Big Ben in London with double decker busses driving by

A Post-Brexit Investment Primer

November 2016

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There was a time when businesses eager to expand into Europe planted their flag first in the United Kingdom. Aside from sophisticated English accents, the UK offered a welcoming logistical and regulatory environment and automatic access to the European Union’s 500 million people. Last year, for example, Britain accounted for $600 billion of the $2.9 trillion in direct investment in the EU coming from the United States.

But now that the UK has decided to leave the EU, foreign businesses will have to plan for a new set of rules. And those rules will depend largely on what British Prime Minister Theresa May is willing to trade for the right to control immigration – a deciding factor for most “Leave” voters in June’s Brexit referendum. Rather than falling neatly into the Norway or Switzerland models for non-member engagement with the EU, whatever is negotiated will most likely be designed specifically for Britain.

The Japanese government recently released an open letter listing Brexit’s potential consequences and urging the British and EU authorities to proceed slowly and carefully, so that businesses can adjust to coming changes. In fact, while many precise details of a UK exit deal are yet to be determined, we can already discern the general contours of the post-Brexit investment environment.

For starters, manufacturers’ investment calculus probably will not change in the near term. Firms that were planning to open new plants in the UK to capitalize on its educated workforce and supply-chain infrastructure will likely move ahead with little trouble.

The UK’s tariff-free access to Europe has long anchored its interests in the European project, despite British skepticism about deeper integration and a “United States of Europe.” Over time, post-Brexit manufacturers in the UK may encounter cumbersome new rules for exports to the rest of Europe, and they may even rethink long-term expansion projects; but new non-tariff barriers are not an immediate problem, and the EU is unlikely to go so far as to impose actual tariffs on goods from the UK.

The situation is more complicated for services, which are not fully covered by the EU’s single market, because national governments have retained the right to issue licenses for architects, doctors, and other credentialed professions. Thus, only about one-fifth of all trade within Europe is in services, and the bulk of that is in information and communications technology (ICT).

Service businesses that need to hire English speakers should consider the fact that only 38% of all Europeans claim to speak the language. And not all English is created equal. Regardless of how many foreigners learn English, services firms will still have the most suitable labor pool in Britain, and their expansion plans will likely favor the UK, too.

The exception is financial services. Under the current passporting system, European banks, insurers, and fund managers can sell their products anywhere in the EU. As a result, the City of London has become the largest agglomeration of financial expertise in Europe – if not the world. But if financial firms lose their passporting privileges and their clients cannot easily access Europe from Britain, bankers will seek new office space in Amsterdam, Paris, or Frankfurt, which will likely welcome them with streamlined licensing procedures and tax breaks.

As for young technology firms, especially startups, planning an expansion is trickier. While the UK has world-renowned universities and a vibrant culture of research and development, it is impossible to predict whether the British government will make up for lost EU grants for startups.

Many ICT firms benefit from British intellectual-property laws, but they need not maintain a physical presence in the UK to write these protections into their contracts. Meanwhile, Germany is making a big push to lure new startups, and could come to be seen as an attractive alternative.

Larger technology companies will no longer have the UK as an advocate for light-touch regulation within the EU. Now that these companies will have to work with the European Commission directly, they are probably thinking that creating more jobs within the EU may make it easier to secure more favorable tax treatment.

An even thornier issue than taxation is data protection. If the UK diverges from the EU and enters into an arrangement similar to the EU-US Privacy Shield – which allows American firms to store private European data in the US if they commit to certain cyber-security standards – this will add another layer of complexity and uncertainty for any business.

For pharmaceutical and health-care companies, new rules governing travel and residency could disrupt scientific research; and the European Medicines Agency, which oversees drug safety, will likely leave London, further muddying the existing system for bringing new products to market in the EU.

As the current set of rules are revised and renegotiated in the coming months and years, businesses’ investment decisions across all sectors will become more complicated. British authorities will strive to keep bankers, scientists, and others in the UK; but, in the face of so much uncertainty, any new hurdle could change the outcome. Looking further ahead, it’s hard to find any sector where the balance for fresh investment tips toward Britain.

 

This article was written by Christopher Smart from Project Syndicate and was legally licensed through the NewsCred publisher network.

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