Yahoo Finance Brexit: Why US needs to care about UK-EU divorce
It can be difficult for the casual onlooker in North America to wrap their head around the high-stakes, convoluted political situation surrounding Brexit.
But it’s time to take notice: threats of food shortages, grounded flights and stalled factories are looming large in one of the world’s biggest economies as the country faces the prospect of a no-deal Brexit in March 2019. Business investment has dried up in many sectors and the property market, particularly in London, has turned south.
Past fears of Grexit were enough to slam global stock markets. The UK economy is more than 10-times the size of Greece and is a hub for $1.4tn (£1.1tn) in annual trade, indicating the severity of market reaction if things get messy.
Political turmoil can easily spillover into the markets, warned Charles Lichfield, an analyst covering Europe at the political risk consultancy firm, Eurasia Group. “This would be on a much bigger scale [than Grexit],” he said. “Any investor that is interested in the UK should look very closely at the Brexit deal.”
The drama ramped up this week as UK prime minister Theresa May struck a deal with the European Union on her country’s divorce terms and outlined plans for the future relationship between the two sides. But she’s struggling to convince lawmakers to vote for her agreement. Some members of parliament are looking to oust her, amping up the risk of a chaotic no-deal Brexit.
Here’s an overview of some of the key reasons you need to care about Brexit:
Political influence
American and British politicians like to highlight the “special relationship” that both sides have. The nations are close allies and the UK has long acted as a mouthpiece for American interests in the EU.
The UK’s exit from the bloc gives the country far less influence over the remaining 27 EU nations and makes it a less valuable ally for the US, noted Lichfield.
Brexit could also create a less stable Europe: a messy Brexit could lead to a range of geopolitical risks, and a smooth Brexit could embolden other nations to seriously consider whether they might want to leave and seek the same preferential terms.
Business, investment and trade ties
The UK and US are firmly intertwined when it comes to trade and business investment.
The UK is the fourth largest importer of US goods and services in the world, behind only Canada, Mexico and China. Trade with the country is worth about $230bn (£179bn) annually, nearly 5% of total US trade per year, according to US government statistics.
But more importantly, the UK is by far the largest investor in the US with $615bn (£479bn) in foreign direct investment at the end of 2017, according to the US-based Organization for International Investment. That money is used by British firms to build facilities, purchase equipment and hire American workers. British companies currently employ roughly 1.1 million Americans, according to research backed by the American Chamber of Commerce to the European Union.
On the flip side, countless American companies, including Coca-Cola (KO), Facebook (FB) and McDonald’s (MCD), have massive operations in the UK. They depend on the UK market, and also depend on the UK’s seamless trade ties with the EU for their European sales and profits.
Economists widely expect that Brexit – whether there’s a deal or not – will damage many of those trade ties with the EU after the planned transition period runs out at the end of 2020. Brexit is expected to leave the UK worse off, threatening consumer sentiment and spending power.
“Brexit will impact the pool of talent you can hire from [because it will restrict EU immigration] … it will affect consumer sentiment in the market … it will affect the swiftness [of] trade,” warned Lichfield.
Big banks
America’s biggest banks have large bases in the UK, using the country as a gateway for access to the EU. But they have been moving jobs and assets over to the continent as May’s Brexit plan has generally overlooked the needs of this industry.
Current EU passporting rules allow banks in any EU country to serve customers across the bloc, while banks outside the region have severely limited access.
“The UK will lose so-called passporting rights for financial services when it leaves the EU,” warned Iana Dreyer, founder and director of Borderlex, a website specialising in European trade analysis.
The Bank of England has forecast that about 5,000 financial jobs will move from Britain to the EU by the time Britain leaves the EU, with more leaving later on, depending on the new trade agreement.
“[American] banks are based [in the UK] for a reason. It’s not just language and a shared work culture,” said Lichfield. “It’s also their unfettered access to Europe, and that will go, even in [May’s] supposedly benign Brexit scenario.”
Travel troubles?
On the one hand, travel to the UK has become cheaper for tourists as the UK pound (GBPUSD=X) has dropped by about 15% against the US dollar since the 2016 Brexit referendum. This led to a record year in 2017 for international tourist visits and spending, according to VisitBritain, the country’s national tourism agency.
On the other hand, there’s the risk that tourists may not be able to take advantage of the cheap currency in the event of a no-deal Brexit as their flights may be grounded.
The UK’s exit threatens to ground flights between the UK and the EU, along with flights between the UK and 17 other nations, including the US, Canada, Morocco and Israel.
The UK government laid bare in September how a no-deal Brexit would eject it from the EU’s international flight agreements and regulations.
The government is in the midst of trying to fix this situation and is renegotiating air service agreements with the 17 countries outside the EU. These countries have air service agreements with the EU, but after Brexit, the UK won’t be part of these deals.
“The UK is working closely with these countries to agree replacement, bilateral arrangements designed to come into force as soon as the EU-negotiated agreements cease to apply to the UK,” the government said, noting it had finalised some agreements and was working on the rest. A spokesperson declined to specify to Yahoo Finance UK which countries had agreed to new deals and which ones were in progress.
