UK Divorcing the EU: Potential Side Effects for the United States

If all goes as planned, March 29, 2019, will go down in history as the day the UK divorced the EU, this despite the UK parliament overwhelmingly rejecting the Brexit deal agreed on November 14, 2018, between Brussels and UK Prime Minister Theresa May. In a drawn out, tightly coordinated exit process, dire consequences in terms of international trade, financial, and even tourism flows can be mitigated. But, what if instead Brexit triggers a domino effect on the global economy because either there is a “no-deal Brexit”—the United Kingdom exits the EU without an official withdrawal agreement—or Brexit moves forward but later than planned. Today we highlight a few examples of consequences for the United States, traditionally one of the United Kingdom’s strongest allies and economic partners.

• Currency valuation. The day following the announcement of the EU referendum results in 2016, the Dow Jones Industrial Average fell by 3.4 percent, the euro fell to $1.11, and the pound plummeted as the dollar strengthened. Fast forward to Brexit with similar strengthening of the US dollar and the US trade balance shifts under the weight of higher import, lower export demand. The United Kingdom is the fifth-largest export market for US goods and leading source of US imports from Europe.
• UK subsidiaries of US businesses. Not only is the United Kingdom the top country for US total assets of majority-owned affiliates, according to the US Bureau of Economic Analysis, but the valuation of those assets and revenue streams thereof, not to mention stock and other investments, could be hurt by currency fluctuations and transaction costs.
• “Open skies” for travelers. The US and UK have penned a post-Brexit agreement for flights between the countries outside the EU-US Open Skies agreement, but what about tourism flows in general? While in 2016 the United Kingdom was the second most popular foreign destination for Americans, Americans may find the United Kingdom an even costlier travel destination depending, again, on trends in the dollar-pound exchange rate following Brexit.
• Strategic trade and regulatory relationships.The US will lose the benefits of the United Kingdom as a doorway to the EU, especially if US-based companies have home-based their European supply chains, for example, out of the United Kingdom. Companies will also need to evaluate separately sector-specific rules and and regulations unique to the United Kingdom and the EU going forward.