The Brexit debate – why does it matter to US businesses?

On June 23, 2016, the United Kingdom (the UK)¹ will vote on whether to remain in or leave the European Union (the EU). Brexit² has become the popular term coined by the media for the scenario in which the UK votes to “leave” or “exit” the EU in the referendum in June. A similar term (Grexit) has been used when there has been speculation in the past about a possible exit by Greece from the EU. The political and economic debate around a Brexit has been in the UK headlines for some time. As the referendum date approaches, Brexit is also now hitting global headlines and the United States (the US) has been one of the most prominent countries contributing to the wider global debate.

From a political perspective, there is apparently “profound disquiet”³ in Washington as to the risks posed by a potential Brexit. US president Barack Obama entered the fray of the political debate during a recent visit to the UK in April when he stated that as a “friend” who was being “honest”, the UK was perceived as a stronger ally by the US “in”, rather than “outside” of the EU. The US president put forward a positive case for the UK to remain in the EU on the basis that from a trade, economic and foreign affairs perspective the EU doesn’t “moderate British influence” but instead “magnifies it”⁴.

The US president has not been a lone voice from the US. In recent weeks, an array of prominent figures from former US Treasury secretaries, Defence secretaries, Heads of the CIA and national security advisers, from across the political divide, have all weighed into the Brexit debate. Donald Trump has said “I think if I were from Britain I would probably want to go back to a different system.”⁵ While Hillary Clinton “values a strong British voice in the EU”.⁶

The level of intervention from past and present luminaries “across the pond” points to real concern in the US corridors of power as to the potentially destabilising influence a Brexit might have both in terms of global trade and economy and global security and foreign affairs.

In a letter to the Times signed by eight former US Treasury secretaries⁷, Brexit is likened to opening a “Pandora’s box”. There is a short term concern and a longer term issue. The short term concern is that immediately after a vote in favour of Brexit there could be severe consequences for capital markets and currency markets that could spread beyond the UK and EU. The OECD has said “A UK exit (Brexit) would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD, particularly other European countries”⁸. The longer term impact of a Brexit depends on what side of the debate one is on. On the one hand there is a view that membership of the EU is holding back the UK economy. On the other hand the UK government’s view is that a Brexit would give rise to serious economic costs that would affect businesses, jobs, living standards and public finances for decades to come⁹.

A specific concern is how far US businesses with subsidiaries or other operations in the UK would be able to trade freely with the rest of the EU through those UK entities.

The problem for US businesses with UK operations or which use the UK as a “gateway” for trade and services to the EU, is that in the run up to the referendum, regardless of whether the post Brexit outlook is negative (the remain campaign) or positive one (the leave campaign), no one can say with certainty what a post Brexit world will look like. There has been a lot of speculation as to the different models that might be adopted by the UK, using other countries as examples (our Brexit brochure sets out some of the models discussed) but any preferred model is impossible to predict until negotiations take place following a vote to leave.

According to James Quincey, Coca-Cola’s president and CEO, the principal issue for businesses is the “tremendous uncertainty that it (a Brexit) will cause and already is causing”. Uncertainty and inability to plan ahead in the short term may impact on US businesses with business interests in the UK and Europe in a number of ways, including, for example, delays in investment decisions¹⁰, a freeze on recruitment of new staff in any UK based operations¹¹ and a reluctance to enter into new trade or services contracts which may be adversely impacted by a Brexit. If there is a vote to leave, continued business uncertainty may be a factor over a protracted period, until such time as the post Brexit landscape becomes clearer.

Some US businesses have made their views about a Brexit known to their UK workforce. So, for example, Microsoft which employs 5,000 people in Britain has said in a letter to UK staff that Britain should stay in the European Union if it wanted to receive more investment¹². Companies thinking of taking a position in the debate, one way or the other, are free to do so but need to ensure that they comply with UK referendum rules governing campaigning activities and expenditure.

It is difficult for US businesses to decide how much to do in the way of planning until the result of the referendum is actually known on June 24, 2016.

There are some immediate risks that might be anticipated, including, for example, hedging currency risk to the extent a business has exposure to a possible short-term drop in sterling¹³. US businesses might also start to think ahead to how a Brexit might impact on any UK operations, as well as the wider potential impact for the industry sector in which they operate. Our Q&A brochures on the Financial Institutions and Energy industry sectors look at some of the questions businesses operating in those specific sectors may want to consider including, for example, the potential impact on access to the single market, potential legislative and regulatory changes specific to those sectors and potential loss of funding or membership of EU industry bodies and institutions.

If there is a vote to leave, we also know that there will be at least a 2 year period from the referendum before a formal exit by the UK from the EU¹⁴. During this period, US businesses with exposure will be able to commence a comprehensive review of perceived areas of risk, including legislative risk, contract and counter-party risk, trade, funding and operational risk (to the extent relevant)¹⁵. It may then take a further period of 10 years¹⁶ or more before the post Brexit legislative, regulatory and new trading landscape becomes clearer and businesses are in a position to start planning ahead with more certainty.

In March 2016, the British-American Business¹⁷ network conducted a survey in London and New York to gauge its members’ opinions on the EU referendum. Member companies who responded collectively employ 327,000 people across the UK. The results of the survey suggest a fairly united voice as far as US businesses are concerned.

• 95% of respondents were in favour of the UK remaining in the EU.
• 70% of members stated that if the UK were to leave the EU it would have a negative impact or a strongly negative impact on their company’s future investment or business prospects in the UK.
• 88% stated that access to the EU single market makes the UK the more attractive destination for their company.
• 42% of respondents had UK headquarters. 1 in 10 respondents would consider moving operations out of the UK if it were to leave the EU.