether it provides any certainty as to the way in which UK may exit Brexit (it doesn’t). Those same parties will be considering whether the events regarding Brexit would give rise to the ability to exit their commercial arrangements whether by some kind of "force majeure" or according to other legal concepts as "uncertainty and frustration".
- Uncertainty represents a reminder that comprehensive due diligence is required to assess and manage risks before undertaking investment or entering into agreements. No doubt there will now need to be a broader set of considerations as to the potential risks which may affect a party's involvement. For example, if a trade agreement underpinning investment is terminated or varied, or the "sovereign risk" of a change in Government is present which could cause potential expropriation of investment or refusal to allow the repatriation of funds or investment, then the proposed deal may need to include more "exit" provisions.
- In our context the handling of the TPP will represent an important "litmus test" as to the approach of our new Parliament which will inform future negotiations of other proposed FTA. The previous JSCOT Inquiry into the TPP was terminated by the double – dissolution and it may be continued or started afresh by the "new" JSCOT. That approach to review and the debate in Parliament will be a good guide. Some of those debates were present in the passage of the ChAFTA legislation and the level of debate may now be more intense – unless of course the major parties can agree to support all the deals and take out the impact of the Greens and Independents.
Hopefully, in the very near future, there will be further certainty delivered in terms of the trade and investment impacts of Brexit. Closer to home, the sooner that the Australian Federal Government, (whatever form that takes), can confirm its economic, political and legal agenda and the nature of our trade agenda with our overseas trading parties, the better.