As the likelihood of the UK crashing out of the European Union without a deal increases, Asian companies, especially those with business interests in one or both the places, remain on their toes. Lawyers are, however, around to guide them through the uncertainty and volatility that Brexit could bring.
With the United Kingdom set to leave the European Union on March 29, a “no-deal” Brexit looks increasingly likely, particularly as British MPs have struggled to reach consensus, either on accepting Prime Minister Theresa May’s Brexit withdrawal deal or extending the process beyond the stipulated deadline.
Like their counterparts in other parts of the world, governments, companies and consumers in Asia are bracing themselves for the fallout from Brexit. In particular, they worry about the advent of a new era of trade with the West in which volatility and uncertainty become the new norm.
Among the factors that could give rise to instability is the potential loss of access via the UK to the EU Single Market, and consumers in Asia may be impacted by reduced exports to the UK and EU. Additionally, Asian businesses that have built supply chains with the West could find them under threat. This has led companies in the region to be on their toes regarding Brexit.
Marcus Pollard, counsel at the Hong Kong office of Linklaters, says that Asian businesses are taking Brexit seriously and have a real thirst to know what happens next. “But like everyone else, the uncertainty is something Asian companies have mostly adjusted to already,” he says. “As the terms of Brexit are unsettled, we don’t see many Asian companies making sudden or dramatic decisions to leave the UK or change their European business models. The Brexit rollercoaster is unpredictable so, sensibly, there is a feeling of let’s wait and see and then react.”
Agrees Ros Kellaway, a London-based partner, at Eversheds Sutherland. “Like most businesses with operations in the UK, there is enormous concern at the level of business uncertainty about the outcome in relation to Brexit,” she says.
Meanwhile, Shirin Tang, partner, and Saqib Alam, of counsel, at Morrison & Foerster note that Asian companies are treading the uncertainty with caution and concern. “Many have taken bold contingency measures: Japanese automakers who are among the largest investors in UK manufacturing are bowing out of the UK. Asian funds with real estate exposure are taking a wait-and-see approach,” they say. “Ultimately, it boils down to investment goals. Some Chinese companies are seeing Brexit as an opportunity and are investing in the UK with a long-term view despite the short-term Brexit uncertainties.”
NO-DEAL IMPACT
Among the areas to be hardest-hit by a no-deal Brexit will be the smooth movement of goods across borders. Pollard says that “no deal” could cause disruption because of the UK’s sudden change of status from member to “third country” and that by default WTO rules apply for trading between EU and UK. “In practice, this means new tariffs on goods and regulatory border checks will be required,” he says. “Asian companies which rely on trading between the UK and EU are obviously more likely to be impacted. The sectors most affected include those that rely on imports and exports flowing smoothly without delays for regulatory or customs checks (just-in-time supply chains and perishable goods, for example) and highly-regulated sectors such as financial services, pharmaceuticals, and aviation.”
Tang and Alam feel that aside from increased costs from border delays and customs tariffs, divergent regulation will increase the legal and compliance costs of doing business in the UK and EU. “As sectors most exposed to border delays, customs tariffs and divergent regulation, companies in the financial services, automotive, groceries and chemicals sectors are most likely to be affected by a no-deal Brexit,” they note.
Kellaway says that for those Asian businesses previously reliant on the EU free trade agreements, it has become clear that if there is a hard exit on March 29, 2019, these agreements with Japan and Korea for example, will not have been replaced with new agreements with the UK by that date. “This could result in goods crossing the UK/Asia border being subject to tariffs,” she says.
CONTINGENCY PLANS
So what sort of contingency plans should these companies be putting in place, if they haven’t already? Pollard says that many large businesses, particularly those in the financial services sector, have taken steps to prepare and implement contingency plans, such as relocating parts of their business or obtaining new licenses. “Preparing for ‘no deal’ should include considering indirect effects on customers, counterparties and supply chains - as well as any direct effects on the business or its employees,” he says.
Tang and Alam have observed that companies are not only looking inwards, they are also examining the Brexit exposure of those in their supply chains. “Retailers and suppliers are stocking up to ensure they have adequate inventory if faced with border delays. For products with a short shelf life like food, this can be extremely challenging,” they say. “Legal and compliance functions need to ensure companies have the right regulatory approvals to continue doing business in the UK and Europe.”
Asian companies should be scrutinising their supply chains and considering how a hard Brexit could impact them, says Kellaway. “They should be considering the terms of their contracts with customers and suppliers because one of the most likely consequences of a hard Brexit will be significant delay at UK ports and airports, and increased costs resulting from those delays and the potential imposition of tariffs and customs processes,” she adds.
LEGAL ASSISTANCE
With the stakes being this high, it’s no surprise that law firms are playing an important role in guiding their clients through this volatile phase. As well as a dedicated Brexit microsite to give clients regular and updated intelligence and advice, we have seen a rising demand for board-level strategic advice and risk assessments for key business areas,” says Pollard of Linklaters. “Of course clients are naturally looking to us to prepare them for all eventualities – with practical day-to-day guidance, amending contractual arrangements, employment concerns and more.”
Tang and Alam of Morrison & Foerster say that they are assisting clients with strategic and organizational planning from data privacy to employment issues, contract continuity and dispute resolution. “Specific advice aside, we are also constantly evaluating the full range of possible forms of the UK legal landscape might take post-Brexit.”
Eversheds Sutherland is advising numerous clients on the potential impact of a hard Brexit on their supply chains, ranging from liabilities arising from contracts to the transfer of data from the EU to the UK post-Brexit, to the entitlement of EU employees to remain in the UK after Brexit, says Kellaway. She, however, notes that Brexit might not take place on March 29. As the UK Prime Minister is still trying to secure a deal from the EU which the UK House of Commons will endorse, we now expect at least a short extension of the UK’s departure date possibly until June,” she says.
Deepening downdraft chills factory activity
By Jonathan Cable and Leika Kihara of Reuters
Factories across the globe slammed on the brakes in February as demand crashed, hit by the ongoing U.S.-China trade war, slowing global growth and political uncertainty in Europe ahead of Britain’s imminent departure from the EU.
A slew of recent surveys highlighted how much manufacturers are suffering, particularly those exposed to China’s slowdown, and adds weight to expectations that policy tightening from central banks is pretty much over.
Eurozone manufacturing activity went into reverse for the first time in over five years in February, British factories slashed jobs and braced for Brexit while China’s vast manufacturing industry contracted for a third straight month.
Japan’s factory gauge fell at the sharpest pace in 2-1/2 years as slumping orders prompted plants to cut production, while data from South Korea showed its exports plummeted.
“All in all it does suggest there is a lot of weakness out there. What’s driving it is those countries which are particularly exposed to China and they have taken a hit,” said Peter Dixon at Commerzbank. “Overall it doesn’t appear to have been a particularly strong start to the year.”
IHS Markit’s February eurozone final manufacturing Purchasing Managers’ Index fell for a seventh month, coming in at 49.3, its first time below the 50 level separating growth from contraction since June 2013.
Giving little hope for a turnaround in the bloc’s fortune anytime soon, new orders fell at the fastest rate in almost six years, backlogs of work were run down, purchases of raw materials were curtailed and hiring remained weak.
Faced with a further slowdown in eurozone growth, the ECB will re-launch cheap bank loans as early as June and delay rate hikes to 2020 in a bid to stave off a recession, a Reuters poll has predicted.
In Britain, factories stockpiled goods at the fastest pace seen in any Group of Seven country since records started in the early 1990s in case the country fails to get a transition deal to smooth the shock of Brexit.
“The current index reading – 52.0 – does mean the sector is still narrowly expanding, but make no mistake, the underlying details make it clear that this is only because firms are building up inventory ahead of Brexit,” said James Smith at ING.
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