A2 Global's Brexit Outlook: A deep dive into the impact of Brexit on US corporates

A2 GLOBAL'S BREXIT OUTLOOK: A DEEP DIVE INTO THE IMPACT OF BREXIT ON US CORPORATES 

Latest Brexit Developments

  • On 2 October, the UK government published its latest offer to the EU in a bid to break the current Brexit deadlock.
     
  • Under those proposals, Northern Ireland will remain part of the EU single market for goods, including agriculture, food, and manufacturing products. However, it will leave the customs union meaning that checks will need to be carried out in Ireland for cross-border trade. The Northern Ireland Assembly would be required to approve the arrangements and vote every four years on maintaining them.
     
  • The Democratic Unionist Party, Northern Ireland’s largest party whose support is critical in the UK parliament, is supportive of the proposal. The Irish government has consistently rejected any agreement that includes setting up customs checks in Ireland, which would effectively mean a hardened border, and has expressed opposition to the latest proposal. This view will likely be echoed in other EU countries.

Introduction

For many US companies, establishing operations in the UK offered an opportunity to gain a strong foothold into Europe, but Brexit threatens Britain’s image as a gateway to the continent. As efforts to reach an agreement with the EU draw closer to the 31 October deadline, A2 Global Risk takes a closer look into Brexit’s impact on US firms and a potential UK-US free trade agreement.

 

Brexit’s impact on US companies

The UK’s planned withdrawal from the EU will impact businesses not just on the continent but also across the Atlantic in the US. While the implications will depend on the exact conditions of the UK’s withdrawal, businesses will likely face a new operational environment post-Brexit. 


Based on the current most probable scenarios – a deal on a slightly modified version of the withdrawal agreement without the Northern Ireland backstop, or a no-deal Brexit – frictionless trade between the UK and EU will almost certainly end. This will mean that some US companies will need to shift some operations to the continent to ensure continued access to European markets. A weakened pound sterling (GBP), likely resulting from a potential no-deal exit, will also harm the competitiveness of US-made goods as they will become more expensive.

 

The UK’s regulatory landscape will also change, and businesses will be required to adapt to a new set of rules. This will likely mean that US companies with subsidiaries based in the UK will likely experience a period of regulatory and legal uncertainty as the UK will need new laws to replace existing EU legislation.

 

From a human resources perspective, businesses will also be affected if the UK government delivers on its stated aim of ending free movement of EU citizens into the country. For instance, a US company employing EU staff in the continent that wishes to bring employees into the UK after Brexit will likely go through different visa requirements.

 

In the possible but unlikely scenario whereby both sides agree to a deal that includes setting up limited customs controls in Ireland, which would be in line with the 2 October proposals, this will change the operating environment for businesses relying on the smooth transfer of goods across the border.

 

Evaluating the potential for a UK-US free trade agreement

A UK-US trade deal could bring considerable economic benefits to both countries. For the UK, a free trade agreement (FTA) with the world’s largest economy could offset some of the costs resulting from no longer being a member of the EU single market and customs union. Through a trade deal, Washington could soften the impact on some US companies amid heightened trade tensions with China by providing them with better access to the UK market.


How would a UK-US FTA look like?

A UK-US FTA will probably take several years to negotiate. It will likely involve an agreement on reducing tariffs for goods, however the prospect of a comprehensive deal on services will be more limited. This is because the US is unlikely to offer significant concessions on financial services – a key UK objective – in part because the sector is regulated at the federal and state levels, complicating the prospect of improved access to the US market. 

Existing ties

The two countries enjoy a close economic relationship and are key trading partners. According to the Office of the United States Trade Representative (USTR) total trade with the UK was an estimated USD261.9 billion in 2018. The US had a trade surplus of USD18.9 billion with the UK, which was also its seventh-largest trading partner in goods last year. A key source of friction between Washington and some trading partners such as China and Germany is the US’ trade deficit with those countries. 


Source: Office of the United States Trade Representative



Source: Office of the United States Trade Representative 

A trade surplus with the UK means that US officials have a positive view of existing trade relations, which will facilitate negotiations between both countries. 

Key factors

A key factor influencing the possibility of a UK-US trade deal will be the border in Ireland. If there are no border controls on the island, as is currently the case, the UK will be unable to sign an FTA with the US. This is because goods from the EU could go to the UK without any customs controls. These could enter the UK through Ireland and then be exported to the US under more favourable terms as part of a UK-US FTA. Ultimately, the UK’s ability to strike a deal with US will depend on the agreement reached with Brussels or a no-deal exit, which would give London more control over trade policy. An FTA will also need to be approved by both houses of the US legislature – the Republican-held Senate and the Democrat-controlled House of Representatives – and the Democratic Party’s house speaker Nancy Pelosi said the party would not vote in favour of a deal that could undermine the 1997 Good Friday Agreement by setting controls near the border.


According to negotiating objectives set out by USTR in February 2019, the US government intends to ensure duty-free access for agricultural goods in the UK. This means that agricultural producers in the UK will be faced with increased competition, while fuelling existing concerns among consumer groups that the UK government could loosen standards on food products. For instance, chlorine-washed chicken – a common way to treat poultry in the US but a product that has been banned in the EU since 1997 over food safety concerns – could be exported to the UK. Food safety concerns over goods that are especially sensitive for domestic consumers in the UK will likely be key sticking point in negotiations.


The close personal relationship between Prime Minister Boris Johnson and US President Donald Trump will play a defining role in influencing the successful outcome of trade negotiations. This underlying dynamic will shift however in a scenario of a UK coalition government led by Labour Party leader Jeremy Corbyn. The opposition leader has been outspoken in a series of remarks against the US President, which will likely lay the foundations for an antagonistic relationship, decreasing the likelihood of an FTA after the UK leaves the EU. Under a Labour government, the UK will likely prioritise close economic alignment with the EU rather than pursuing an FTA with the US.

 

Outlook
Despite repeatedly confirming that the UK will leave the EU on 31 October, a scenario involving an extension is more likely. Even if the EU concedes to many of the UK’s latest proposal to replace the Northern Ireland backstop, and both sides reach a breakthrough in negotiations, this is unlikely to radically shift the current parliamentary arithmetic, which voted numerous times against a broadly similar agreement brokered by former Prime Minister Theresa May.


However, if the UK does exit the EU on 31 October or at later date, likely 31 January if both sides agree to a new extension, companies will be required to adapt to a new business environment. Key challenges will include adapting to a new regulatory landscape and proactively taking measures to mitigate any disruption that could result from an end in frictionless trade and the free movement of people.

The likelihood of a UK-US FTA will largely depend on the outcome of the current Brexit negotiations. While it could bring considerable commercial benefits, it will likely reflect the economic imbalance that at exists between the two countries.