State of Brexit: Five Things You Should Know Now

By Katie Davies, VP International Solution Development, Radius

Brexit will have a profound impact on the UK. Years before it takes effect, it’s already influencing Britain’s socioeconomic, political and business climate. Here are five important developments you need to follow if you do business in the UK or with UK-based businesses.

1. Lower British Pound Value and Bank Changes

The pound is the worst-performing currency in the world this year, and has lost almost a fifth of its value against dollar since the referendum passed. (An unrelated "flash crash" that made the currency drop nearly six percent in two minutes is said to be the result of a trading glitch.)

The pound has fallen amid investor worries about a "hard Brexit" that would cause lower growth and a loss of investment at a time when Britain’s current account deficit is at a record high. Some analysts predict that the pound will fall further this year as Brexit plans materialize. One researcher said the pound is “starting to act like an emerging market currency.”

US ratings agency Standard & Poor's, which lowered the currency’s rating from AAA to AA immediately following the Brexit vote, has warned that the pound may lose its international reserve status and could be ejected from the International Monetary Fund’s elite basket of reserve currencies unless it negotiates full access to European Union (EU) markets.

As many analysts have noted, however, there are benefits to a devalued currency, and they go beyond merely promoting tourism. Greg Ip of The Wall Street Journal explained in an article last month that a lower sterling will serve to increase UK exports and decrease imports, which will in turn “help narrow the trade component of the current-account deficit.” It also will increase the value of UK investments outside the UK. Ip adds that “by reassuring foreign investors that future appreciation is more likely, a cheap pound eases the financing of the deficit.” Conservative MP Philip Hollobone even called the falling pound “a massive boost to international competitiveness” for the UK.

For banks, Brexit could put an end to "passporting" agreements, which allow those with operations in the UK — including foreign banks — to provide services across the EU. Those banks without existing legal presences in (non-UK) EU member states would need to establish a subsidiary outside the UK to remain in the single market. Depending on the outcome of negotiations, some banks in this situation may decide to move operations out of the UK, potentially weakening London’s position as a global financial capital.

UK banks and government officials are of course acutely aware of this possibility. A Bloomberg.com article last week points out that the finance industry contributes about 10 percent to Britain’s GDP. Bloomberg quotes UK trade secretary Mark Garnier as saying that the UK is seeking a happy medium for UK financial institutions post-Brexit: “What we are not trying to do is fit into an existing box. We are trying to create a new model.”

Some have called for “equivalence,” which would allow limited, revocable access to the single market. Garnier eschews this as not “good enough” and, according to Bloomberg, envisions that negotiations will lead to “a better version of equivalence that might work well for London-based banks.”

2. Tougher Immigration Rules

A tougher stance on immigration is a focal point for Brexit supporters, who believe foreign workers throw natives out of work and put pressure on wages. This is debatable. A report by London School of Economics’ Centre for Economic Performance (CEP), for example, found that areas in the UK with large increases in EU immigration did not suffer more from job losses or lower pay than other areas. Wages did drop overall, but that was due to the 2008 global financial crisis and a weak recovery, not to immigration, the report said.

Over the past decade, migration from the EU has averaged 100,000, though totals have been higher in recent years. There are now about 3.3 million EU nationals living in the UK, 2 million of whom are employed.

Certainly, the Brexit referendum outcome speaks to the desire of many in the UK to more strictly control the nation’s borders. Teresa May underscored this point last month, saying, “We have voted to leave the European Union and become a fully independent, sovereign country. We will do what independent, sovereign countries do. We will decide for ourselves how we control immigration.”

In the short term, immigration rules will remain in place, including rules for non-UK citizens currently in the UK, for those going to the UK looking for permanent work and for those planning expat assignments. In the long term, UK immigration rules will almost certainly tighten. Multinationals will need to keep apprised of changing visa and work permit requirements. It’s important to note that those requirements are industry-specific. UK lawmakers will almost certainly want to prevent a “brain drain” that might result from overly rigid immigration rules in critical, robust areas of the UK economy like technology, education and medicine.

3. Trade Deal Options

One path the UK could follow would be to join Norway, Iceland, and Liechtenstein in the European Economic Area Agreement (EEA), which allows non-EU members to freely move “goods, capital, services, and persons” throughout the EU as a single market. EEA countries must comply with all EU economic rules, but because they are not EU members, they have no say in the rules’ formulation. It is unlikely that this model will be acceptable, given that the UK voted to leave the EU to get away from EU rules.

It’s more likely that the UK will negotiate its own free trade agreement with the EU. A drawback would be probable tariffs on goods. Customs duties alone could add between 4% and 15% to the costs of exports. An even bigger concern is regulation on services, which make up 80% of the British economy.

The British government has said that 3 million jobs are linked to trade with the EU. The EU also has 53 free trade deals with other nations that the UK will probably lose.

Britain could also negotiate trade deals as a member of the World Trade Organization (WTO), but they would have to be approved by the other 163 members and would require tariffs on cars, pharmaceuticals and agricultural products. Like most trade agreements, they would not cover services.

Any finalized trade deals are years away, as the country can’t start negotiating until it has triggered Article 50, and trade deals can’t be implemented until the UK has formally left the EU.

That said, The Financial Times recently reported that UK ministers revealed “that a transitional trade deal was likely to be a key part of Brexit negotiations that begin next year.” Here again, UK leaders in both business and government fully understand the stakes of the UK-EU trade-deal negotiations, and aren’t likely to take a hard line that would disrupt one of the world’s most robust economies. The Times quotes one government official as saying of trade deals: “We are working to deliver the best possible exit from the European Union and it is completely wrong to suggest we have ruled in or out transitional arrangements.”

4. Data Protection Concerns

After Brexit, the flow of EU personal data to the UK will only be permissible if the European Commission deems its protections adequate. So far, the commission has only found 11 countries up to its standards.

In the meantime, EU laws are becoming stricter. The General Data Protection Regulation (GDPR), which will apply to all member states starting in May 2018, includes mandatory data breach requirements, the right to be forgotten and increased penalties for violations. The new regulation will likely come into effect while the UK is still an EU member. That should ease the transition and enable the country to replace EU rules with similar domestic legislation after Brexit. Motivation to do so is strong; the GDPR will apply to all UK companies that offer goods or services in the EU. As my colleague Stuart Buglass writes, “Given that the UK will undoubtedly want to match the provisions of the GDPR, UK-established businesses should continue their GDPR readiness programs.”

5. A Legal Challenge That Could Throw a Wrench in the Works

Brexit opponents claim the UK Parliament should have a say in the break-up negotiations, which will set the stage for the future. A case is currently pending.

The suit revolves around whether the government has the right to trigger Article 50, the formal agreement-ending process, without prior approval from Parliament. The case will likely be referred to the Supreme Court, which is expected to make a decision by the end of the year.

If the challenge prevails, anti-Brexit legislators could try to create a less restrictive immigration policy and stronger ties to the EU.

Whatever the outcome of the case — and indeed of any of the issues discussed here — it’s worth remembering that even in the face of Brexit-related uncertainties, the UK remains a popular destination for multinationals, particularly US-based companies whose leaders feel at home in a compatible legal, cultural and linguistic environment and are happy to take advantage of the UK’s educated workforce and favorable corporate tax rates. These advantages aren’t going away. In fact, at the time of going to press there are new suggestions that the EU is moving to a more prescriptive pan-European corporate tax regime, or Common Consolidated Corporate Tax Base (CCCTB). If such a move happens it will provide further opportunity for the UK to reposition itself as a desirable corporate tax location for businesses.

Brexit will inevitably bring challenges — such as those related to immigration requirements and trade with the EU — but there are likely to be a similar number of advantages that come with breaking from Brussels. (The following Wall Street Journal article speaks to this: “Brexit May Make UK More Attractive to Multinationals After EU’s Apple Ruling.”) Global businesses need to maintain a balanced view of the UK’s evolving relationship with the EU, and stand ready to take advantage of opportunities while many competitors simply stand and wait.

For more information, view Radius' "Impact of Brexit" SlideShare.