In a move that shocked the world, the U.K voted on June 23, 2016 to leave the European Union. The final vote was 52% Leave and 48% Remain, with Britain and Wales leading the charge to exit, while Scotland and Northern Ireland pushed to stay.
While the impact of the vote was felt immediately, with global markets tumbling and British Prime Minister David Cameron announcing his intention to resign, the process will take much more time. The U.K. has two years to negotiate its exit from the EU. What may happen in that time is anyone’s guess. There will certainly be some turmoil on the European front, particularly in the areas of economics and immigration.
The natural reaction here across the pond is to wonder how all this might affect U.S. businesses going forward. The answer is, no one really knows yet. The unprecedented vote, combined with the upcoming U.S. presidential election, has created an atmosphere of uncertainty on the economic front.
While many were quick to predict doom and gloom, all forecasts are not as negative. Here are some potential impacts of Brexit, both good and bad, that U.S. companies might anticipate in the near future.
The Immediate Market Reaction
News of the U.K. vote caused global markets to tumble, sparking fears of a worldwide financial crisis. While the initial panic seems to be subsiding and there are some signs of the markets righting themselves, many businesses remain wary of what’s to come.
Twenty percent of U.K. businesses polled reported that they were considering moving their operations outside the country after the vote. Uncertainty generally makes businesses uncomfortable, and many fear that uncertainty in the future of the European markets will cause a negative ripple effect across the world, leading U.S. investors to pull back on investing, impacting the growth of U.S. businesses.
Future Dealings with EU Companies
As a practical matter, the process of the U.K. extricating itself from the EU will involve the rewriting of hundreds of laws, rules, and agreements involving everything from trade regulations to distribution channels. Contracts that are tied to euros or pounds will have to be reassessed.
Distribution will be heavily impacted. Many businesses have long used London as a sort of gateway to entering the European market. Most companies base their European operations out of London, effectively using the English capital as a shipping center for European distribution operations.
Now, with Britain pulling out of the EU, the EU may place restrictions on shipping from the U.K. in response to the U.K. forbidding immigration from EU countries. This would likely take the form of costly tariffs on goods coming out of the U.K., particularly those coming from elsewhere, including the U.S. In order to avoid these increased costs, U.S. businesses will have to develop new and separate chains of distribution elsewhere in the EU, which will likely mean higher shipping costs.
Distribution centers in the U.K. may suddenly seem like questionable investments. The Eurozone accounts for 15% of U.S. exports, while the U.K. represents only 4%. With different distribution arrangements required going forward, it would make sense for U.S. companies to shift their European centers of operation elsewhere.
Regardless of how Brexit plays out, every company that trades goods in the EU, whether as a supplier or a purchaser, will be required to implement changes to their distribution structures. This may become an even bigger issue down the line if any other European countries decided to follow the U.K.’s move and break from the EU.
A Strong U.S. Dollar Can Be a Bad Thing
After the vote to leave was announced, the pound fell to a long-time low and the euro plummeted, while the dollar saw historic rises. While that may sound great for the U.S., analysts warn that a strong dollar can be bad for U.S. businesses.
Although it may seem counterintuitive, a strong U.S. dollar generally means weak foreign profits. When the dollar is strong, U.S. goods become more expensive in foreign markets. Particularly in a time of financial uncertainty, foreign buyers will be inclined to turn elsewhere for cheaper goods, leading to plummeting U.S. profits in foreign markets. With a loss of European profits, U.S. distributors will have to look to other markets to make up for the shortfall.
The Future of Investment, and Some Reasons for Hope
Brexit sparked a move by investors to pull back, focusing only on the safest of investments. The fear is that this could lead to a difficult road for emerging markets and companies that are looking to secure investment in the future.
Some analysts, however, disagree, and see Brexit as offering new opportunities for small businesses and entrepreneurs. Billionaire venture capitalists still need to invest somewhere. Those that were in emerging British companies may now want to shift their interests to lower-risk opportunities that are not embroiled in the turbulent European markets. This could be a particularly good opportunity for Silicon Valley startups to court venture capitalists that were previously invested in British tech companies.
Tech startups have also benefited in recent years from slow growth in the U.S. economy. Low interest rates have driven investors to put their funds in riskier prospects, hoping for a high rate of return. With the continued low interest rates expected in the wake of Brexit, this trend is likely to continue. Now might be the ideal time for emerging companies to raise capital for new ventures. Analysts also predict that Brexit will lead to lower borrowing costs, which are great for allowing entrepreneurs to grow their businesses.
The ultimate impacts of Brexit will be played out over the course of the next couple years. What does seem certain, however, is that the ripple effects will be felt for a long time to come. U.S. companies, particularly those with European operations, should make a point to stay on top of any developments coming out of the U.K. or the EU to determine how they might impact ongoing business operations.
