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The ‘Brexit’ Effect

U.S. companies and banks doing business abroad should be prepared.

By Michael Salerno

As the economy recovered from the financial crisis of 2008, many U.S. companies expanded to the United Kingdom as a way to reach the European Union market, either by exporting, using a U.K. distributor or setting up operations there. Such expansion was a relatively easy move, thanks to a common language and similar banking and legal systems.

But then came Brexit — the U.K.’s 2016 referendum by popular vote to exit the EU, and things got complicated. Now many of these same U.S. companies are trying to read the tea leaves about Brexit’s final outcome. The deadline for the U.K. to negotiate a withdrawal agreement was March 29, after which time the U.K. must leave the EU, whether or not an agreement had been finalized. U.K. Prime Minister Theresa May has negotiated a deal with EU leaders but the vote to accept the deal has failed three times, and the Brexit has been delayed twice. The new deadline is Oct. 31, but the U.K. could leave the EU earlier. The U.K. faces the possibility of leaving June 1 if the House of Commons can ratify the deal in May to avoid European Parliament elections. A no-deal exit would take place if elections to the European Parliament don’t take place.

Current and Future Consequences for Businesses

No-deal Brexit would mean that EU law would no longer apply to the U.K., including the passing of individuals across borders. It would likely have wide-ranging, negative impacts on the U.K. including rising unemployment, shrinking GDP and deprecating currency. It would also disrupt the global economy and affect businesses, supply chains and healthcare across the EU. Banking and financial services would feel the most impact, but other service-related businesses — such as accounting, software and engineering, to name a few — would also be affected.

U.S. companies operating in the U.K. who provide products and services to other EU countries would have to contend with two sets of rules, regulations and possibly tariffs to export to the U.K. and then to export to EU countries. If a business holds Euro-denominated bank accounts at a U.K.-based bank, there may be operational issues depending on the bank’s Brexit strategy. Additionally, if U.S. businesses employ individuals in the U.K. who are from other EU countries, those individuals may not be able to work in the U.K. anymore.

Not much would change until January 2021 when the grace period ends if the negotiated agreement is approved by parliament. The final terms of Brexit could still raise issues related to contracts, intellectual property, employment and tariffs for U.S. companies with operations in the U.K. These companies may then have to look for new relationships or even relocate to another EU country. The uncertainty surrounding Brexit is slowing or postponing businesses’ expansion and additional investment in the U.K. Many are waiting to see what happens before making any significant decisions and are evaluating multiple scenarios based on different outcomes.

Impact on Community and Regional Banks

Not only will Brexit impact U.S. companies doing business in the U.K., it will impact community and regional banks in the U.S. To prepare for Brexit, deal or no deal, banks should identify if they have any clients with exposure to the U.K. and how each scenario could affect their clients’ bottom lines. When evaluating clients who may be impacted, it’s important to look at those who have direct sales in the U.K., use a U.K. distributor or use the U.K. as a sales arm for access to other EU countries. These clients may see an impact on their current sales, affecting their cash flow.

How to Prepare

Deal or no deal, U.S. companies doing business in the U.K. and banks with clients who do business in the U.K. need to prepare for Brexit in whatever form it takes. For companies doing business directly with the U.K., trade agreements are under way that could substantially expand trade with the U.K. U.S. companies that rely on the U.K. as a key element in their EU strategy, however, should have plans in place for both no-deal and negotiated Brexit. Many companies have already looked at alternate strategies or have even moved their operations to another EU country, such as Ireland or Germany.

The Silver Lining

On the bright side, if significant trade barriers are erected between the U.K. and EU as a result of a no-deal exit, the U.S. could greatly benefit from expanded trade with the U.K. This potential windfall will ultimately depend on the timing and details of a possible trade agreement between the U.S. and the U.K. In addition to formulating their strategies for responding to Brexit, businesses can lobby U.S. policy makers for favorable trade terms.
While Brexit is certainly a bump in the long road to economic recovery, it does not spell doom for the global market. U.S. companies doing business in the U.K. can survive and even thrive with the right strategies in place.

Michael Salerno is First National Bank of Omaha’s lead director of global banking. For more information, visit www.fnbo.com.

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