Brexit

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

Publication May 2016


What is the Brexit debate about?

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.

Why does the Brexit debate matter to the US?

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.

How does Brexit impact on US businesses?

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 countries8. 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.

Is uncertainty the biggest issue for US businesses at the current time?

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.

Can US businesses and industry sectors do any contingency planning?

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.

British-American Business network : EU referendum survey

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.


Footnotes

1

An overview of the EU referendum (including details on who is eligible to vote) can be found on our Norton Rose Fulbright client siteBrexit online.

2

Brexit is a play on the words “British” and “exit”. British is the adjective commonly used to refer to nationals living both in Great Britain (England, Scotland and Wales) and in the wider UK (Great Britain and Northern Ireland). It is the wider geographical area of the UK which is currently a member of the EU.

3

BBC report, May 16, 2016.

4

Daily Telegraph guest commentary article written by President Barack Obama, April 23, 2016.

5

The Guardian, May 15, 2016

6

Daily Telegraph article, April 23, 2016

7

Times article, April 21, 2016.

8

THE ECONOMIC CONSEQUENCES OF BREXIT: A TAXING DECISION, OECD ECONOMIC POLICY PAPER April 2016 No. 16

9

HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April 2016

10

According to an article in the Financial Times, US companies have $556bn of investments in Britain (FT article, April 21, 2016)

11

7,5000 US companies employ 1.2m making the US one of Britain’s biggest employers (FT article, April 21, 2016). Job losses has been cited as a Brexit risk by the Bank of England (Quarterly report May 12, 2016).

12

City AM, May 17, 2016

13

Bank of England cited risk (Quarterly report, May 12, 2016).

14

Article 50, Treaty on European Union.

15

See our client brochure and siteBrexit for detail.

16

President Barack Obama speculated that a trade deal between the UK and the US alone might take up to 10 years and that the UK will be at the “back of the queue” behind the EU. A House of Lords European Committee report (May 2016) speculates that withdrawal will be a “complex and daunting task” which may take years.

17

British-American Business Council (BABC) is a transatlantic business network with more than 2,000 member companies based in business centres across North America and the United Kingdom.

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