On the Brexit trade agreement, SaaS and investment
By: George Wetz
Tags: Brexit, Government Policy, Technology, SaaS, Software Development

Summary

There are many articles on the impact of the Brexit trade agreement for many important areas of life: the economy, international travel, and fish... But if you’re involved in providing digital services such as SaaS or software more broadly, what does the deal mean for you now, and in the long term?

Tldr; for now, most things stay the same. But they might not forever. And that fact in itself has consequences.

Doing business

What do those of us in tech need to do come January 1st? For most of us, not a lot.

Access for providing digital services remains as before (with some exceptions in certain areas like legal, financial, aviation and TV). There won’t be any import tariffs or taxes, and cross-border payments are unaffected too. So unless you’re in an affected sector, you can carry on as you were before.

But free movement is over. For business trips, company reps can travel over the EU border for 90 out each 180 day period — essentially half the time. This includes being able to take your family with you with minimal (but presumably some) paperwork.

On data, there (probably) won’t be any barriers to data moving across the border, nor any provisions that data must be based on the home territory, which is apparently the first time the EU has agreed to do with with a third country.

Why only ‘probably’? The UK still needs to create the legislation to show the EU that its GDPR-replacement is equivalent, and until that’s done this isn’t guaranteed. Though it’s hard to imagine that the UK won’t create data legislation that passes the EU’s “data adequacy” test, which is due to happen by Q2 2021. After all, as in many areas of the Brexit negotiations, I think the focus in more on the near term optics of sovereignty (having our own UK data protection legislation) with the reality being that most rules will stay exactly the same (basing UK legislation on the EU’s current rules).

But this does still cause a problem, because the rules could in theory change in the future. And this will change how people make decisions, particularly on investment.

Investment

On digital trade, there’s a commitment not only to continue the status quo of no barriers, but also for the UK and EU cooperate on the rules for future ‘emerging technologies’. I think in part the intention here is to assuage the concerns of investors and entrepreneurs who will now be seeing risks in placing long term bets across the border.

And despite this commitment, those risks remain. The dovish interpretation is that the ‘emerging technology’ provision is a failsafe that that’s unlikely to ever be used, and if it were, it would be in the sphere of an extremely sensitive area of society, such as national security.

But the hawkish interpretation — and the one that must be considered — is that the definition of ‘emerging’ is broad and could be used by either side to add tariffs or restrictions on cross-border trade in the future across a whole gamut of emerging technologies — such as AI, the Internet of Things or drones — to protect their investments in home grown companies.

This risk is something entrepreneurs and investors will be thinking about: Will this happen? Unlikely. How big a deal would it be if it were to? Potentially really big. So how should you mitigate this risk? Look for similar opportunities inside your own territory instead. This, I believe, is the psychology that will drive lower investment in technology between the UK and the EU over time.

Government policy thoughts

Less cross-border investment over time (say 5–10 years plus) could mean slower innovation, because innovation relies on competing for access to a relatively small pool of smart and talented people. This in turn creates an incentive for both parties to grow their talent pool.

From the UK perspective, as the smaller party with a centralised government, placing a big strategic bet on investment in STEM subjects seems sensible. With freedom of movement restricted, relocating employees is going to be harder than before.

A large talent pool is an asset that may counterweight the risks of future tariffs for investors, giving confidence to cross-border investors that they might not otherwise have. This in turn would create more job opportunities for that talent, and overall reduces the likelihood of a ‘brain drain’ out of Britain — something that has been feared by many through the Brexit process. It’s therefore imperative we see an updated strategy update on this area from the Government, to give investors confidence before they decide to divert their attention elsewhere.

And one final thought: What will post-Brexit Britain’s role be in the action against ‘big tech’? The EU is bringing in new regulations; the US has started antitrust proceedings. Which of these two great powers does the UK side with, if any? As we’ve seen with tax enforcement, international coordination is essential to efficacy. If the UK becomes a weak link in this coalition, for example by providing a ‘haven’ to big tech, then this is likely to cause significant irritation in the EU, where huge political capital is being expended on the ‘big tech’ issue. Could this in turn make it more likely that the EU takes that hawkish interpretation of emerging technologies sometime down the line? Perhaps.

Further reading