Brexit: Bad For Business?

Today I will be examining Brexit and how it is going to and already has affected business, both in the United Kingdom and overseas. Firstly, we will be looking at just what is Brexit. Secondly, we will be determining how this affects businesses in the United Kingdom, both British and international companies. Then, we will be discussing whether Brexit is something that American business owners should be worried about. Lastly, we will be looking at how Brexit could potentially affect the author(myself).

What’s Brexit?

On June 23, 2016, the United Kingdom voted on the referendum to depart the European Union. The inhabitants of England, Scotland, Wales and Northern Ireland decided that the advantages of belonging to the unified monetary body didn’t outweigh the price of free movement of immigration. On March 29, 2017, Prime Minister Theresa May following the desires of the people by tendering the Article 50 withdrawal notification to the European Union. In the withdrawal notification, the United Kingdom and the European Union had until March 29, 2019, to settle on an agreement.

On March 19, 2018, the UK and the European Union agreed to a 21-month transition strategy that is kind of like a ‘soft Brexit.’ It’s a backstop in case an official deal doesn’t transpire before the deadline.

A ‘hard Brexit’ will mean leaving the European Union swiftly with no limitations save for a new free trade agreement. On November 14, Prime Minister Theresa May-‘s cabinet ratified the plan. Then the Prime Minister defined the three choices facing her country. Keep the deal as is, as the United Kingdom doesn’t have the economic power to negotiate a better one.

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Leave the European Union with no agreement, which would be not as good as then the hard Brexit alternative the opponents favor because, without a trade agreement, ports would be impeded, and airlines grounded which would cause, imported foods and drugs to run short. No Brexit, which many citizens are lobbying to remain in the European Union by having a new referendum because the voters did not comprehend the economic difficulties that Brexit would impose. (Amadeo, K. 2018).

What does this mean for Businesses in the UK?

The method of detaching the United Kingdom from the European Union is far from flawless, and nobody has any real idea what it would look like in the end. Businesses will also question whether they wish to continue to be based or headquartered in the UK. It may be that the final arrangements have a direct impact on these outcomes but until these are agreed on, businesses will either make a snap decision or choose to delay, but neither option looks beneficial for the United Kingdom economy in the short term. (Thomson, S. 2016) The Brexit vote two years ago has damaged the economy of the United Kingdom, as a weaker pound sterling has pressed domestic incomes and doubt has hit investment. Economists from all sides agree on this, despite having their disparities over the extent of the damage and whether the losses could intensify. (Giles, C. 2018). The Brexit vote has  now at present cost the United Kingdom anywhere between £20billion and £40billion. (Blanchflower, D; Sentance, A. 2018).

Previous economic modeling exercises from the administration and others have found that higher costs of trading with the EU lead to more substantial negative impacts on the UK economy. In other words, a scenario where the UK leaves without a trade deal with the EU and reverts to ‘World Trade Organization rules is likely to result in UK economic output being lower in the long-term than a situation where there are fewer barriers to UK-EU trade, such as in a comprehensive free trade agreement. (Harari, D. 2018) The UK will be far worse off under all scenarios studied by the British government. Officials could not estimate the precise impact of the deal that the Prime Minister has negotiated with the EU, but even in the best case this too will mean a weaker economy than remaining in the EU.

According to The Bank of England, the Prime Minister’s plan could result in new trade barriers that would cause the UK economy to become smaller than it is currently forecast to be in 2023. If May can negotiate future trade relations with the EU that do not include customs checks or regulatory barriers, the economy could grow. May’s plan includes a transition period that which during, most trading rules for companies will remain the same, but that would also mean a close relationship with the EU on trade in financial services and an even broader cooperative partnering on transportation and energy. Their administration’s estimates are based on other assumptions such as Britain’s ability to strike very ambitious free trade deals with much larger economies like the US. (Kottasová, I. 2018).

Does America need to be worried?

For the informed Investor, I’d have to say yes. Brexit diminishes business growth for companies that operate in Europe. U.S. businesses are the most significant investors in the United Kingdom. Just one day after the UK voted on Brexit, the Dow dropped 610.32 points, and this also puts currency markets in turmoil as the Euro fell 2 percent to $1.11 market value. The British Pound Sterling fell, and it fell hard almost 14 percent. Both currency failures increased the value of the American Dollar. That kind of financial strength does not bode well for the U.S. stock markets. It makes American shares much costlier for foreign investors. American companies that operate in the United Kingdom invest $588 billion and employ more than a million people.

British investments in America are at the same level. Brexit could potentially impact up to 2 million U.S./British jobs. Although it is unknown exactly how many are held by U.S. citizens. The uncertainty over their future will diminish growth. Brexit was a vote against globalization. It takes the United Kingdom off the main stage of the financial world. It has created uncertainty throughout the U.K. as London (primarily) seeks to keep its international clients. American stability means that London’s loss could be New York’s gain. (Amadeo, K. 2018).

A strong dollar sounds good, but it’s bad for U.S. businesses that sell products overseas. A robust American Dollar makes the company’s products more expensive and less attractive to buyers outside the U.S. The U.S. manufacturing sector fell into a 5-month recession triggered by the strong dollar and manufacturing lost about 39,000 jobs in the past 12 months. If the American dollar continues its post-Brexit gains, it will spell bad news for U.S. trade and production. A stronger dollar could make imported items cheaper for U.S. consumers, which could also offset consumer fears about volatile global markets. But at this point, concerns of a stronger dollar appear to be outweighing the positives of it. (Gillespie, P. 2016)

Currently, US businesses that trade with or invest in the EU often establish operations in the UK as a jumping-off point to develop trade with other EU countries. Whether the US or other non-European businesses maintain a European distribution center in the UK, they should consider the potential for double taxes on products exported to the UK and then re-exported to the rest of the EU after Brexit and the UK’s departure from the EU customs union. Such products are likely to face taxes on entry into the UK, and then further charges under customs union on re-export to the rest of the EU. (Gent, D. 2018)

How does Brexit affect me (the author)?

As a future business owner with ties to business/friends that live and do business within several different cities within the UK, Brexit has the potential to affect me on several different fronts. Mostly, in the Taxes imposed upon imports and exports to and from the UK. AS well as in travel to and from the rest of the European continent, in particular between the Republic of Ireland and Northern Ireland as I will have to deal with both the EU customs and the customs agents of the UK. Lastly, but most important by how willing the UK citizenry will be to buy higher-priced imported goods from America due to the new-found strength of the US Dollar.

In Conclusion

The future impact of Brexit on businesses, does not look good, but it remains to be determined. Brexit has a lot stacked against it currently with very few options of where to go. The options that it does at least on some level seem to be lose-lose for at least either the UK or the rest of the world that intend to do business with the UK. With the downfall of the British Pound Sterling and the increase in value of the American Dollar, consumers might shy away from foreign products if Brexit continues on its current path, not to mention the reluctantly of foreign investors to export their product to the UK to have to re-export them to the rest of the EU.

Unless a company is already dominant within the European market, Brexit is likely to shy off future investment of new products within the UK. Lastly, I hope that the UK can figure this out because if they don’t, it is going to mean a lot of people losing their jobs in the meantime. We just might be witnessing history at the dawn of the United Kingdom’s Great Depression, and I hope that all of us are ready for it.