The "Brexit" Effect on U.S. Companies Doing Business Abroad
As the economy recovered from the global financial crisis of 2008, many U.S. companies expanded to the United Kingdom (U.K.) as a way to reach the European Union (EU) market, either by exporting, using a U.K. distributor or setting up operations there. Such expansion was a relatively easy move, thanks to a common language and similar banking and legal systems in both countries.
But then came Brexit—the U.K.’s 2016 referendum by popular vote to exit the EU and things got complicated. Now many of these same U.S. companies are trying to read the tea leaves about Brexit’s final outcome. The deadline for the U.K. to negotiate a withdrawal agreement is March 29, 2019, after which time the U.K. must leave the EU, whether or not an agreement has been finalized. U.K. Prime Minister Theresa May reached an agreement on withdrawal terms with EU leaders last month, but now must persuade Britain’s parliament to approve the agreement. The U.K. faces the possibility of a “no-deal” Brexit—likely the worst possible outcome for everyone involved if the agreement is not approved by the deadline.
Current and Future Consequences
“No-deal” Brexit would mean that EU law would no longer apply to the U.K. as of March 29, 2019 including the passing of individuals across borders. It would likely have wide-ranging, negative impacts on the U.K. including rising unemployment, shrinking GDP and depreciating currency. It would also disrupt the global economy and affect businesses, supply chains and even healthcare across the EU. Banking and financial services would feel the most impact, but other service-related businesses—such as accounting, software, and engineering, to name a few—would also be affected. U.S. companies operating in the U.K. and providing products and services to other EU countries would have to contend with two sets of rules, regulations, and possibly tariffs to export to the U.K. and then to export to EU countries.
Not much would change until January 2021 when the grace period ends if the agreement is approved. The final terms of Brexit could still raise issues related to contracts, intellectual property, employment, and tariffs for U.S. companies with operations in the U.K. These companies may then have to look for new relationships or even to relocate to another EU country.
The uncertainty surrounding Brexit is slowing or postponing businesses’ expansion and additional investment in the U.K. Companies are struggling to understand the impact of Brexit and its potential effects on markets, currency, labor, and supply chains. Many are waiting to see what happens before making any significant decisions and are evaluating multiple scenarios based on different outcomes.
How to Prepare
Deal or no deal, U.S. companies doing business in the U.K. need to be prepared for Brexit in whatever form it takes. For companies doing business directly with the U.K., trade agreements are underway that could substantially expand trade with the U.K. U.S. companies that rely on the U.K. as a key element in their EU strategy, however, should be concerned and should have plans in place for both no-deal and negotiated Brexit. Most of these companies have already looked at alternate strategies or have even moved their operations to another EU country, such as Ireland or Germany.
The Silver Lining
On the bright side, if significant trade barriers are erected between the U.K. and EU, the U.S. could greatly benefit from expanded trade with the U.K. This potential windfall will ultimately depend on the timing and details of a possible trade agreement between the U.S. and the U.K. In addition to formulating their strategies for responding to Brexit, businesses can lobby U.S. policy makers for favorable trade terms.
While Brexit is certainly a bump in the long road to economic recovery, it does not spell doom for the global market. U.S. companies doing business in the U.K. can survive and even thrive with the right strategies in place.
About the Author
Michael Salerno joined the bank in 2002 and currently leads the Global Banking team, which includes business development, international payments, foreign exchange management and trade finance solutions for corporate and correspondent banking customers. International issues can present challenges for organizations, and Michael enjoys creating simple and transparent solutions that reduce the complexity of doing business internationally.View Global Banking Solutions