This is the sixth in an ongoing series of blog posts by Foley & Lardner LLP on the implications of the June 23, 2016 voter referendum in the United Kingdom (“UK”) to exit the European Union (“EU”) (“Brexit”). This current article recounts recent developments, the current status of Brexit and the very difficult days, months, and years that appear to lie ahead as the implications of the UK’s decision play out.
On March 29, 2017, the UK gave formal Article 50 notice that it was exiting the EU. This notice triggered a two-year period within which the terms of Brexit are to be negotiated between the UK and the EU27. Since then, these negotiations have produced little apparent progress. On the UK side, there has been increasing infighting between proponents of “hard” and “soft” approaches to Brexit. On the EU27 side, there has been seeming non-negotiable insistence on resolution of “Brexit divorce bill” (which the UK must pay on exiting the EU), free movement of people issues and resolution of the Irish border question before any substantive talks on trade can begin. Suffice to say, the stage on which this drama unfolds is littered with wounded fighters whose goals, ideas, and reputations seem increasingly tarnished.
As should be obvious, industry in the UK, particularly in the automotive sector, has become increasingly concerned about the lack of apparent progress and the two-year clock that continues to run. While the EU27 members have recognized that it needs to consider (at least internally) the possibility of a transition period (beyond March 29, 2019 as is increasingly urgently voiced by the UK), it is clear that there will be no extension of the two-year period without the unanimous approval by all 27 EU member states. The seemingly disastrous June 2017 referendum on Brexit called by Prime Minister Teresa May only further served to undercut her government’s perceived control of the negotiation process. Simply put, there is a perception that UK leverage and it’s ability to progress the auto industry’s vital interests appear to have been weakened.
The current scene was aptly captured in a recent cartoon appearing The Economist under the caption: “Brexit Talks – The Current State of Play.” As seen in the attached reprint, the cartoon features a tennis court. On one side is a tall, athletic EU player serving at “advantage.” On the other (UK) side of the net, the court is further divided by yet another net running perpendicular to that net, dividing the UK side of the court into two halves. In each UK half, two clearly less-gifted UK players (labeled respectively “soft” and “hard”) are hitting errant balls at each other (instead of contesting with the EU) and shouting complaints about each other to Teresa May who is depicted sitting on the sidelines, labeling both “hard” and “soft” as at “fault.” In the background and as a reminder of the clicking Brexit two-year clock, there is the game’s umpire who seeks to have the EU and the UK sides resume playing with the not-so-gentle reminder to the UK side – “time.” This cartoon scene recalls the infamous statement in an 1868 New Zealand parliamentary debate which noted that “as to the Native question … the Natives are restless, and seem desirous of fighting.”
As has been clear from the outset, Brexit means change, uncertainty, and risk for business. It threatens business planning, employment, and competitiveness. As well, it makes more difficult long term investment and strategy planning. Such problems are always anathema to business. The Economist cartoon with its references to EU27 “advantage,” “hard,” and “soft” infighting on the UK side coupled by a weakened government blaming both hard and soft as at “fault” is a metaphor for the current dismal EU bargaining position in general and the increasingly uncertain position in which the UK industry finds itself, in particular.
From the outset when the Brexit vote went down, it has been clear that the UK motor vehicle industry, which is economically linked to and integrated with the EU, will likely, be vulnerable after Brexit. Urgent concerns were then and are today vocally expressed from car makers and labor leaders alike about reduced competitiveness, increased costs, currency risks, inefficiency, diminished integration in which the industry has operated until now – a 500 million person EU-wide free trade area. As one senior union spokesperson stated about the future prospects of his plant after Brexit, “it is absolutely suicidal. I am concerned about the long-term future of the plant because we don’t know what Brexit means.” Some car makers threatened to move production to the EU (e.g., France) or to EU trade zone countries (like Turkey) unless the UK holds car makers harmless from anything post-Brexit that would make its vehicles less competitive in the EU. While the UK government publicly assured that it will protect the motor vehicle manufacturer from any downside consequences from Brexit, the specifics of how, when, and in what form such protection might take remain unclear. Perhaps, the message was “trust us, we’re from the government.
The consequences for the UK auto industry are enormous. Most UK auto makers are foreign owned and have built facilities in the UK to serve an EU-wide market. They have no “historic” tie to the UK. Not only do these UK manufacturers export two-thirds or more of their production to the EU27 but they have integrated their UK plants into their EU wide systems for design, parts manufacture and assembly and engineering resources parts manufacturer. Loss of the current free-trade access to the EU27 which would potentially make UK producers less competitive and such competitive diminution may well be compounded by potential currency distortions due to fluctuating euro/pound rates. A Toyota representative put it succinctly about Brexit risks: “trade and barrier-free market access” and “uncomplicated and predictable customs arrangements” are “vital for future competitiveness.”
Thus, the horizon looks rather bleak, at present. There has been seemingly little or no concrete progress to give the UK auto industry necessary assurances. Ironically, while a transition period may help the politicians on both sides of the channel buy time to reach a final solution, a transition period may pose its own set of problems for industry if it requires, in effect, that industry accommodate first to changes applicable during the transition period and then have to adjust to a new playing field once the final Brexit deal is struck.
There will be renewed Brexit negotiations at the ministerial level in December. One can only hope that UK infighting will have stopped by then, that the EU27’s pre-conditions will have been satisfied and that serious negotiations on the post-Brexit world can begin. What that post-Brexit world will look like remains, of course, unknowable; however, increasingly there is perception that the UK may, by default, exit the EU and have to rely on its rights and obligations as a member of the WTO. While the WTO platform provides a recognizable and enforceable set of rules on issues like tariffs on goods, trade procedures, standards, etc., reliance on WTO membership will be a clear step down from the free trade benefits which the UK had enjoyed as a member of the EU. It will likely take a long time, perhaps years, to regain the free trade position that the UK is giving up as it exits the EU. Clearly, as time goes by, the natives are getting restless. The Brexit clock continues to tick toward 2019 … and beyond.