London To Tech Startups: Please Don't Mind the Brexit Gap (cnet.com)

An anonymous reader writes: The UK faces a potential economic backlash from its decision to exit the European Union, but London Mayor Sadiq Khan doesn't think tech startups should be worried. Khan on Monday stopped in New York while on a goodwill tour that included visits to Montreal and Chicago. His mission: to win back the hearts of tech companies that may be turned off by Brexit. The breakup looks bleak for tech, with nearly nine out of 10 British tech leaders opposing Brexit before the June vote. And while the effects of Brexit haven't taken hold yet, Khan remains optimistic about London. The British metropolis remains Europe's hub for the technology sector, Khan said, citing a poll commissioned by London & Partners, the mayor's economic promotional company. "London's been open to people, to trade and to ideas for more than a thousand years, and that's not going to change," Khan said Monday at the Chelsea office of workspace company WeWork. The survey reached out to more than 200 US tech executives, who believe London is the best city in which to build a startup in Europe, beating out Berlin, Paris and Dublin. While Brexit means London soon won't have access to the EU's open market across the continent, US tech leaders still choose the city for its "favorable time zones and lack of language barriers," according to a statement from the mayor's office.

Comments

Nobody knows yet

[Ed Avis]

While Brexit means London soon won't have access to the EU's open market across the continent,

Nobody knows yet whether this will turn out to be true. The negotiators may be able to cook up some deal that keeps the UK within the single market but outside the European Union (broadly as happens for Norway). On the other hand, a complete break is also a possibility.

Re:Nobody knows yet

[Oswald McWeany]

EU is going to want to punish UK severely as a warning to others to not leave. There will be no easy access to the single market.

Re:Nobody knows yet

[lordholm]

it is very easy, freedom of movement is fundamental for the tech companies which relies on recruiting labour from the whole continent. This is unlikely to be possible without having to go through a lot of red tape.

Last time we recruited from outside the EU, the red tape took close to 6 months to go through.

Re:Nobody knows yet

[Anonymous Brave Guy]

More than that, it will still be possible to sell almost anything to European customers anyway. The worst plausible outcome for trade with the EU is probably that we fall back on general WTO agreements for a while, in which case we're mostly talking about tariffs here. Those are going to be relatively small by the standards of startup culture where you're looking for unicorn-level successes anyway, though they could conceivably be more of an issue for regular businesses in tech sectors if the EU decides to be obstructionist in any future trade deal.

There may be some regulatory hurdles, but in fields like IP and data protection our laws are obviously already aligned with the rest of the EU, so there's unlikely to suddenly be some big compliance burden unless the government shoots itself in the foot by trying to soften protections to appeal more to the US tech sector. YMMV if you work in a field like biotech.

The bright side for UK tech businesses, particularly smaller ones and startups, is getting rid of a lot of silly EU regulations passed in recent years, the things that say you have to put cookie warnings on your site, or if someone buys a digital download from you then by default you mustn't actually supply it for 14 days in case they change their mind, or that you have to apply different VAT rates and rules for customers in every different member state you sell to (which can change at literally a few days' notice, which no-one will actively give you) and file special returns accordingly. These poorly implemented regulations cause significant overheads for small businesses who want to be spending their time building useful things instead, often for no real benefit to anyone or even actively annoying customers, and the sooner we're rid of them the better.

There will certainly be downsides, probably including significant economic harm in the short to medium term, from Brexit. If we're going to do it, let's at least try to take advantage of the upsides as well.

Re: Nobody knows yet

[Rei]

The UK makes up about 1/6th of the EU's trade. The EU makes up about 50% of the UK's trade. One side has leverage in these negotiations, and it's not the UK.

The EU has made one thing and one thing alone abundantly clear: there will not, under any circumstances, be access to the single market without corresponding free movement of people. And no, Norway doesn't have that (neither do we here in Iceland). It's one of the founding principles of the EU, and it will not be compromised on.

The UK can of course leave the EU and choose to allow free movement of people in exchange for access to the single market. Whether that's acceptable to UK voters is a whole different story. And playing by the regulations of the single market also kind of defeats the point of the whole brexit thing. Countries like Iceland and Norway still have to obey the vast majority of EU regulations - we just don't get a say in making them.

Re:Nobody knows yet

[Zocalo]

The UK isn't in Schengen, so that's moot - there's a difference between not requiring ID to cross borders (Schengen) and needed to go through EU immigation controls at the border (non-Schengen) too. Now that the EU has us over a barrel however I'm sure some of them - like the Visegrad Group, or V4, (Czech Republic, Hungary, Poland and Slovakia) - might just try and insist that we adopt Schengen if we wish to have continued access to the EEA free trade area.

On the subject of the V4, their position does perhaps make how things are going to end up a little clearer to predict - provided that they are not just bluffing. Basically, they have promised to veto any Article 50 agreement that doesn't continue to allow free travel (with ID) for their citizens to the UK, as is currently the case. Any Article 50 agreement requires a unanamous vote in favour - all 27 remaining countries - so the only agreement V4 wil accept is a *very* soft exit, which simply won't be acceptable to Leave supporters. Likewise any extension of the two year period requires all 27 nations to agree which is equally unlikely so, two years after the UK invokes Article 50 whenever that is, it defaults to a hard exit with no trade agreements in place - the UK ceases to be member of the EU and becomes just another country with no established trade agreements in place.

That will no doubt make many in the Leave camp very happy... until the implications of having all the EU's trade treaties become null and void and WTO defaults kicking in strike home because they really, really, suck - why else would governments spend so much time negotiating treaties with each other? If we're lucky, we'll have that covered by getting an agreement to maintain the existing EU trade agreements as an interim measure as a stop gap, but if we end up in WTO defaults with one or more of our major trading partners, we're basically screwed - something even Pro-Leave groups concur with.

Re:Nobody knows yet

[Anonymous Brave Guy]

That was all true in the immediate aftermath, but like the market turbulence and most of the other panic reactions in the UK, it appears the sudden emphasis on keeping the remaining 27 together may have been short-lived. I think a lot of people and businesses have woken up to the reality that this is not going to be an overnight change now, and that a lot of what "experts" and politicians of all sides were saying during the referendum campaign and its immediate aftermath has already proved to be unrealistic. Only time will tell what kinds of deals get worked out before the actual Brexit and what the real long-term situation will be.

Meanwhile, the remaining 27 still have pressing issues with both immigration and the European economy to deal with, set against a backdrop of security fears (overstated or otherwise), rising far-right nationalist parties in several states, and weakening political leadership from some of the big players like Angela Merkel who have their own looming elections to face at home. Regardless of what happens with Brexit, the EU is still looking a lot less robust and attractive than it used to.

Re: Nobody knows yet

[Anonymous Brave Guy]

The UK makes up about 1/6th of the EU's trade. The EU makes up about 50% of the UK's trade. One side has leverage in these negotiations, and it's not the UK.

I'm not sure how strong the UK's bargaining position really is, but your conclusion seems to be overstating the one-sidedness of the situation.

Even losing 1/6 of its international trade would be devastating to a modern economy, and in practice some of the biggest and most influential nations within the remaining EU would be among the hardest hit. For perspective, the UK is about as economically significant as half of the other EU member states put together (meaning the ones with the smallest economies, obviously). So even if the EU has a bigger percentage figure to throw around, the UK definitely has significant leverage to negotiate with.

In any case, those two statistics inevitably don't tell the whole story. Notably, they don't consider the effects on the UK in trade with non-EU partners and in its own internal market. Foreign trade with non-EU partners is actually a bit more than half of the UK's total these days, but perhaps more significantly, trade with non-EU partners has already been growing faster than with the EU even without the changes that Brexit will bring. If the UK does remain within the customs union as part of whatever deal is done, there will be significant costs for trade with non-EU partners as well as benefits for trade with the EU, and depending on how strong any deal is, EU regulations could hamper the UK's internal market as well. Likewise if the UK continues to allow completely free movement of labour to and from the EU, but consequently can't do so to and from other partners outside the EU, that isn't necessarily a win from the UK's perspective, even without the political impact.

This three-way balancing act between EU trade, non-EU trade and the internal market is perhaps the most interesting part of the whole situation, because it means if the EU draws its line too far across the sand, it really could be better for the UK to walk away, fall back on probably some minimal WTO-based arrangement for a while, and focus on building agreements with non-EU partners as soon as possible. That outcome most likely hurts everyone more than a comprehensive UK-EU trade deal negotiated in good faith for mutual benefit, but it might well cost the remaining 27 more in the long term, particularly if the UK is able to score a couple of quick wins with early deals and that sets the tone for future debate and negotiations.

What we most need right now is for the politicians and business leaders to stop posturing and saying silly things, and to let the grown-ups start talking about credible possibilities for a future arrangement so we can get past the big uncertainty phase as quickly as possible. No-one benefits, or probably gains any significant advantage in future negotiations, by keeping the whole community in suspense for any longer than is necessary.

Re:Nobody knows yet

[Anonymous Coward]

On passporting, I have to say it is surprising that the words spoken by obviously self-interested financial services companies are being taken at face value by many people. After all, this is an industry who many seem to argue can never be trusted to speak in any manner other than one motivated entirely by their own short-term self-interest.

The reality is that passporting is a sideshow and is about overhead costs for banks, not whether they can operate in any one country. They know that they need to continue to employ staff running "high value add" activities in London for a huge number of reasons, primarily to do with the network effect of having so many banking, asset management, legal, accounting, tax and other professionals in the same place. The UK government will continue to make it relatively easy (if perhaps expensive) to get visas for people in those jobs as they already do for non-EU citizens. But some "low value add" activities like clearing may now need to be either duplicated in two countries or relocated from the UK to somewhere else without passporting rights. That will increase overheads and entail significant one-off transition costs which they would obviously rather not pay. Note that these are not necessarily people costs as banks will likely take the opportunity to automate and locate in low-cost jurisdictions.

This is a bigger problem in turn because the European "high finance" banking market has basically been overcrowded for at least 20 years now - my suspicion is that a significant number of banks are at best breaking even but still desparate to be involved in "high finance" because it makes them seem more exciting and "cleverer". So the ability to pass those higher overheads on to customers is likely to be limited (at best) given this.

Politically it is only really the French pushing hard on this. They are still upset that after the Euro was established in the late 90s a huge amount of trading activity moved from Paris to London as banks consolidated to reduce costs during the early 2000s slowdown. I suspect that as the French realise that actually Eastern Europe will be the beneficiaries of what they are asking for their rhetoric will recede on this somewhat and pragmatism driven by Germany, Italy and Spain (whose banks are in a pretty perilous state already) will prevail and equivalency granted (given that equivalency is already granted for the Cayman Islands and the US, it is hard to argue that the UK, whose regulation will start in an identical position to the remainder EU, should not be given the same status).

However, passporting was not the main reason that banks lined up to support "Remain". What they were really worried about was the EU going down a different regulatory path on financial services which had the potential to cause significant damage to them. The UK had effectively been slowing this down behind the scenes but now that is gone. This is not about a competitive dynamic between the UK and the EU but the EU regulating out of existence (or out of profitability) a significant chunk of their business within the remainder EU. The remainder EU countries would probably be bigger losers economically than the UK on this, although the EU would argue this is with the benefit of a reduction in systemic risks. But from the banks' perspective that doesn't matter - it would simply be an overall smaller market for them.

Re: Nobody knows yet

[saforrest]

Yes, we read the same post.

The EU is not going to endanger nearly 20 percent of their economy to make a point. It would be far more dangerous to damage the EU economy than the optics of a successful Brexit.

There is not any leverage on either side. Both must get along and negotiate a mutually beneficial deal, or slit their own throats with a childish tantrum.

Yes, I agree they will cut a deal. This will probably happen after months of threats and bluster from both sides. It definitely won't be a pure "screw the Brits" deal. It will contain a few concessions, probably minor restrictions on free movement, which May can point to as victories. These will be the exception rather than the rule. By and large the post-Brexit economic reality will probably resemble the pre-Brexit reality, except that Britain will exercise less influence in EU affairs. The market access will come at a price. The notion being touted that the UK is sufficiently important by itself to set the terms of the deal it wants is simply wrong.

Re:Nobody knows yet

[AmiMoJo]

The company I work for exports a lot of stuff to the EU and the rest of the world. Exporting to the EU is much, much easier because the rules are harmonized, and so there is a lot less paperwork and dealing with import tariffs and an office in one country and server other EU member states near it easily enough. Outside the EU things get tricky, especially when trying to move hazardous materials like lithium batteries.

After Brexit our laws are likely to diverge from the EU. After all, what is the point of "taking back control" if they don't? I imagine data protection will be weakened fairly quickly, to allow for greater domestic spying and access to browsing history and email by local government and random agencies like Trading Standards. If you read the submissions made regarding the Snooper's Charter, you can see that they are chomping at the bit to violate your privacy. Human rights and employment law will be gutted too, to make us more "competitive". The race to the bottom is just getting started.

More over, we are going to have to adopt US and Chinese standards to get the trade deals we need. Being only a small player we can't dictate terms any more, we will just have to adopt their rules in much the same way as we have to adopt the EU ones.

EU lawsuits against tech companies

[OrangeTide]

If tax evading tech companies are sick of being dragged through European courts and fined hundreds of millions of euros, perhaps they should welcome Brexit with open arms. Imagine, a small island nation that will be easily influenced by promises from corporations to win votes for the politically ambitious. Everything is up for negotiation in the UK.

Brexit means that the UK can be the new America for these tech companies.

Re:EU lawsuits against tech companies

[jiriw]

Sure, go right ahead. All England and Wales have to do to make this break really quick and (iron wall-like) permanent is pull a stunt like Ireland did, tell the rest of the EU about it beforehand (or not) and that the EU can, taxes concerning, go eff themselves. The rest of the UK isn't really sure about brexit yet - they are keeping all options open, including secession from the UK.
I'm pretty sure the UK politicians know that themselves as well, especially those (who were) pro-brexit - when you look into their post-brexit-vote behaviour. But history has seen stranger things. Germany declaring war on both the United States and Russia, France trying to occupy Moscow in winter or Japan attacking Pearl Harbour. Sometimes people choose to do things that are doomed to fail from the get go. I'm afraid when it reaches that point we can only let it rage and try to build from the ashes.

"remains Europe's hub for the technology sector"

[hey!]

Which is kind of contingent upon being part of Europe, economically and administratively speaking.

Life is about tradeoffs, and of course nobody can decide for other people whether the tradeoff is worth it. So if Britons want Brexit, fine. But rejecting one tradeoff means accepting another one; in return for being freed from all the annoying EU stuff, they'll have to pay a price. Insofar as they don't pay that price, then the substance of all that annoying stuff is likely not to go away. So suppose you're a US company interested in the Continental market, not just the UK. The best you could hope for would be the reestablishment of a more complicated version of the status quo.

The uncertainty is such that only a fool would bank on London maintaining its role in the EU. That might happen, or it might not. But either way if you're an American company, well, educated Germans usually speak very good English, often better than the average American does. The central location is also a little more convenient for operations, so locating in Munich is like putting your US HQ in Chicago.