This month's referendum on the United Kingdom's membership to the European Union – and the prospect it raises of a British exit (or "Brexit") from the EU – has understandably attracted much attention worldwide. Although the vote will take place half a world away from Australia, its effects are likely to be felt everywhere, including by Australian businesses that operate in the UK.
At this stage, we don't know whether a Brexit will even happen, let alone how a UK withdrawal from the EU will work or what a post-Brexit UK will look like. (The British government itself has acknowledged that such a scenario is unprecedented.)
But what we can do is start thinking about what could happen if it does...
This article discusses some of the potential implications for Australian businesses should a Brexit become a reality after the referendum on 23 June 2016.
COULD WE SEE A BRITISH TURN TO AUSTRALIA AND THE ASIA-PACIFIC?
One possible outcome of a Brexit is that UK access to European markets could be curtailed, or alternatively, the terms of the UK's access to them could become less favourable. If so, Britain may, out of necessity, start to look towards other markets – in particular the Asia-Pacific region, which continues to be a driver of global economic growth.
If this turns out to be the case, the UK's existing ties – historical, cultural and legal – with Commonwealth countries (in particular Australia) might make them favoured for British outbound foreign investment, both of themselves and as 'familiar' places from which to launch new Asian ventures.
The UK is already the second largest source of foreign direct investment into Australia, and Corrs' market-leading public M&A deal reviews consistently show that UK companies are among the leading purchasers of significant Australian businesses.
A Brexit could, perhaps, bring even more UK interest in Australia.
On the other side of the ledger, if the UK's obligations to extend 'most favoured nation' status to European countries fall away, Britain could have the opportunity to extend more favourable access to both Australian individuals and businesses.
At the same time, if a Brexit results in trade ties and freedom of movement laws between the UK and Europe being severed, there could be opportunities for Australia to attract EU external investment and trade. In the tertiary education sector, for example, Australia might be able to attract a share of some of the 125,000 European students currently studying at British universities.
But while possible, such positive outcomes of a Brexit in reality appear to be unlikely.
As Martin Wolf of the Financial Times has observed, Britain is by reason of geography necessarily a part of Europe (if not the EU), and is always likely to look across the Channel first for trade and investment.
Even if Britain does turn its attention elsewhere, there is little reason to expect that Australia would be its preferred port of call, or that the UK-Australia Trade Agreement suspended over 40 years ago would suddenly spring back to life. Also, there is no clear evidence to suggest that EU nations would suddenly become more interested in doing business with Australia after a Brexit.
THE POTENTIAL COSTS AND CONSEQUENCES OF A BREXIT
While it may create some opportunities, a Brexit seems likely to present more downside risks than upside prospects – including for Australian companies.
From an Australian perspective, the most significant impact is likely to be felt by Australian businesses that currently use Britain as a 'launching pad' to access the broader European market.
Consider, for example, the position of Australian financial services businesses that run their European operations from London-based subsidiaries. At present, they are able to take advantage of EU ' passporting' arrangements that allow financial institutions in one EU country to operate in the others, without having to meet the requirements of all of their respective individual regulatory regimes. Depending on what post-Brexit accommodations the UK and EU reach, Britain could lose its passporting rights, resulting in such Australian businesses having to replicate or relocate their European operations.
More generally, some observers are concerned that the UK departing European Union could result in a fracturing of the long-term European consensus regarding the free movement of people and capital. Europe is a significant destination for Australian trade, and an EU without a British voice may be more inward-looking and less committed to breaking down barriers, not only among member states but between the EU and the rest of the world. As a result, Australian businesses may find their ability to operate and trade from a single European base – whether London or elsewhere – compromised.
Even for those Australian businesses whose UK (or other) operations do not depend on access to European markets, a Brexit – particularly an acrimonious one – involves substantial risks. HM Treasury's analysis of the short-term economic impact of Britain leaving the EU concludes that "[a] vote to leave would cause an immediate and profound economic shock" which would "push the UK into recession and lead to a sharp rise in unemployment" and increase financial market volatility.
Given the likely negative consequences of a Brexit, most Australian businesses will, understandably, be hoping that the 23 June referendum sees the status quo maintained.
John W.H. Denton AO is a Partner and the Chief Executive Officer of Corrs Chambers Westgarth.
James Shirbin is a Special Counsel in Corrs' Corporate Advisory group. In 2014-15, he was a visiting lawyer at leading international law firm Slaughter and May's London office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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