On Friday 24th June, one of the earliest areas to declare a result in the British referendum on membership of the European Union was Sunderland, a small predominantly working-class city in the North of England with a population of less than 300,000. While the city had been expected to vote ‘Leave’ the size of the vote (61% against 39% for ‘Remain’) was a shock.
On the other side of the world, within a few minutes of the Sunderland result the yen had risen by 2%. By close of trading on Friday the Nikkei had fallen by almost 8%, while across the Korean Strait, the KOSPI tumbled by almost 4%, and the Korean won weakened dramatically against the yen and the dollar.
It’s doubtful that the voters of Sunderland anticipated such fluctuations in currency and equity markets across Asia following their vote. Many of them, however, would have known that the result was significant to Nissan, as the Japanese company has been expanding in this region of Britain over the last thirty years. Since 1986, Nissan’s £50 million assembly plant has developed into a £P 3.7 billion investment, and the plant is now (according to the Financial Times in March this year) north-east England’s biggest private sector employer. The company had stated publicly during the campaign that it supported a ‘Remain vote and even threatened legal action against the ‘Leave’ campaign when the campaign used the company’s logo in a leaflet that implied that Nissan supported a ‘Leave’ vote.
According to Nissan’s own figures, over half of the cars manufactured in this plant are exported to continental Europe; so it might seem odd that voters in Sunderland should choose to reject the European Union. After all, many of the jobs in this region might depend upon free trade with the EU. But what the ‘Brexit’ vote shows to foreign investors is that political decisions in Europe are becoming increasingly determined by emotional and populist currents that are not necessarily susceptible to economic logic or even a rational calculation of self-interest.
According to the Wall Street Journal, China, Japan and India were the biggest backers of projects in the UK last year, after France and the US. As such, following the Brexit vote, we expect Asian investors may be looking very carefully at their investments, not just in Britain but across the European continent itself. The British vote has begun a period of uncertainty that may make it more complicated for foreign investors to use Britain as abase for investment and trade across Europe.
In addition to Japanese carmakers manufacturing in the UK, many Chinese companies have also been focused on using London as a stepping-stone to European markets, and the much-discussed new relationship between China and Britain may now be in question. Political risk will likely now be a key factor for many investors looking at other countries in Europe as they try to grapple with the ripple effect of the British referendum—far-right groups in the Netherlands, France and other countries are now pushing for their own referendums on the back of Brexit.
Italy also has a referendum planned in October of this year and, although it is not about Europe but about the structure of Italy’s own political system, the Italian Prime Minister Matteo Renzi has said that he will resign if he loses the referendum. Such a resignation could create political chaos in Italy and across Europe and could give an opportunity for the anti-Euro party Movimento 5 Stelle (currently second in the polls) to win more votes in Italy and press for a referendum on the Euro.
Analysis of the British vote shows that it was split between ‘haves and ‘have-nots’. Surveys and media reports suggest that those citizens that voted for ‘Remain’ felt themselves to be left behind by globalisation. They did not appear to favour a new and outward-facing free-trade UK unshackled from the EU but a more protectionist UK, less open to foreign influence and trade. How this will develop is impossible to predict at the moment but a more protectionist mood in the UK would arguably affect Asian companies operating and investing there in a variety of different ways. For example, currently the UK has to conform to the EU procurement directive in all its public sector procurement and is also unable to give state aid to British companies, except under limited circumstances. No-one knows how this might change after Brexit but it could be a highly relevant consideration for Asian companies bidding for large infrastructure and energy contracts in the UK. Would a protectionist UK government be more reluctant to involve Chinese or Japanese companies in nuclear energyor high-speed rail projects, for example? Or, alternatively, might a post-Brexit government that was less focused on Europe be more welcoming to investors from elsewhere, including Asia?
The regulatory and legal aspects of Brexit are going to keep lawyers very busy for years to come, but specific investments may in the future be determined less by rules made in Brussels and more by an increasingly flexible approach, which may allow foreign companies to negotiate incentives for investments with local and national government that are not possible under current EU regulations. In such circumstances, it will be vital for companies to understand more about the local context and issues surrounding any investment they make, including researching the profiles of the key local stakeholders. In addition, if the UK does decide to cancel or lesson some of the rights of employees derived from the European Union, this could make the role of the unions more important as they will likely attempt to prevent workers from losing some of their current rights.
As Britain tries to determine what the country’s next steps should be, investors in Asia and elsewhere should be thinking carefully about how they can manage the political and economic risks that have been thrown into sharp relief by this vote. As the situation develops, we will be issuing regular updates for our clients to help them foresee, manage and mitigate some of these risks.
Jason Wright is a managing director with Kroll’s Investigations and Disputes practice, based in Hong Kong. Views are personal.
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