Brexit Could Shake Up American Business in Europe

As Britain's exit from the European Union approaches, with little progress being made, we are soon to reach the point of no return. In less than six months Britain is due to leave the Union, of which it has been a member since 1973.

But why should this matter to those west of the Atlantic?

First of all, nowhere have U.S. companies invested as much money as in the UK (other than the Netherlands).

Ford produces cars in the UK for sale to Europe. JP Morgan, Citi, and most U.S. banks are based in London to serve the needs of clients across the continent. American companies export billions of dollars worth of equipment to the UK, especially in the areas of heavy machinery, pharmaceuticals, and aviation, much of which is to service the wider European market. Simply put, the UK has become a base for many U.S. corporations as an anglophile country with direct access to the largest market on the globe: the EU. Billions of dollars of American investments are dependent on the UK's access to this market.

In order to grasp Brexit, it might help to consider an example closer to home. Let's say Louisiana decided to part company with the rest of the United States.

On the one hand, The Bayou state could technically leave but remain close to the U.S. in practice. By following all the same regulations, and paying in some taxes, the state would continue to enjoy access to lucrative American market. Something along the lines of Puerto Rico. Not America but the same as America.

Alternatively, Louisiana could go for a clean break. The state could enforce its own rules and forge its own path, but without the ability to trade freely with its nearest neighbor. Companies in the state would no longer be subject to FDA supervision, for instance. That would mean less regulations and lower costs but a potential reduction in standards over time. Would the United States allow tariff-free import of food from Louisiana? Unless there was something given back in return, the likely answer is no.

So which path is better?

That question is at the very heart of the Brexit debate in the UK right now.

For many, especially business owners, the former is not only the right answer but the only one. The European Union is the largest market place in the world. Britain enjoys unfettered access to Europe and wields a great deal of influence there. To continue to enjoy the free market of Europe, the United Kingdom must continue to follow that market's rules. Life would stay much the same in the UK as it is now, but crucially, the exiting British would no longer have a seat at the European decision making table. Considering almost half (44 percent) of UK trade is with its European neighbors, it is no surprise this argument is so popular.

However, to the original architects of Brexit, this option amounts to treason.

The financial and economic implications are irrelevant. The goal is to extract the country from the EU entirely. If the price of free trade is to allow European courts jurisdiction over trade disputes, or for British companies to follow rules set by foreign legislators, they would rather take their losses and move on. Almost every independent observer has admitted this route would cause economic and financial harm to citizens, businesses, and the nation as a whole. However, for the predominantly wealthy instigators of this divorce, this is a price worth paying for what they call “taking back control.”

Neither option has a majority of support in Britain, and almost every suggestion made by the British so far is unpalatable to the EU. The EU cannot, nor would want to, allow a member to leave while continuing to enjoy the benefits of membership. Allowing the benefits of membership without the responsibilities is a fast track to disintegration. If the U.S. allowed Louisiana to leave, to play by a different set of rules, but continue to enjoy the benefits of the Union, it would not take long for other states to follow suit.

So where do we go from here?

In reality there are a half dozen possible outcomes, of varying consequence and likelihood. These range from the about face of no Brexit or a comprehensive deal that closely mirrors the existing relationship at one end, to an extreme divorce or no-deal Brexit at the other end.

Of all the outcomes, it is the no-deal scenario that should be working its way into projections and plans in the United States. Up until recently this was considered to have only the remotest of chances. Now, the likelihood is growing by the week. It would mean no agreement on trade, no extended transition. This is the disorderly, abrupt exit of the UK from the EU with no deal in place. Overnight this would cause grounded flights, voided financial contracts, and chaos at ports. The UK government has advised pharmaceutical companies to stockpile medicines, and shops are being warned about food shortages. As nightmarish as this sounds, it would be the default scenario in the case of no deal being agreed.

For a country so important to U.S. business, receiving one of every eight dollars invested abroad by Americans, and such a vital gateway for U.S. companies, this no-deal Brexit is bad news. Supporters would tell you that the pain might be worth it in the long run. But that is an easy thing to say when it is somebody else's money on the table. American businesses and individuals with money invested in this historically close partner should pay close attention. The next six months will be vital.

Liam P. Browne is an economist by education and a financial consultant by trade. He is a specialist in derivatives contracts, currently working in London and splitting his time between there and Mexico City. Liam studied in Newport, Rhode Island, as well as in Ireland and Belgium. He graduated cum laude from The Katholieke Universiteit Leuven in 2011 as a Master of Business Economics. He is a self-professed expert on all matters EU; especially how its workings impact financial markets and economies. Any questions or requests can be sent to @EUderiv on Twitter for an (unaffiliated) answer or discussion. To read more of his reports — Click Here Now.