By: Alan Sasserath and George Batas
Brexit has officially happened: as of January 31, 2020, the U.K. is no longer a member of the European Union (EU). To many Americans, Brexit may seem like a distant event “across the pond” of no significance to their world, but there are several important ramifications and opportunities for U.S. businesses.
What is Brexit? Brexit is the abbreviation for a British exit from the EU. The EU is an economic and political set of treaties existing between 28 European countries allowing, among other things, free trade and free movement of people between member countries. In June 2016, after a public referendum in the U.K. during which 17.4 million people (or 52% of the population) voted to leave, the process for exiting the EU, or Brexit, began. For many British nationals, the decision to leave came from the belief that the freedom to negotiate their own trade deals with countries would eventually allow access to more wealth and opportunities for British citizens and businesses.
From January 31 through December 31, 2020, the U.K. will be in a transition period, during which they will negotiate a new trade agreement with the EU, as well as with other countries around the world who have no existing EU deals. One of those countries is expected to be the U.S., with both sides stating such a trade deal could be negotiated simultaneously with the deal being discussed between the U.K. and the EU.
For U.S. businesses, this means that during the transition period, the U.K. must obey EU rules and trade regulations; however, they are now allowed to hold formal trade negotiations with countries such as the U.S. and Australia for both goods and services. Any new trade agreements would start at the end of the 2020 transition period, and although the U.K. seeks to remain aligned with EU regulations in such areas as the motor vehicle and chemical industries, their government states that they are open to modification if it is in the best economic interests of the country to do so – for instance, to reach a new trade deal with the U.S.
Many U.S. economic experts believe that Britain’s departure from the EU creates a host of opportunities for U.S. businesses, as well as a chance to deepen historically important economic ties between the U.S. and U.K. Although the two English-speaking countries already have one of the strongest economic partnerships in the world – exceeding a total annual trade revenue of $260 billion in 2019 – heavy EU regulations over the past few decades greatly inhibited the flow of trade in financial services, the telecommunications sector, the motor vehicles industry and in professional services. Furthermore, under EU regulations the U.S. faced a steep 11% tariff for agricultural exports. The U.S. is the world’s largest food exporter and the most efficient producer of food in the world. The U.K.’s exit from the EU presents a great opportunity for American businesses in the food export industry. As two of the most technologically and medically innovative countries in the world, huge opportunities are expected to open up for U.S. and U.K. businesses in these industries as well.
Other U.S. experts believe that Brexit heralds the end of multilateral economic growth, with many countries coming together to chart a common economic course, and that nationalism and bilateral trade agreements will become more common. For U.S. business owners interested in expanding overseas, this will mean carefully weighing the pros and cons of where to set up bases of operation in order to best take advantage of specific markets.
For U.S. businesses post-Brexit, a powerful U.S.–U.K. pact which eliminates or greatly reduces most tariffs, expands market access and writes new rules for digital trade could decrease costs and compliance burdens for businesses in almost every industry while also leading to billions in investment on both sides of the Atlantic. For American businesses already operating in the U.K. and concerned about less access to EU markets, such benefits are expected to help offset any potential economic consequences. An alternate suggestion would be to maintain operations in the U.K. while also expanding to another country within the E.U.
Please see our ongoing series of articles discussing the merits of various countries as a base of operations overseas, the first of which, Ireland, can be found here: http://bit.ly/2v46VC1.
Rarely does the U.S. have the chance to create a trade deal with a country so deeply alike to our own. As the world’s fifth-largest economy, the U.K.’s exit from the EU presents both opportunities and challenges for U.S. business owners.
If you are interested in additional information regarding Brexit and international tax implications, or if you are a business owner operating in the U.K. or the EU, please contact our team to learn more.