On 23 June, 52% of UK voters voted in favour of leaving the European Union, which has generated considerable uncertainty about the United Kingdom’s future relationship with Europe and, as a result, the wider world, including Singapore.

Singapore and the United Kingdom

Singapore is one of the United Kingdom’s largest trading partners in Asia and one of the few countries with which the United Kingdom has a trade surplus. Singapore accounts for half of UK exports to the Association of Southeast Asian Nations (although some will be reexported elsewhere), worth £5.6 billion in 2014. Conversely, Singapore exports totalled S$7 billion to the United Kingdom in 2015 out of S$530 billion in total exports, representing just more than 1% of all exports by Singapore.

The United Kingdom is also the largest investor among the countries in the European Union into Singapore. Total foreign direct investment into Singapore from the United Kingdom exceeded £30 billion at the end of 2014, making it the fifth-largest total source of foreign direct investment. Half of Singapore’s foreign direct investment into the European Union goes to the United Kingdom, including significant investments in infrastructure projects.

Treaties with the European Union and the United Kingdom

Singapore and the United Kingdom entered into the Agreement on Promotion and Protection of Investment on 22 July 1975 (the Investment Treaty), which governs the commercial bilateral relationships of the two countries. This is still in effect today.

That said, the European Union and Singapore completed negotiations for a free trade agreement on 17 October 2014. The European Union-Singapore Free Trade Agreement (EUSFTA) aims to supersede the Investment Treaty and all other bilateral investment treaties with other members of the European Union. The agreement requires formal approval by the European Commission and then needs to be agreed on by the Council of the European Union and ratified by the European Parliament. The ratification process is due to be complete later this year.

The EUSFTA is a comprehensive trade and investment agreement. It covers traditional trade topics, such as the elimination of tariffs on goods, improved market access for services, and less traditional trade and economic matters, such as intellectual property protection, competition rules, and disciplines on technical barriers to trade and government procurement.

The investment chapter to the EUSFTA includes a range of protections for investors, including measures that deal with expropriation, national treatment, fair and equitable treatment, full protection and security, and free capital movements and payments. Disputes must be settled in accordance with detailed, bespoke mediation and arbitration procedures.

Finally, Singapore and United Kingdom are subject to bilateral tax treaty arrangements that manage relief from double taxation. The two nations most recently signed a protocol on 15 February 2012 that took effect on 27 December 2012, and its provisions took effect in April 2013 (United Kingdom) and in January 2013 (Singapore).

Brexit Consequences

We do not currently know what form the United Kingdom’s exit from the European Union may take. In the few days since the referendum result was announced, there has been considerable speculation, ranging from a total severance to some form of a closer relationship. The process will, however, take time, and the United Kingdom will remain a part of the European Union for at least another two years.

In the short term, the prospect of Brexit will have a limited effect on the Singapore business environment, and the change in Europe’s political landscape is unlikely to adversely affect relations between Singapore and the United Kingdom.

However, whilst Singapore companies’ businesses are for the most part focused in Asia, and therefore have limited direct UK exposure, those with operations in the United Kingdom may record reduced earnings (and, correspondingly, downward pressure in stock price) owing to the depreciation in the sterling against the Singapore dollar. Conversely, the strengthening of the US dollar because of heightened volatility and global economic uncertainties following Brexit could benefit business. For example, manufacturers and aviation service providers that book revenue in US dollars and costs in Singapore dollars may benefit.

In anticipation of changes to come, businesses can take preparatory steps by reviewing existing contracts and those currently under negotiation:

• Jurisdictional scope of contracts may be limited—The definition of “European Economic Area” (EEA) may need to be redefined to continue to cover the United Kingdom after its withdrawal.
• Investment—Strategies that permit investments in the EEA may need to be amended for investments in the United Kingdom to continue to be permitted.
• Force majeure/frustration—Uncertainty may drive parties to look for an exit from contracts that are no longer profitable or underperforming. Consider defining Brexit as a force majeure event.
• Termination rights—Those who wish for the option to withdraw from potentially loss-making contracts should consider drafting termination rights that will apply in the event of a Brexit.
• Dispute resolution—Consider arbitrating disputes rather than litigating in the English High Court, where enforcement is anticipated in the European Union, because a post-Brexit enforcement regime is currently unclear. Anticipated investment treaty protections and corresponding sophisticated dispute resolution mechanisms under the EUSFTA will not be available for UK investments.

Although long-term planning is not currently possible, businesses should also consider the following risks:

• Exchange rate volatility—Consider forex risk exposures, including payment obligations, funding requirements, liabilities, partnership expenses, revenues, and location of funds.
• Employment—Singapore companies that employ staff who bear EU passports in the United Kingdom will need to keep in mind potential changes (albeit some way off in the future) to those employees’ ability to work in the United Kingdom.
• Future contracts—As outlined above, the potential consequences of Brexit should be carefully considered as part of future transactions connected to the United Kingdom.