By Simon Holmes and Naomi Inns, King & Wood Mallesons’ London Office
On 23 June 2016, the UK will hold a referendum on its continued membership in the European Union (EU).The result will have significant implications for both UK businesses and businesses operating in the UK.
UK business leaders – alongside politicians – have been fiercely debating their ‘Stay’ or ‘Leave’ positions. In this article we explore one of the key arguments of the ‘Leave’ campaign (Brexit), namely that Brexit will be good for businesses because it will reduce red tape regulation.
Brexit may not reduce red tape to the benefit of businesses
In addition to the official Leave Campaign, there are a number of independent campaigns calling for Brexit, including Business for Britain which argues that:
“Free from unnecessary, restrictive and financially punitive regulation, able to make our own trade arrangements and to better invest our wasted EU “tax”, Britain will be the best place in the world to do business.”
It is widely recognised that the EU is burdened by overregulation, which gives this argument some immediate and superficial appeal. However, given that in a survey conducted by E&Y, 72% of investors cited access to the European single market as important to the UK’s attractiveness. it is clear that businesses should question any argument that Brexit is the answer to overregulation.
In particular, the argument that Brexit will reduce regulation in a way which is beneficial for businesses operating in the UK overlooks the following important facts:
. To trade with EU member states post-Brexit, UK businesses would still need to comply with EU regulation, but in a context where the UK Government no longer has the ability to directly influence the content of that regulation.
. It is uncertain what the UK’s international trade arrangements will be after a Brexit: a free trade agreement (FTA) with the EU requires ratification by individual member states. There is no guarantee under this model – or, alternatively, under a model where the UK relies simply on WTO rules – that UK businesses will benefit from complete freedom of movement and trade in the EU, or from the rights under FTAs in place between the EU and other non-member states. It seems most likely that the cost of trading internationally will increase for UK businesses.
. The vast majority of red tape / regulation is generated by the UK Government itself. Indeed, the UK Government has often been criticised (particularly by many of those now arguing for a Brexit) for “gold plating” legislation – i.e. making it more, not less, complicated and burdensome than it need be.
Is EU legislation “unnecessary, restrictive and financially punitive”?
The fundamental purpose of the EU is to enable a single internal market allowing goods and services to be traded freely across the member states and – through FTAs – with non-member states. A single internal market requires consistent rules to govern trade between members, rather than 28 separate and potentially conflicting sets of rules. Much of the current EU legislation is necessarily technical, relating to matters of security, consumer safety (e.g. standards for car safety, agriculture, toys for children and chemicals), financial services (e.g. the EU passporting system) and banking (where centralised and consistent legislation facilitates cross-border trade and foreign investment).
It is widely recognised that the EU is overregulated and reform is necessary. However, exiting the EU to escape red tape regulation may not be the answer. If the UK left the EU, it would still be required to comply with EU regulation – or introduce regulations in areas previously covered by EU regulations – to trade with member states. In effect, existing EU rules and regulations would need to be maintained or replaced by UK equivalents and be repeatedly updated in order to keep up with improved standards and requirements across the EU. However, the UK would no longer enjoy the influence that it once did over the drafting and introduction of any new rules in the EU with which UK businesses need to comply.
Reform and red tape reduction can – and should – occur within the EU framework itself, whether UK decides to stay or leave. EU institutions recognise the need to improve. In 2014, the European Commission reviewed its procedure Results” which involves benchmarking any proposed work or initiatives to ensure that there is tangible benefit to EU citizens and companies. The UK – if it remains in the EU – will need to share responsibility for reducing red tape.
Will Britain be free to make its own trade arrangements?
Article 50 TFEU requires that a Member State must give at least two years’ notice to the European Council of its intention to leave the EU. During this period, the UK would negotiate a withdrawal agreement setting out the arrangements for withdrawal and its future relationship with the EU.
It is still unclear what form the UK’s departure from the EU would take. Two models are the most likely candidates: (i) negotiate a FTA with the EU; or (ii) rely on WTO rules.
It is not clear what rights would be granted under a FTA or how long negotiations would take, as the FTA would require ratification by individual member states. It is therefore difficult to determine the extent to which the UK would continue to have access to free trade in the EU, and it is equally difficult to determine the extent to which the UK would be subject to the rules on the freedom of movement for workers in exchange for receiving freedom of capital, goods and services.
In addition, it is not clear whether a FTA would guarantee to the UK the benefit under existing FTAs between the EU and other countries.
If the UK relies on the WTO rules, it would lose the benefit of free trade with the EU and the existing FTAs between the EU and non-member states. The UK would not have access to trade in the EU on terms that were any more advantageous than other third countries and would be subject to the EU Common External Tariff.
While the UK is free to make its own trade arrangements if it exits the EU, it will be negotiating from a significantly weaker platform. The EU is the largest market in the world, with the EU economy worth approximately ￡11.3 trillion (bigger than either the US or China) and has significant bargaining power. The UK does not enjoy this privileged position and, more likely than not, exiting the EU and trading under the terms of a negotiated FTA or the WTO rules would increase the cost of cross-border trading for businesses.
Will Britain be the best place in the world to do business?
Many sectors, particularly in the City, rely heavily on the ability to recruit from the EU, and a Brexit is likely to reduce their ability to do so. An exit from the EU could reduce freedom of movement. EU workers could be subject to tougher immigration requirements, and even short visits could be administratively burdensome. At the very least, it would be likely to increase red tape, which could deter the best candidates from moving to, and working in, the UK and the City in particular. These are the people that the UK needs to compete in a global market.
David Cameron has made it clear that the result of the referendum will be final, and if the vote is in favour of exiting the EU, the UK Government will trigger Article 50 TFEU to commence the process for exit. A key question being raised is the extent to which the UK Government will – or should – allow David Cameron to trigger Article 50 TFEU immediately. Some consider that it is his duty to do so; others argue that a more measured approach should be adopted as, from the moment Article 50 is triggered, a two-year negotiation period commences, with a unanimous vote of all 27 remaining Member States needed to extend the negotiation period any further.
Regardless, it is very important for businesses to examine carefully arguments being made in favour of Brexit: a seemingly attractive theory is highly likely to overlook significant truths that would result in a different post-Brexit reality to that being suggested.