Brexit picture: what would the UK's tech sector look like?

With only a couple of weeks left until the referendum on the UK’s membership in the EU, articles and analyses on Brexit make the headlines almost every single day. For the tech industry a potential Brexit is a major issue, given that every aspect of the economy and of our lives has been digitised, and we are dealing with an increasingly cross-border market. Through the Digital Single Market (DSM) strategy, the European Commission wants to put Europe on the digital map and remove the borders for the online world in order to boost the economy, and open up cross-border trade for businesses and consumers. However, countries outside of the EU will not be able to reap the benefits of full market access that Member States enjoy and will likely fall into a legal limbo.

Britain is already in the process of taking advantage of the benefits of the digital economy, so what would the UK tech sector look like if the UK leaves the EU?

London could lose its status as Europe’s tech hub

London is currently Europe’s tech hub and its tech sector is one of the success stories for the UK. According to the European Digital City Index, London is the number 1 city in Europe for supporting digital startups and scale-ups. Research by KPMG also shows that hiring in the UK tech sector has been growing in the last three years, and the business activity growth in the tech sector exceeded that of the entire UK economy.

The tech sector has a lot to gain from not being isolated from the advancement in the rest of Europe. According to Tim Farron, the leader of Liberal Democrat party, “Brexit would be a disaster for the UK’s tech sector … London’s status as the digital capital of Europe would be at risk if we shut the door on the world’s largest market”. If the UK leaves the EU, tech companies looking for opportunities could choose not go to London, but to other capitals with a high focus on technology, such as Berlin. One of the key reasons will be the high level of legal uncertainty and risk attached with a potential Brexit.

Tech companies in London have already shown their support for remaining in the UK. A poll of members of techUK, an association representing more than 900 tech companies in the UK, mostly SMEs, reveals widespread support for staying in the EU. Approximately 70% of its members favour remaining in the EU because EU membership makes the UK more attractive to international investment, more globally competitive and gives the UK a better position in trade relationships. They believe that leaving the EU could increase uncertainty for their businesses. Recently, Microsoft has also showed its support for the UK to remain in the EU. In a letter to its 5,000 British staff and to 25,000 businesses in its network, Microsoft UK CEO, Michel Van der Bel, wrote that the UK being part of the EU has been one of the main reasons why it is an attractive place for Microsoft investment in Europe. The company has been investing in Britain since it opened its first office there in 1982 and is the first US tech company to make a statement on the referendum.

British citizens might not get to benefit from a European digital single market

The European Commission launched its Digital Single Market (DSM) strategy in May 2015, aimed at positioning Europe as a tech leader and at creating a unified set of rules for all 28 Member States.

In the event of a Brexit, the legislative areas being harmonised by the DSM will no longer apply to the UK. This will leave businesses around the world in a state of legal uncertainty when working with companies in the UK. For instance, the Commission is currently working on creating EU-wide rules on e-commerce, which aim to make it easier to sell digital goods and content across the EU. If the UK leaves the EU, the British online shopping industry will lose access to the cross-border market of 27 other countries in the Union, and could risk missing out on online cross-border trade.
Regular citizens also have a lot to gain from the DSM. Take roaming charges for example, which will be abolished in the EU as of June 2017. The UK government has assured British consumers that they would still benefit from the drop in roaming charges even if they choose to leave the EU. However, after a Brexit, negotiations will have to take place to determine the conditions of the future EU-UK trading relationship. These are very likely to be extremely difficult negotiations, which will only be made worse by any moves from the UK to try and exclude freedom of movement from any EU-UK deal.

UK consumers will also benefit from one of the Commission’s latest reforms to allow for Europeans travelling anywhere in the EU to still have access to online services, such as Netflix, which they have paid for in their home country. British Prime Minister David Cameron has praised such reforms by saying they are one of the reasons why his country should not leave the EU: “The UK has been pushing for a digital single market that delivers for consumers across the EU … These proposals deliver just that.”

Data transfers between the EU and the UK could become illegal

Data protection and data transfers are very sensitive subjects in Europe, as the EU defends high standards on privacy. This became clear in October last year when the European Court of Justice invalidated the ‘Safe Harbour’ data transfer agreement with the US, on the basis that the US does not provide adequate protection for EU citizens’ data. Should Britain choose to leave, this situation could set a precedent for a similar call for the UK to demonstrate it protects EU citizens’ data. Proving this could be a particularly challenging task given the current reforms the British government is pushing through on government monitoring and access to data. These measures have been criticised by privacy activists and legal experts, who claim they do not meet EU data protection requirements. Recently, more than 200 senior lawyers signed a letter saying that the proposed Investigatory Powers Bill ‘compromises the essence of the fundamental right to privacy’ set out in EU law and fails to meet international standards for surveillance powers. In this context, it could prove difficult for the European Commission to credibly negotiate a data transfer agreement with the UK, leaving many companies in limbo or, worse, isolated from the European digital single market.

Technology is global, and it will impact every one of us, regardless of physical borders. As such, the impact of Brexit on the tech sector is also not simply contained to the UK. A potential Brexit will mean that the UK will not be able to influence EU legislation anymore, certainly not to the same extent as it does now, taking its pro-market, pro-technology voice out of the EU debate. Given the importance of tech legislation like the ones in the DSM strategy and the benefits of the digital economy, this opportunity should not be missed.
By Andreea Ghita, Technology Practice