The Conservative victory in the UK General Election in May 2015 will mean a referendum by the end of 2017. It also means that the consequences of a possible Brexit or split from the EU have to be seriously considered by all businesses operating in or trading with the UK. At the referendum, voters will be asked to vote on the question: ‘Should the United Kingdom remain a member of the European Union or leave the European Union?’.
A ‘no’ vote would have considerable impact on UK and European businesses, and the effects will be felt in different ways by different sectors of the economy and different business models. Businesses will also have to cope with the uncertainty pending the outcome, and the continuing questions that would follow a close vote to stay in the EU.
A report by Open Europe, the non-partisan and independent policy think tank in February 2015, concluded that the chemicals sector has the potential to be disrupted substantially by any change in the UK’s relationship with the EU. The main effects of a change in the UK’s relationship with the EU include:
One of the core pillars of the EU is the freedom of movement of goods throughout member states. Legally, for trade in goods and services to continue between the UK and Europe in a post-Brexit scenario, the UK would have to enter into trade agreements with the EU on the same terms that exist as part of the Union.
One way of achieving this would be for the UK to take the same approach adopted by Norway and become a member of the European Economic Area (EEA) rather than the EU. This would allow Britain access to the single market; however, one disadvantage is that the UK would have to agree to comply with all EU laws and regulations, as it does currently, but without the ability to input on their content. The UK would also have to agree to continue to pay its share of the cost of running the EU. This could be the ‘government by fax’ complained of by the Norwegians, where new legislation is sent by the Commission to Norway, and Norway simply has to comply.
An alternative could be to take the approach of Switzerland. Switzerland is not a member of the EU or the EEA, but has access to the single market for the purposes of exports of goods, although not services. However, this would not be viable for the UK, which has a large services sector.
If Brexit was to become a reality, the UK would have to negotiate a separate trade deal with the EU, which would no doubt cover trade in chemical products. Not only will UK-based companies seek to continue to trade in much the same way as before, but also companies based in EU member states with a UK presence or ongoing business with UK companies will be keen to minimise disruption to their supply chains. This could mean that, in the longer term, chemicals companies find that they have similar access to European markets in a post-Brexit world to that which they currently enjoy. UK companies would have to comply fully with the EU rules and regulations.
Similarly to free movement of goods, free movement for EU workers is a core principle enshrined in the Treaty on the Functioning of the EU. Under this framework, any EU citizen has the right to establish a business or seek work - whether employed or self-employed - in any EU member state without requiring a specific authorisation or work permit. This means that businesses operating in the UK and EU can employ EU citizens on the same basis as their own nationals without the need for any additional processes.
Initially, UK prime minister, David Cameron stated that the scope of the freedom of movement of workers would be at the heart of the UK’s renegotiation strategy. However, as this freedom is a fundamental right included in the Treaty, it is unclear how any negotiation could provide for the UK to both stay in the single market and restrict the movement of workers. The free movement of workers is a key economic pillar of the internal market.
Ultimately, any decision to leave the EU would be likely to restrict UK citizens seeking work or residing in an EU member state. It would be for the UK government, having negotiated a free trade agreement not including the free movement or workers, to decide whether UK businesses should be able to recruit talented workers from the EU.
The EU is party to a large number of free trade agreements with countries around the world. It is currently also in the process of negotiating the TTIP between the EU and the US (C&I, 2015, 6, 31). One of the proposed benefits of TTIP is that it will allow for US shale gas to be imported cheaply into Europe. As energy costs account for a substantial percentage of chemical manufacturers’ outgoings, Brexit, and therefore likely exclusion from any finalised TTIP, could have a significant impact on the profitability of companies operating in the sector. Additionally, the UK would need to individually negotiate the roughly 800 international trade agreements currently in place through the UK’s membership of the EU.
Common Customs Union
As much as 56% of the chemicals produced in the UK are exported into the EU. The German think tank Bertelsmann Stiftung estimates that the chemicals industry could lose up to 11% in added value if Brexit becomes a reality.
This disruption would be caused in part by additional administration at the point of entry of the goods into the EU and also by the imposition of tariffs on chemicals exports from the UK to the EU. Early estimates put such a tariff at 4.6%, assuming the UK to have ‘most favoured nation’ status which would provide the UK with the best terms available.
A potential benefit of Brexit for companies operating in the UK chemicals sector is for the regulatory burdens currently implemented by Brussels, for example, renewable energy targets, to be removed or reduced. Additionally, the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) could be removed or amended. Easing the regulatory regimes for UK chemicals companies could help make them more competitive in emerging markets and allow for diversification.
However, companies should think twice before celebrating Brexit on these grounds. Europe is likely to make any EU/UK trade deal conditional upon compliance with the EU regulatory framework. Reducing the environmental burden on UK companies would distort competition in the EU, which is contrary to the Treaty provisions. Additionally, given that the UK played a significant role in shaping the REACH regulation, companies may find the UK government unwilling to change it.
A further, although not as well covered, consequence of Brexit would be the effect on competition law enforcement in the UK. Currently, the EU and UK competition law regimes operate on the principle of supremacy, whereby EU competition rules take precedence over UK law. Therefore, where there is a breach of competition law that affects, or may affect, trade between member states, the national competition authority – the Competition and Markets Authority (CMA) in the UK – must apply EU competition law.
In a post-Brexit scenario, the CMA and the UK would not be required to apply EU competition law in their decision making process. However, where the action in question also affected trade between member states, the EU competition laws would continue to apply. The result of this would be increased complexity, delay and cost in having to run two complaints, or defences, to the same anti-competitive conduct. Additionally, it raises the potential issue of the EU Commission and the CMA handing down conflicting decisions regarding the same conduct.
A similar effect would apply to the laws on merger control. Currently, the EU Merger Regulation establishes clear jurisdictional rules determining whether the Commission or the national competition authority will review a proposed merger transaction. Post-Brexit, companies that satisfied the jurisdictional test for both UK and EU merger control would not be able to rely on this system and could instead have the proposed transaction scrutinised by both the UK Regulator and the Commission. Again, this would add cost and complexity to such transactions, as well as creating the unwelcome possibility of divergent decision making by the two regulators on whether the proposed transaction can go ahead and any conditions that should be attached to the merger.
If the UK left the EU, it would no longer have a say in the development of European competition law; however, British companies would still be bound by European competition law if they continue to trade in Europe.
Simultaneous liability under the UK and EU regime, coupled with the likelihood of different priorities for the regulations, could tend to increase the competition law risk. The EU would also be likely to insist on, within the context of any trade agreement between the two, the maintenance of the state aid and procurement rules in the UK.
The UK’s relationship with the EU is subject to significant change, whether on a renegotiated basis, or in a Brexit scenario following an in/out referendum. The impact of this for chemicals companies and those operating in the chemicals sector is clearly wide-reaching. However, the precise implications cannot be ascertained with any certainty until more is known about what mechanisms are planned for continued trade between the UK and EU. It seems unlikely that the details of a free trade agreement could be worked out within the two-year transitional period allowed by the Treaty. While certain implications, such as on the movement of workers and goods, have been central to the debate around the UK’s future in the EU, others have not been considered to the same extent. It is important not to forget these, less public, issues as part of the wider discussion.
A number of meetings have been held with the leaders of various EU institutions and member states following the election. On 1 September 2015, Jonathan Faull became the new director-general leading the Task Force responsible for strategic issues related to the UK Referendum – the so-called ‘Brexit unit’ – reporting directly to European Commission president, Jean-Claude Juncker. However, it is unlikely that EU leaders will be prepared to compromise the fundamental principles of the EU and the internal market.
In the end, perhaps the UK will opt not for Brexit but rather as Daniel Mulhall, the Irish ambassador to Great Britain recently coined it, to ‘Bremain’.
Martin Rees is a partner and Katherine Wakeham is a trainee at Squire Patton Boggs (UK) LLP based in London, UK.