Both the US and UK act as a fundamental and reciprocal foundation of economic growth for each other. But how will Brexit change the trade relationship between the two nations? Nick Adams, VP EMEA at Globalization Partners explains the challenges and opportunities.
The strong, historical ties between the UK and the US have endured and prospered over the years to the point that the United Kingdom is the fourth largest export destination of American goods and services and the US’ seventh largest business partner. Both nations act as a fundamental and reciprocal foundation of economic growth for each other, and mutual prosperity has long been a core objective of politicians and business leaders alike.
But, following Brexit, it is no longer business as usual, and there remains considerable uncertainty on both sides of the pond as to how Brexit – particularly in a post-pandemic economy – will change longstanding ways of doing business.
But let’s be clear, for US businesses, Brexit is about both challenges and opportunities – both issues should be high on the list of priorities for US business already trading with the UK or planning to do so in the future. Let’s start by examining some of the potential opportunities Brexit may offer US companies which see the UK as an important market, and/or view it as the ideal starting point for expansion across mainland Europe.
- Lower import costs: When the Brexit deal transition period ended on December 31, 2020, the EU’s Common External Tariff (CET) was replaced by the UK Global Tariff (UKGT), which includes a UK-applied Most Favoured Nation (MFN) tariff to apply to all countries. The list may change as trade arrangements with the EU are still underway. In addition, the number of products that are tariff-free is increasing from 27% under CET to 47% under UKGT, while the UKGT average tariff decreases to 5.7% from the CET’s 7.2%.
- Levelling the financial playing field: In the finance industry, most London-based financial institutions are losing free access to the EU market. In contrast, a number of US-based retail and investment banks already have EU ‘passporting rights’, which allow financial institutions authorised in any EU or EEA member state to trade freely in any other member state with minimal additional permitting. In practical terms, this means US banks can immediately conduct business for clients in the EU and the UK.
- Playing the long game – the UK-US trade deal: The extent to which the US stands to benefit from improved trade terms will depend on the detail of any future UK-US trade agreement, which is still in its early discussions stage. When that deal eventually arrives (most likely in several years, reportedly in 2023 or 2024), there is potential that US companies will gain significant advantages.
So, despite the uncertainties surrounding Brexit, there remains grounds for optimism that it will deliver benefits for US businesses looking at the UK as a growth market. However, in the short- and long-term, it’s important to plan around a range of pitfalls that have the potential to cause problems for the established norms of transatlantic business:
- Mergers and acquisitions: US businesses with UK corporations in their portfolios or US companies looking at UK-based acquisition opportunities may need to re-examine the specifics of the entity they want to acquire or partner with. For instance, registration for UK companies already in their portfolios might be due for an upgrade depending on whether the business is a European entity formed under EU law, a UK company with a European Economic Area (EEA) corporate officer, a UK company involved in a cross-border merger or an EEA company.
- Supply Chain: As the UK adds new international, non-EU trade agreements, US businesses with supply chains in the UK may need to quickly integrate any additional rules that apply. While a Free Trade Agreement (FTA) between the US and the UK remains a sought-after option for both parties, without it, some businesses are subject to longer lead times in each link of their supply chains. This is a result of stringent customs controls that can delay the shipment of goods between the UK and EU.
- Data protection and privacy: Following the end of the Brexit transition period, the UK went from being an EU member to a third country. To continue an uninterrupted flow of data between the EU and the UK, an adequacy decision needed to be met. The European Commission recently announced a draft decision on adequacy, concluding that the UK ensures an essential level of data protection. While transatlantic data transfers still remain a complicated issue, this paves way for a smooth EU-UK data transfer agreement post-Brexit.
- Employment: Prior to Brexit, EU nationals working in the UK for US companies were covered by the EU Settlement Scheme. Now, however, there are new conditions on immigrants moving to the UK to work for a US company, regardless of their country of origin. First and foremost, newly arrived non-UK workers require a visa, and to be eligible, they need to demonstrate their job offer comes from an approved employer sponsor.
For existing employees that wish to continue working in the UK, those who are EU, EEA or Swiss citizens employed in the UK as of the end of the transition period will be required to apply for the EU Settlement Scheme before June 30, 2021. Throughout the process, continuous verifications of the EU, EEA or Swiss job applicant’s right to work status are a must.
The UK’s new points-based immigration system is expected to limit employers’ ability to hire low-skilled or unskilled workers. In turn, this could increase hiring costs, and US companies must be prepared for the possibility of a wage uptick if they are to entice quality employees, particularly in highly competitive sectors facing talent shortages.
Brexit is uncharted territory, and those US businesses that continue to monitor the emergence of new opportunities and risks will be ideally placed to succeed in both the UK and EU now and into the future. As stakeholders everywhere look to smooth the transition, organisations that build their understanding of how it is changing this key trading ecosystem – either directly or with the help of expert advice – can plan for the future with confidence.