Brexit’s Cascading Impact on Global Trade

By Hannah Kain, President and CEO, ALOM

We have all gotten used to simply hitting the “buy” button on a shopping cart and then expect our order to arrive shortly thereafter. We hardly pay any attention to the origin of the shipment, and sometimes we may be surprised to see where it comes from. Businesses and governments have been focused on how to facilitate goods crossing borders with minimal issues. But Britain leaving the European Union (EU) will be a step in the opposite direction.

It was a surprise and wake-up call when UK voters decided that the country should follow the Brexit movement and leave the EU. All over the world, business leaders are contemplating whether it is time to react or whether it is premature. The only certainty is that the outcome of the referendum inserts a level of uncertainty which historically has been bad for business and growth.

It is even uncertain how long the uncertainty itself may persist. Within the first days after the referendum, British politicians, including one of the most outspoken Brexit proponents, declared that there was no rush. In fact, the UK was not even planning to “officially” let the EU know about its intention to leave for another year or two, followed by several years of negotiations. In the meantime, the UK’s EU commissioner, Lord Hill, resigned his high-profile position as Commissioner for Financial Services, and UK members of the EU Parliament resigned their committee leaderships. Other European leaders, upset and concerned about the impact, have started pressuring the UK to get the process started.

Impact on Corporations

Consumers and businesses have come to rely on the EU being one market, albeit with different languages and cultures. 41,000 US businesses use the UK as their EU headquarters, providing a springboard to the other EU countries. Forty percent of the world’s top 250 multinational companies have their European headquarters in London, according to research by Deloitte (http://www2.deloitte.com/uk/en/pages/growth/articles/london-crowned-business-capital-of-europe.html), as do 60 percent of the 250 largest non-EU companies. These companies must rethink their strategy. It is safe to say that commercial real estate prices in London will drop. Many more companies have headquarters in other EU countries and must now plot other ways to reach the UK market.

Many factors figure in for business leaders as they contemplate locations:  Goods, money, people, market demands, regulations and data. The supply chain though the UK will be greatly impacted, as new barriers will prevent the smooth transport of goods.

Fortune 100 companies are much less likely to feel the pain. Because they generally have a presence in almost all countries, their adjustments will likely be easier to manage. Hit harder will be smaller and midsized companies trying to manage their supply chains with minimal investments. Manufacturers and anyone moving physical goods will feel the biggest impact, as the UK may require a separate in-country distribution network.

Over time, the UK’s position may affect the location of manufacturing plants. Bigger manufacturing plants rely on the ability to reach significant markets from their location. If it becomes too cumbersome to get manufactured goods into the EU from the UK, then plants in the UK may be limited to selling only to the UK market. As the manufacturing plants rely on their suppliers and they again rely on sub-tier suppliers, this may snowball through the supply chain to impact smaller suppliers and UK communities that rely on manufacturing.

Cross-Border Complexities:  Costs Go Up, Trade Goes Down

In a global economy, consumers and companies want to move goods fast and freely. However, every time goods pass a customs border, it requires paperwork for both sender, receiver and the governments involved. It also means risk of delays that may cause customers to become unhappy and take their business elsewhere. Cost go up, and trade goes down. More and more regulations in each region require increased diligence. For instance, the regulations for heavy metals vary from the U.S. to the EU to China. Each entity has different definitions and restrictions. However, for all practical purposes, EU is a uniform zone with one set of regulations.

Privacy is another area that may need to be specifically negotiated when working in the UK or with UK-based suppliers. U.S. companies have faced uncertainty about data, because the European Court of Justice invalidated the Safe Harbor regulation between the EU and the U.S in October 2015. The Safe Harbor regulation allowed U.S. companies to store data about EU citizens in their systems, if they had certain privacy regulations in place. Now, it’s unclear whether U.S. companies can continue to store this data, and this uncertainty has created anxiety among companies that employ EU workers or sell into EU market. These are the type of discussions that will now require one more level of complexity as the UK will have to conduct its own negotiations.

U.S. manufacturers faced headwinds the last year as the increasing strength of the dollar made their products too expensive overseas. With the falling GBP British pound after the Brexit vote, the UK market becomes less favorable. Add to that an expected sluggish economy in the UK, and the market becomes less attractive. Granted, the UK is only the seventh largest trading partner for the U.S., but still the impact is expected to be about ¼ of a percent less growth in the U.S. This is not trivial. Hypothetically, over the next 15 years, our economy may have grown 4 percent less due to Brexit and its impact on employment and available funds. That 4 percent represents funds that could have otherwise been used on something worthwhile, such as education, medical research or helping economically disadvantaged communities.

How soon will the UK situation be resolved? At the moment, nobody knows. But the TTIP (Transatlantic Trade and Investment Partnership) has been negotiated between EU and U.S. since 2013 and will remain in place for some time. Trade and investment regulations are complex matters with wide-ranging impact on other areas, such as taxes, intellectual property, investment protection, banking regulations, labor rights, consumer protection as well as industry specific issues.

Although it’s hard to predict what will happen, the fact is we may be facing ten years of uncertainty and negotiations – all of which could be devastating to smaller and midsized companies relying on the UK as their primary export market. As we head into the uncertainty, it’s a good idea to be proactive on this matter and start contingency planning.

Hannah Kain-Headshot

 

Hannah Kain is President and CEO, ALOM, a global leader in supply chain management services and solutions, headquartered in Fremont, CA with offices across the U.S. and in Hong Kong, and 15 affiliated facilities around the world.

 

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