By Megan O’Brien, finance and business editor
⏰ 7-minute read
Nearly four years after the Brexit referendum vote, the U.K. officially split from the EU on Jan. 31.
The EU and the U.K. are now in a transition period during which much will remain the same -- for everyone from residents to U.S. businesses -- as the U.K. eases into its departure.
However, the next year will have effects for companies globally as the EU and U.K. try to come to a new agreement.
As of 11 p.m. GMT on Jan. 31, Britain is legally no longer a part of the European Union (EU). After close to four years of intense debate, political turmoil and negotiations, Brexit Day officially occurred.
But … nothing feels different. Especially not for U.S. businesses.
The Brexit story may seem anticlimactic right now, but that is simply because Britain and the EU are entering into a transition period. Also referred to as the “implementation period,” this phase will last until Dec. 31, 2020 in an effort to help all parties ease into the departure and to give the U.K. and EU time to negotiate a future partnership amid this geopolitical shift.
Still, the period following Brexit Day brings a lot of questions to mind:
Who does it affect?
What does the transition entail?
How will the results of the transition period affect the global economy?
Are there steps U.S. businesses should be taking during this time?
News outlets and analysts have done their fair share of predicting what’s to come for the U.K. and global economy, while conceding that nothing is certain since talks have yet to play out. Meanwhile, in speaking with business people on the ground in the UK, the feeling is that there’s just no way to know the tenor of the outcomes.
Right now, for businesses -- especially U.S. ones -- the reaction to Brexit looks mostly like waiting, seeing and preparing for multiple scenarios.
Firstly, let’s look at who this affects from a business perspective. U.K. companies are the obvious answer. However, the post-Brexit Day transition period and the ensuing outcomes are also relevant to companies around the world that have exposure to the U.K.
“Exposure” in this case means having ties like a supply chain, location or other operational structure in the U.K. It also includes the conduction of business with the U.K. (i.e. imports/exports). Consider the more than 43,000 U.S. exporters that use the U.K. as their entry market into the EU. These businesses could feel the effects of the transition period -- whether positive or negative -- regardless of their size or location.
The period in limbo
The concept of Brexit Day is a tad oxymoronic in nature. Jan. 31 was marked as the day Britain would be leaving the EU and thereby forfeiting its participation and vote in the EU institutions. However, much of its EU membership still applies until the end of the transition period. According to the BBC, the following will remain the same until at least December:
Rules around traveling to and from the EU
Rules regarding freedom of movement, or eligibility to live and work in the UK
That’s right: Nothing much changes around trade, for now. The U.K. will still be a part of the EU customs union and single market until at least December, so it will continue trading without added charges and checks.
While still subject to most EU rules and regulations, the U.K. will start planning for its future outside the EU during the transition period. Along with trade, these discussions will address issues like security, law enforcement, manufacturing, banking and data sharing.
Nobody knows for sure how these talks will play out. Thus, many businesses are planning outcomes that affect them negatively, just in case.
The takeaway for U.S. businesses:
Much remains the same in this transition period after Brexit Day. The next year will consist of relationship-planning that could hold changes for businesses around the world. Business leaders are making plans for all types of outcomes.
The period following the official Brexit leaves much unconfirmed, since talks are still underway.
Trade transition discussions
Trade is perhaps the most significant issue that the U.K. and the EU will need to come to agreement on.
Brexit Secretary Stephen Barclay has stated that the U.K. will seek a “zero tariff, zero quota” free trade deal with the EU. This would allow for the U.K. to continue its trade relationship with the EU without barriers while leaving it free to pursue trade agreements with countries outside the EU (i.e. the U.S.).
However, the EU trading bloc has argued that this would undercut many of the EU’s regulations and any possible deal cannot go forward without a “level playing field” to ensure fairness.
The takeaway for U.S. businesses:
Again, much of U.K. trade relations is still dependent on the negotiations that will occur over the next year, since the U.K. and EU are, for the most part, in disagreement.
If the U.K. were to get a deal like its prime minister says it wants, U.S. companies would be able to trade with EU countries with few barriers and embrace the possibility of a U.S. trade deal with the U.K. that benefits them.
Formal negotiations will not begin until next month, as the EU needs sign-off on its negotiating mandate. This will leave the EU and U.K. only about eight months to formulate a new economic relationship. However, it is possible, even likely, that the complexities involved will not be solved in that timeframe.
Of course, leaders wonder what the worst-case scenario might be: If the U.K. and the EU fail to come to an agreement by the end of December, they will likely have two choices: 1) Extend the transition period. This would need to be determined by June 30, 2020. 2) Experience a “Brexit cliff edge,” which means that Britain will “crash out” of the EU without a trade agreement (also known as a “no-deal” Brexit).
The potential impact of post-Brexit life
Brexit has been international news for the past four years. It is only fitting that it will have an effect around the world as it finally unfolds.
Here’s a picture of what could happen in the year to come. Already, some U.S. companies are taking action based on Brexit developments so far -- but for the most part, it’s a waiting game.
The U.K.’s exit from the EU raises several questions about its trade future. Post-transition, will it be able to continue its trade relationship with the EU without impediment? Will it create a new trade deal with another trading powerhouse?
If the U.K. cannot come to an agreement with the EU by the end of the transition, the relationship will revert to the World Trade Organization (WTO) rules, which would entail a large change in tariffs, checks and rules.
Because of the strong potential of new tariffs and regulations on goods, companies around the world that have ties to the U.K. are preparing contingency plans to deal with the market. These plans include moves like revising supply chains and manufacturing strategies, investing in more logistical equipment, relocating hubs and making other structural changes.
Some have already enacted these plans. U.S. companies like Ford, Bank of America Merrill Lynch, JPMorgan Chase and MoneyGram have all announced plans to relocate or close locations in the U.K.
Meanwhile, global businesses are taking the opportunity to explore operations in different countries, like the Netherlands and Nordics, that have highly-educated workforces, good schools and housing.
In fact, Amsterdam is being called the “new London” with about 100 companies relocating offices to the Netherlands because of Brexit, according to the Netherlands Foreign Investment Agency (NFIA).
Some businesses are transferring part of operations to other European countries in the wake of Brexit.
Taxes & costs
Many companies with ties to the U.K. are utilizing the transition period to address possible implications to their legal and operational structures. The Wall Street Journal predicts these companies could face higher tax and administrative burdens -- as well as the cost of the effort to prepare for these changes -- should a deal not be reached.
As an example, if a U.S. business pays royalties, interest or dividends from an EU subsidiary to a recipient in another EU country, it is currently exempt from withholding tax. As a member of the EU, the UK (and U.S. countries using the UK as a gateway to the EU) enjoyed this tax relief. However, if the UK leaves the EU without a deal (or without a comprehensive one), the withholding tax will be implemented.
Uncertainty around Brexit negotiations have caused lower demand for goods and services in Britain as consumers and businesses look to delay investments and cut spending. If your U.S.-based business is doing the same, it’s clearly not alone.
Even though “freedom of movement” rules remain the same during the transition period, the U.K. has already seen a large decline in its population of EU workers. Companies are taking measures to attract and retain workers – as well as maintain the status of their remaining workers.
If non-UK staff already employed in the UK have completed the correct paperwork, they can stay there during this time. But in the case of a no-deal Brexit, any non-UK staff hired would need visas in order to start work. Thus, companies who have UK hubs continuing to hire non-UK staff should probably be considering how they would adapt to this in the event of a no-deal Brexit.
The bottom line
Companies with exposure to the U.K. need to be cognizant of the effects above while preparing for all types of outcomes of the transition-period discussions.
A SWOT analysis for multiple outcome scenarios – "no-deal,” “hard” and “soft” Brexits – could prove helpful in targeting efforts. Especially in the case of a “no-deal” Brexit, executives will want to institute contingency plans.
As these Brexit discussions pan out, we will get a better idea of the impact they hold for trade, the global economy and business as a whole – and then U.S. executives can refine their action plans.