Europe: To stay or not to stay, that is the question

Ruth Green

Since its inception under the Treaty of Rome in 1958, no country has ever exited the European Union. The possibility of entering uncharted waters has ensured fraught debate ahead of the United Kingdom’s referendum on membership.

The outcome of the referendum on the UK’s membership of the EU will have major implications not only for the future of the UK and its constituent countries, but also for other EU Member States and its trading and diplomatic partners. Its significance is difficult to overstate. The vote on 23 June is only the third time the UK has held a country-wide referendum.

There have been cogent and less persuasive cases made for the benefits of both membership and exit from the perspectives of business, finance, diplomacy and from economists and politicians. Several notable international figures have also given their two cents-worth. President Barack Obama weighed into the debate during his trip to London at the end of April, stating that the UK would go to ‘the back of the queue’ for US trade deals if it were to leave the EU.

While some expressed discomfort at Obama’s contribution – mainly those advocating exit – Lourdes Catrain, Vice-Chair of the IBA International Trade and Customs Law Committee and partner and director of Hogan Lovells’ European International Trade and Investment Group, says a comment from the US president is undeniably significant.

‘President Obama made it crystal clear what he thinks about the prospects of Britain negotiating a bilateral trade agreement with the US,’ she says. ‘In that sense, I think it’s interesting that the EU’s most important trading partner has made such a clear statement on its position.’

Janet McDavid, a partner in Hogan Lovells’ Washington, DC office and Co-Chair of the IBA Antitrust Committee, agrees that the US views the UK’s membership of the EU as a ‘net positive’, adding that ‘those of us in the US who work with multinational clients or have multinational practices would be very concerned if the UK were to exit the EU’.

Angel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), didn’t hold back either in an impassioned speech at the London School of Economics in April in which he referred to a ‘Brexit tax’ equivalent to a month’s salary by 2020 if the UK were to leave.

Gurría’s speech coincided with the launch of the OECD report, The Economic Consequences of Brexit: A Taxing Decision, which echoed findings from other economic bodies warning that the UK would be worse off financially outside of the EU. He noted that the UK’s GDP per capita has doubled since it joined the EU in 1973 – more than any other major EU Member State or indeed any English-speaking countries outside of the EU.

Though Gurría recognises that the EU is by no means a ‘finished product’, he suggests that withdrawing would mean losing access to the Single Market, and with it, the ‘benefits of trade agreements covering 53 markets that it currently enjoys and which it helped shape’.

Of course, outside the EU, the UK would still be bound by the rules of the World Trade Organisation (WTO), of which it has been a member since 1995. This includes the WTO’s anti-dumping duties, says Catrain, which are designed to protect members’ economies against foreign imports believed to be priced below fair market value. ‘If the UK were to leave the EU then I don’t think it would change that much in terms of anti-dumping duties as the UK would remain part of the WTO and bound by its Anti-Dumping Agreement, which is almost a carbon copy of the EU anti-dumping rules,’ she says.

Catrain notes that, away from the EU, the UK might be able to avoid the ‘lesser duty rule’, which would allow the country to impose anti-dumping tariffs. Historically the UK has ‘always been an advocate of keeping the lesser anti-dumping duty’, she says. This has proven particularly pertinent in recent dramatic developments affecting the UK’s steel industry.

‘There’s been a lot of criticism of how long Brussels takes to impose anti-dumping duties, but it can’t be done overnight and outside the EU it would, arguably, take the UK just as long to come to a decision,’ adds Catrain. 

Before trade issues can be meaningfully discussed, however, there remains a lack of consensus on what model the UK might follow outside the EU. Reference points include the types of free trade agreements that Norway, Switzerland or Canada have negotiated with the EU. The UK could simply trade with the EU within the WTO framework.

‘Nobody knows what the relationship in legal terms is going to look like,’ says Hendrik Haag, a partner at Hengeler Mueller in Frankfurt and Chair of the IBA’s 2009 Task Force on the Financial Crisis. ‘The UK could even be outside of the EU, but continue to be a member of the European Economic Area, like Norway, which basically means that European rules also apply. This seems very unlikely though because the UK would have to abide by European legislation without having any opportunity to influence it.’

Philip Wood, Special Global Counsel at Allen & Overy and a member of the Task Force, believes this overriding uncertainty is already weighing heavy on investor sentiment. ‘The outcome is uncertain and in my view that uncertainty will feed in seriously on the level of investment,’ he says. ‘There’s a lot happening in the world – the slowdown in China, the collapse of the oil price and of commodity prices – all of those factors are already contributing to a general air of uncertainty. I would think that in the UK the slowdown in activity is being driven by the uncertainties created by Brexit, and, if we were to leave, that uncertainty would go on while we’re negotiating all these agreements.’

Catrain notes that companies in industries that are highly integrated across the EU, such as the automotive industry, have already been making contingency plans to prepare for any possible outcome. ‘You have to remember that no country has ever exited the EU before – it’s unprecedented territory and that means a period of uncertainty from companies’ perspective,’ she says. ‘Any Brexit agreement will need to be tailor-made, it will be a complex negotiation and it’s difficult to predict the final content.’

The legal profession itself also has cause for concern, at least according to the Law Society of England and Wales, which published a report entitled The EU and the Legal Sectorin October 2015. The research carried out by Oxford Economics – which undertakes forecasting and modelling for UK companies and financial institutions expanding abroad – indicated that the UK’s legal services sector would be ‘disproportionately disadvantaged’ compared to the whole UK economy as the sector is so reliant on financial services and other professional services sectors that are likely to suffer from lower levels of investment if the country were to vote to leave.

Of course, the referendum is not exclusively about potential legal, trade, regulatory, business or financial implications. Security and migration are just two other major issues fuelling debate.

It’s worth noting that in 1995 Quebec voted whether to pursue a path towards sovereignty and, in 2014, Scotland held a referendum on whether to stay in the UK. Both referendums prompted record turnouts and in both the ‘no’ campaigns emerged victorious. As Global Insight went to press in the weeks leading up to the referendum, a similar spike in voter engagement was expected given the important and, to some degree, emotive nature of the issues at stake.  

Ruth Green is Multimedia Journalist at the IBA and can be contacted at ruth.green@int-bar.org