Brexit's Impact On The UK’s Foreign Investment Regime In Light Of The New EU-UK Trading Relationship
The tale of the United Kingdom’s (“UK”) split-up with the European Union came into light in June 2016 as a consequence of a closely contested referendum pursuant to which a small majority of the voters decided to leave the European Union (“EU”) bloc (“Brexit”). After years of rigorous discussions and negotiations, the ‘Trade and Cooperation Agreement’ (“TCA”) was ultimately reached between the EU and the UK, setting out the framework for future trading relations, with provisional application starting from January 1, 2021. As a result of this, the UK relinquished its rights and obligations it had as an EU member state.
In addition to cross-border mobility restrictions, citizens of the UK will be subject to immigration policies, ensuing which they will now require visas for long-term stay in the EU countries. Set out below is an overview of the impact on the overall foreign investment landscape in the UK post-Brexit, taking in view the provisions of the new EU-UK trading relationship.
No access to the EU Single Market and Custom Union
With the TCA, the UK can no longer avail any benefit from a seamless entry to the EU Single Market and Custom’s Union as well as the EU’s ecosystem of policies and international trade agreements (“EU Market”). Consequently, this will generate new barriers to the free movement of people, trade of goods and services, and freedom of establishment across the EU Market. Given that the EU and the UK will now form two distinct markets with different regulatory spaces, there is a certainty of additional customs checks and controls at the borders, which will make it harder to invest across the borders. Although the TCA will ideally serve to limit such disruptions, businesses, stakeholders, and citizens in both directions will most likely be impacted inevitably. In a nutshell, Brexit may cause foreign direct investment to fall in the UK due to (a) a distinct market from the EU which will make it a less attractive export platform for multinational companies (“MNCs”) and (b) complex supply chain between the headquarters and local branches of such MNCs and coordination costs incurred by them, resulting in more difficult management.
Impact on Foreign Investment
Reports reveal that post Brexit, foreign investment in the UK is anticipated to decrease by a significant 37% (thirty-seven percent). The financial services industry is one of the largest recipients of foreign direct investment in the UK. However, there is only a minimal mention of financial services under the TCA. Additionally, the TCA places restrictions on ‘single passport’ privileges, which will ultimately lead to material changes in activities with an element of financial services. As a result of this, cross-border investment activities between the EU and the UK such as investment advice and underwriting, which were earlier carried out in reliance on a single passporting arrangement, may now be hampered. With limited access rights, this means that the UK market participants will now be treated equivalent to third country participants. Instead of covering the future relations between the UK and the EU concerning financial services, the TCA provides a footing for future discussions on market access in financial services in light of the equivalence framework.
Despite its commitment to establish a favourable climate for the development of trade, the TCA accords fewer substantial standards of protection to investors than those found in other international trade agreements or bilateral investment treaties. For instance, there are no clear protection measures against potential discrimination, or dispossession of property, for which investors will have to place reliance on customary international law principles.
Future Trade Agreements – Will the UK have Lesser Influence?
The UK economy is less than one-fifth of the economic size of the EU Market. Hence, it may seem improbable for the UK to strike great deals with non-EU countries since it would have much less bargaining power as compared to the influence the EU enjoys. However, at this juncture, the UK must maximise its opportunities globally by restoring the terms of its trade relations outside the EU. This would lessen the trade costs and neutralize any anticipated negative economic impact.
Overall, the trading uncertainty created by Brexit is likely to have an unfavourable impact on the foreign direct investment landscape in the UK. In this context, impact will also be felt by the companies based out of the United States that solely relied on the UK jurisdiction as a door to enter the extensive EU Markets. To prepare for the significant challenges in conducting an uninterrupted cross-border trade including the possible regulatory divergence, it is recommended that the companies conducting import and export must review their principal contracts, specifically the terms stipulated for cross-border EU trade and the sales tax. It is important for the U.S. companies that have a substantial business in the EU to restructure their investment strategies and find commercially viable solutions to avoid the ancillary expenditure of having distinct entities in the EU and the UK, while still benefitting from the advantages of frictionless movement of goods and services. In this respect, a special protocol within the TCA allows Ireland and Northern Ireland (“Ireland”) to maintain their place in the UK internal market while also benefitting from the EU Market. Owing to this special protocol, Ireland may flourish as the next attractive destination for many global companies post-Brexit.
Jaskiran Kaur is currently enrolled in the LL.M. in Corporation Law program at the New York University School of Law. While at NYU, Jaskiran has taken up courses including Distressed M&A in Special Situations, Corporations, and Secured Transactions. Jaskiran received a combined B.A. LL.B. degree from Amity Law School, Delhi, one of the most prestigious universities in India. After graduating, Jaskiran worked as a corporate associate at IndusLaw, one of the leading law firms in India. In her practice, she advised clients across various sectors including real estate, fin-tech, logistics and e-commerce on a range of transactions such as investments and acquisitions, structuring, advisory, real estate development, corporate and commercial matters. Jaskiran has particular experience in drafting and reviewing a wide range of commercial documents such as business and asset transfer agreements, share purchase agreements, shareholders and subscription agreements and other miscellaneous commercial agreements.