(Opinion) -- Since joining the European Economic Community (EEC) in the 1970s, many Britons have been concerned about the erosion of sovereignty and widening powers of the EEC. In 1982, The Clash released the song “Should I Stay or Should or I Go”, a tune that David Cameron no doubt grew up listening to as a teenager. Just as life imitates art, he included an offer of a referendum in the Conservative Party’s 2015 Manifesto. Forty-three years after entering the EEC, UK voters are now faced with a single-issue referendum question on 23 June 2016: “Should the UK remain a member of the EU or leave the EU?”
Last year, the Australian Prime Minister along with Donald Tusk, the president of the European Commission, announced plans to work towards an Australia-European Union Free Trade Agreement. Such an agreement would go some way towards laying to rest the tensions between Australia and the EU bloc. These tensions initially came to the fore in the 1960s and 1970s with the introduction of the European Common Agricultural Policy and the United Kingdom’s subsequent entry.
There is arguably some irony at play with former Australian Trade Minister Andrew Robb referring to this potential agreement as the “missing piece”, whilst the United Kingdom (as Australia’s largest trading partner within the EU) is soon deciding whether or not to Brexit. A Brexit could mean that Australia will see a significantly weakened EU at the other side of the negotiating table when it starts its trade discussions in 2017.
The United Kingdom leaving the EU would impact its trade of goods and services, both with the EU and with the rest of the world, including Australia. In regard to the EU, Brexit would impact the free movement under which goods circulate without any barriers within the EU Single Market. The United Kingdom could join the European Economic Area (EEA) on its exit, remaining a part of the Single Market (as Norway has), with the result that the United Kingdom would be subject to EU law and regulation without any influence upon its drafting. Alternatively, the United Kingdom could include in its withdrawal a bilateral arrangement with the EU similar to the one the EU has with Switzerland, which is not a member of the EU or EEA, but enjoys tariff-free access to the EU Single Market. This would result in the United Kingdom benefiting from any EU-wide trade agreement with Australia whilst not being party to the negotiations.
U.S. President Barack Obama recently commented that the United Kingdom would be “back of the line” when negotiating trade agreements with the United States. Conversely, at a recent event that K&L Gates hosted in London, Austrade remarked that they would be the first to knock on the door of the United Kingdom in the event of an exit. This is a recognition of the importance of the United Kingdom as a trading partner to Australia and the desire to find a pragmatic solution.
London is of course a global financial hub and much of the regulation of financial services in the United Kingdom is governed by EU law. A Brexit would mean that financial institutions with operations crossing UK and EU borders would become subject to a new regulatory regime.
An important element of the EU financial services regime is “passporting”, whereby the exercise of the right by a firm authorised under an applicable EU financial services directive enables it to carry on activities in another EEA member state on the basis of its home state authorisation. A Brexit would result in the passporting regimes ceasing to apply, unless replicated. This scenario would in all likelihood have a significant impact upon Australian financial institutions with operations in the United Kingdom and particularly those who use these operations as an EU base.
A Brexit could also lead to uncertainty further down the line in various other areas, such as intellectual property, employment, taxation and dispute resolution (amongst others). This would particularly be the case where the United Kingdom is a party to a unified legislation. Australian businesses with operations in the United Kingdom and the wider EU should be prepared to review the impact of Brexit on their existing arrangements.
The Clash’s lyrics “if I go there will be trouble” and “if I stay it will be double” may well sum up the current predicament facing UK voters. If the result is a clear stay, the mood in Europe may initially be positive. However, the implementation of the UK concessions to stay may motivate other EU members to start their own negotiations. This would almost certainly weaken the EU as an institution, also impacting its relationship with the rest of the world, including Australia.
If the result is to go, and the official two year (and possibly beyond) path towards Brexit starts, Australian businesses with operations in the United Kingdom and the wider EU will arguably enter into a period of uncertainty.
By Andrew Petersen, partner and practice area leader-finance, K&L Gates LLP.