The Effects of Brexit on International Business – Jovita Vassallo, Partner, Head of Dispute Resolution, Fletcher Day, International Business Law Consortium

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by on April 20, 2017

The Effects of Brexit on International Business
Jovita Vassallo
Partner, Head of Dispute Resolution, Fletcher Day
International Business Law Consortium
Nicosia, March 2017

Trasncript

Brexit. What is happening in the world? Wasn’t expected, but typically with the British attitude we are where we are, so we have to move forward.

You’ve got the European Union. It’s effectively, it’s almost like a peace treaty. It came together after the war with an economic and political goal. But part of that goal was in order to get countries integrated moving forward as one, so that you have a harmonized state, effectively. It’s currently made up of twenty eight member states, nineteen of which have adopted the euro. It’s a fascinating achievement. You have the four movements: you have the movements of goods, services, people and capital. And probably the best achievement of Europe is the free movement.

So why leave? We’ve heard a lot of negative press. But there are reasons to leave as well. You have to remember that whatever everyone’s opinion is, England, the UK is an island. On an island it has a limited infrastructure. And our infrastructure is currently breaking down. Our NHS, our national health service, is at breaking point because we have a lot more people coming in and using these facilities. For example, in the UK you pay national insurance from the day you start working in order to gain access to the NHS. We have a lot of people now coming into the country, they haven’t paid the national insurance but they have rights to use certain services. Then you have the fact that we can’t nationalize freedom of movement, so when people come into the UK, a lot, the vast majority, actually, are coming to London. That’s where you have your Square Mile, so you have a lot of the banks, the expertise, the legal field. So house prices in London have gone up. For example, a few years ago a studio apartment – so it’s just a one room – in Chelsea went for 1 million pounds. So what’s happening is your doctors, your nurses, your school teachers, your bin men – they can’t live in the centre of London. So they’re having to move out. Now this isn’t necessarily European problem. We’ve got some excellent European workers coming in, they’re working in the banking facility, they are supporting our economy. So, there’s a lot of propaganda because we have people from all over the world coming in. Certainly in London – Russian money, Chinese money, Middle Eastern money. So it’s an issue that we’ve got. Now part of the way there the government haven’t looked at it so well, we need to give some assistance on housing, there are different right-to-buy schemes, for example. The thing, again, with freedom of movement, so with a right-to-buy scheme any of the lower paid workers coming in from the EU have access to that scheme. So again, the center of London’s becoming saturated. So there were reasons to leave. There’s a lot of reasons, certainly, to stay.

Then we have this rather ludicrous situation of the meaningful vote. I say ludicrous, because the meaningful vote was effectively comprised of two things. One was telling all the EU nationals now in England, in the UK, that you have a right to stay and that nothing will change. And the other was that Parliament – so our supreme legislative body – will be able to comment on the agreement once it’s come back. And I say this is an unusual position for two reasons. One, who of us here would go into a negotiation and say, “Right, we’re going to have this negotiation in one week’s time. One of my key cards, one of my best positions is the fact that we have EU citizens here, they want to stay. But don’t worry, before I even start the negotiation I’m going to guarantee those rights. But you are the twenty seven nations, you can do whatever you want with the expats. We don’t care, we’re not asking for reciprocation.” So that’s why I’m saying it’s an unusual situation to be asked to give your hand away, or give one of your key cards away. At the
end of the day, we all want to work together, we all want to trade together, there will be an agreement reached. There could be a form of work permit, it could be a form of visa, but we’re not just suddenly going to say, “Okay, all Europeans get out.” It’s not the way it’s going to be and it’s been very heightened in the press that this could happen. I’m guessing the other point is the fact that we’ve got Theresa May and we’ve got our Brexit secretary who will be doing the best deal they can. Now, you have to remember it’s not the UK can say, “We want this,” – done. We have twenty seven national governments to have to agree. This is going to be a tough negotiation. To get your best deal and then to come back to Parliament, and for Parliament to say, “No, go back and do better.” You’re arguing against twenty seven other people, negotiating with twenty seven other people, so a difficult situation to be in. And luckily, only last week Parliament did actually say, “No, we approve the bill as it is, go ahead and trigger.”

The single market. This, as I say, is one of the biggest achievements within Europe. It has zero tariffs throughout the twenty eight countries allowing us to trade freely. It does impose certain restrictions to trade with non-EU members, so there has to be agreement. They’ve got the customs union – it’s arguable, I guess, that the EU is the largest customs union – you have the customs union, and this is basically, it’s a bilateral trade agreement, or two or more trade agreements that you can have within that union, so you can negotiate your own deals. Again, there are restrictions outside. So you agree your common import tax, tariff, but then you agree a common external tariff. And I think the best way to understand the common external tariff is to understand what will happen if it didn’t exist, which is something relevant to Brexit, because this could well happen. So an example. Say, if you have Japanese sake imported into the UK at a zero tariff. But to import Japanese sake into Europe, say, into France, it’s a 10% tariff, what can happen when you don’t have the common external tariff is the Japanese can import to England, the British can then export to France – zero tariffs. This is police and there is something called the rules of origin tax. So when you are seem to be trying to do this and to not pay your taxes, the rules of origin tax applies and you then get slapped on with a misbehavior tax, effectively. Now, the problem is policing that – it’s very, very difficult to police. So we’ve got restrictions here – import and export agreements. You can only trade within your areas. I’m saying, I mean the single market, what happens is Europe has to agree deals outside of the European Union. There’s fifty two trade agreements, it’s not like Europe only deals with itself. I mean, look at the Canada treaty that’s just been signed. Trade will continue.

You’ve got different scenarios. You’ve probably heard the terms ‘hard Brexit’ and ‘soft Brexit’. ‘Hard Brexit’ is coming out of a single market. ‘Soft Brexit’ is effectively adopting something like, say, the Norwegian system, where they’re not a member of the EU, but they’ve allowed freedom of movement. And having freedom of movement they’re allowed full access to that single market. Then you have something like the Swiss model. That’s more a collection of agreements which allows a limited access to the single market. But there is all this talk about staying in the single market for the UK. No, we can’t. The starting point has to be: we are out of the single market. What we then want to do is try and negotiate a deal where we have a limited access to that market. And I say that because one of the key reasons that the vote, as limited as it was, was to exit the European Union, it’s because a lot of people want control of the boarders again. So having that in mind, you cannot then just simply stay in the single market. We will have to come out and we will have to negotiate a deal then to have access.

Could we be a member, say, of the customs union and not the single market? Well, yes. Look at Turkey. Turkey is not in the EU, it’s a member of the customs union. But again, would we want to do that? Well, if we’re coming out of the single market and trying to negotiate a deal, remember there’s these restrictions on having deals outside of your other customs union and single market. So why would we come out of the single market, possibly with limited access, hopefully with limited access, and go into the customs union? We wouldn’t. So I think that’s a little misleading. I don’t think we will do one and not the other.

There is this term ‘crash out’. Well, we’re saying no deal is better than a bad deal. Now, the idea of simply, if we cannot reach a deal, we simply leave. What happens then? Well, the European treaties will no longer apply, and the World Trade Organization will automatically kick in. So we’ll be subject to certain taxes, import taxes, VAT border taxes.

Now, I think it’s quite interesting to have a look at some of the key member states that are negotiating. So, for example Germany, the strongest economy in the EU. Now, one of the largest importers of German cars is the UK. Do the German government really want to lose that trade? Possibly not. Also we’ve got the banks – some of the banks will now go to Frankfurt. I think that’s inevitable. I think some of the European banks will move to Frankfurt. I think some of the US banks will probably get a stronger presence in the UK. But it was quite interesting to hear Theresa May’s little threat in her January speech that we can always, worst case scenario we can change our economic model. And what she’s saying is, “Here, we have a 20% tax regime. If you keep saying we don’t have a position, if you keep saying that we’re coming in on a weak trade off, well, we can always change our tax regime. So if we’re crashing out, we can become a tax haven, we can reduce our taxes.” Again, UK don’t want that, Europe doesn’t want that. So, when people are saying you don’t have a position, we actually do. We’re not coming from the strongest position, but we certainly have a lot to play with. And Europe doesn’t want to stop trading with the UK and vice versa. The UK’s an island, we import a lot of goods.

As we can see, there are other options. We know about the Transatlantic Trade and Investment Partnership (TTIP). Okay, we wouldn’t be able to enter that, but there again, you guys have (inaudible) Trump. Well done by the way. He’s not a fan of the TTIP. So is it going to go ahead anyway? We don’t know. We all probably remember that slightly sickening picture of Trump and May sort of skipping across the lawn and holding hands. There is a deal, this deal has to be done with the external world. There is life after the EU. And as you know, we’ve got this new Canadian agreement now which has just been signed. So I think Canada, I think outside of the US the largest trade deals are done with Europe. So it’s all very positive move. So there are things to be done. Personally, I think, as I say, we’re going to start with the ‘hard Brexit’, and then we negotiate back in, to an extent. I think we’re going to be able to then broker deals externally. So there’s positive things. I think we’ll end up with some sort of hybrid agreement. I don’t believe we’re going to crash out, and I don’t believe there’s going to be a strict ‘hard Brexit’. I think we’re going to be somewhere in the middle.

Turning on to, for example, the court system. Now, the European courts – we will regain our sovereignty. So we will now repeal the human rights bill. We will repeal, alter some of the statues that are currently in place, we could amend them, we could (inaudible) them or we could keep them. But England is going to now regain control (inaudible) back to the English courts under the laws of England and Wales.

The European Court of Human Rights, common to popular believe, this is not a European institution. It is outside, so the European Court of Human Rights still stand. What will happen – we’re already committed to repealing the human rights bill. But that doesn’t mean that England’s going to go Wild West. We’re going to then put in a new bill – it’s the British Rights Bill. There’s all these questions about whether or not Brexit it can be a force majeure clause, whether or not it means that contracts can be frustrated. At the moment, to my knowledge there’s been no case law on this. And I also think it’s too soon. I think at this point if you argue frustration of contract, I think it wouldn’t fly, it would be a reactive situation. So for example, if companies are going into business, one company, say, in France, is saying, “Hold on, Brexit, I now want to get out of that contract,” we will say, “Well, no. In that case we will have to litigate, you will have to defend, because it’s not going to happen. We don’t believe Brexit is enough to frustrate.” How it will get interesting is when the deal is done and we all know what we’re looking at. At that point could someone question whether or not the deal creates a situation where you could frustrate contract and therefore we (inaudible). We don’t know. Let’s hope not, because once that is litigated, if it’s a negative result for the English legal system or the UK, then it would open the floodgates, increasing a lot of work for as litigators, but not, you know, in the long run being beneficial for the country.

Works and permits. I’ve touched on this. Again, no one is just suddenly going to be kicked out. This is scaremongering. Trade will continue, the City Square Mile will continue. We’ve got strong economy, we have strong banking structures, our legal system is respected throughout the world. There is still positivity here. We’ll simply do something like, say, permits or maybe nationalize. So, instead of everyone coming into London, we might be able to say, “There is a quota here, we need assistance from the doctors, say, in some of our northern cities.” We might be able to move the workers around a little more freely.

GDP and the economy. Well, I’d say the pound’s probably dropped about ten percent. I believe it will stay that level to the end of negotiations. It could fluctuate and certainly depending on the result – we’ll see where it goes at that point. But at the moment that’s actually quite good for our exports. Because as our pound drops, it becomes cheaper for people outside of the UK to buy our goods. So our exports are actually increasing. On the converse side it’s actually getting more expensive while our pound is lower to import, and that has a knock-on effect of course on inflation. And if the inflation rises, the cost of lending will rise. As the cost of lending rises and Brexit negotiations continue, regulatory issues could get higher. At that point are those costs pass on to the customers? We are yet to see.

Tourism. Well, apologize to the Spanish, but tourism is probably going to continue. I think the English have ruined (inaudible), quite a lot of coastal soil, but we will continue. As I say, England’s an island, we travel a lot, we bring money with us into the economies. And no one’s just going to ban the English. As much as some of you may well like to, it shouldn’t realistically happen.

Areas of law. That is an entire topic on its own. Just touching very, very briefly. You have, for example, corporate law. You have to remember that probably over 50% of our laws somehow incorporate European regulations and directives. So we’re already entrenched, it’s already in our legal system. So, areas of law. Well, corporate law, there’s probably going to be some devolution, but not necessarily that much. We are quite an established system, an established system with a lot of European influence in that. You will see an effect on competition law, because you have to remember, the competition law, that arises in the place of business as opposed to the place of domicile. So that in itself will automatically change. The same with your IP – your intellectual property. That will affect enforcement and procedures.

Litigation. This is a bit of a minefield at the moment. How is it going to go – we don’t know. What we could do, we might be able to sign up, say, to the Lugano Convention on our own rights. And the Lugano Convention – that covers jurisdiction. So how we all interact throughout the (inaudible) assisting each other in seizing jurisdiction, because obviously you cannot have two cases running on the same facts in two different jurisdictions. So we’re going to have to do something. There is the Rome Convention. Now, the Rome Convention covers what law will govern specific contract. We’ll have to work out a way in order to ensure this harmonization. But continuing, the English legal system has been going for generations. It’s an established system. The English courts are trusted. The English judiciary is trusted. Now, there could be some protests. There could just be certain companies saying, “No, you voted Brexit, we’re going to put in a German law clause or a French law clause” – two very strong countries in the legal arena. That could happen for a while. But also we have so much litigation going on for Russia, the Abramovich-Berezovsky type of cases, the Aeroflot cases. We’re increasingly being used because we are seen as a just system. And even if there is a knock-on effect on the litigation on the claims being issued within the High Court, we could always turn to arbitration. Our arbitration is governed by the New York Convention. There’s a lot more countries in the New York Convention than there is in the EU. So our arbitration actually may rise, because once again London is an arbitration seat.

State pensions. Well, state pensions are pretty much enshrined in our English law, because it’s a nationalized system. However, for the English it won’t change, but the question is expats – what will happen to our expats? We don’t know. It’s all yet to be discussed, to be decided.

Property. Well, land law itself, again, land law is governed by English law. The prices – it could be seen to be changed in the long run, because if some of the larger institutions move out, that will free up some of the, you know, the large buildings in, say, Canary Wharf in the City. So it could have an effect on the commercial side of it. The residential side, certainly in London, it’s not going anywhere. There is an overkill. We need more housing in London. At the higher end the prices are coming down – so you know, two million plus – but a lower end it’s still business as usual.

Just a few points on imports. So it’s not all bad. We import much more than we export, and we’re key market for many of the member states.

Banking. We’re one of the most banking-friendly countries. Taxation of bonuses are generous compared to the other countries. 20% corporation tax is favorable, although not if your compare us with Cyprus. But in general we’re quite a favorable country. But again, remember that underlying threat of change in the economic structure.

Labor costs. Again, competitive. And the language: English is the business language. And there’s been calls to change it. It’s not happening, it’s going to remain English. It follows on there that your English law and your English jurisdiction clauses may still survive, once everything has calmed down.

So the pros and cons. It isn’t all gloom and doom. We can see all the articles here, Australia, Commonwealth countries, certainly looking at Australia, New Zealand. It creates so many opportunities. So, as I say, it’s not just a negative connotation. It’s tiring to constantly hear this sort of negative “What have you done, you’ve got no negotiating position.” We still do have a negotiating position. Don’t put the British out yet, we’re still in there. Mexico, Canada opening up to treaties. There are different ways we can go. We are going to regain our sovereignty, we’re going to regain control of our borders, and we get to set our own tariffs. With that comes risk, of course it does. We’ve been a member the EU since January ’73. All of a sudden we’re coming out. We risk a drop in trade, we risk an increase in tariffs. How will it go? I think it’ll all come good at the end, but it’s going to be certainly a period of unrest.

Re-join? I would say, no. What happens when you come out of the European Union, if you want to then go back in, firstly, you’ve got to have the other twenty seven nations plus – because the European Union will survive without the British, there is no doubt – they will all have to agree a) to let us back in, and then b) we have to take the euro, because this is the new rule if you come into the European Union. Scotland I don’t think have figured this out yet. But if you want to come back into the European Union, you accept the euro. UK is not going to do that. Scotland is not going to do that. I think someone actually needs to tell Scotland that this is a position that you’re going to have to account for if you do trigger.

And I think that such pretty were we are. I hope I’ve given you a bit more of a positive feel about the Brexit than is general. Thank you.