Unpacking Brexit: How the UK’s exit from the EU could change how Utah does international business
In a landmark vote that shocked much of the world in mid-June, Britain elected to leave the European Union—a decision no other country in the EU has ever made before. Sure, the British exit—coined Brexit—is uncharted territory for Europe, but the impact of this decision influences much more than just the EU itself. Even in Utah, companies that do business within Britain and the EU are affected.
Ultimately, what does this decision mean for Utah and those companies, and just how much will it affect trade and exports between the Beehive State and the UK?
A state of uncertainty
Derek Miller, president and CEO of World Trade Center Utah, says while there’s still a lot more dust to settle, what Utahns do know is that the decision caused a lot of market destruction and political disruptions, with prime minister David Cameron stepping down and Teresa May stepping in.
“What we don’t know is how the next two years will play out,” Miller says. “There are two different ways this could go.”
Miller says the first scenario stems from the hard feelings of other members of the EU, particularly Germany and France, who feel if the UK doesn’t want to be a part of the EU, then they don’t want the UK to be included.
“The rest of the EU will want the separation to happen more quickly and not have any benefits on the trade side for the UK,” he says. “This scenario would mean the EU just severs the UK and says, ‘You’re going your own way; go work out your own trade deals. We’re not going to let you have any of the benefit of being in the EU.’”
The second scenario is what the powers that be in the UK would like, Miller says, which is to have total control over immigration and not be under the thumb of the European Council out of Brussels, which creates commercial regulations the British must live by. However, the UK would also like a uniform set of rules by which trade is done.
“They would like to maintain that firm ground on the trade side,” Miller says. “Another option is to take the Norwegian route. Norway is not officially part of the EU, but they do get the benefit of trade relationships and trade agreements.”
Lonnie Mayne, president of InMoment, a Utah-based customer experience company with offices in the UK, says it’s definitely too early to determine how all of the nuances of Brexit will play out.
“We’re still in a state of uncertainty, and during uncertain times, emotion rules,” he says. “Consumer confidence, spending and company valuations are all down. Whether we’re experiencing the beginning of a longer-term downward trend or a momentary dip depends on how exit negotiations play out, and whether Brexit triggers other EU member exits.”
Joseph Brubaker, shareholder and international law attorney at Kirton McConkie, says Brexit will have short- and long-term effects. “The short-term effect is that the value of the British pound has decreased over the U.S. dollar. The first day it dropped 10 percent. It’s recovered some since then, but with the pound dropping, it’s more expensive for people in the UK to buy goods from Utah companies. The UK is the number one place where Utah companies send their exports, so the demand for those exports will decrease. From a legal perspective, that means there will be fewer sales of Utah goods to consumers in the UK. That could be a big change, but only time will tell how big of a change it is.”
On the other hand, Brubaker says it’s now cheaper to buy goods from the UK.
Utah companies that have sales or distribution agreements with UK companies may need to change their contracts, Brubaker says. A lot of times the UK agent has the right to sell things throughout the EU, but now the definition of EU has changed.
“The Brexit will take at least two years, and maybe up to six years,” Brubaker says. “In the first two years, not a lot of legal changes will happen. We routinely help a lot of Utah companies set up subsidiary companies in the UK, but if the goal is to sell in the EU long term, setting up in the UK might not make as much sense, unless you have lots of business just in the UK. Companies may begin looking at Germany or Ireland when considering expanding into Europe.”
A long transition
Negotiating productive exit terms will be critical in both setting the tone for future relationships and determining a specific framework, Mayne says. It will also be important for UK leaders to address the real concerns raised by the exit campaign.
“Bringing a positive lens to the process is key,” he says. “There will be many opportunities for business and political leaders to reexamine and forge more productive relationships with each other and their customers. As a global business, we are approaching Brexit as a catalyst for new opportunity, while at the same time honoring the real challenges that must be tackled.”
Over the next several years, as the UK transitions out of the EU, Brubaker believes there will be a lot of negotiation between the two entities.
“The main thing the UK will need to do is a trade deal with the EU, as well as an immigration deal,” he says. “The UK can look to Norway, or another way is to look at what the Swiss did, by taking a neutrality position. They can just enter into treaty after treaty with the EU to get what they like. Another option is to look at Turkey, which has a customs unit with EU, but that is much weaker than what Norway or the Swiss have.”
Ultimately the UK needs to find a way to be first option for U.S. companies looking to expand into Europe. Whether the path forward is forged quickly or slowly, Miller believes it will be done thoroughly.
“I do not believe this vote was an indication of the UK turning its back on the EU or the rest of world,” he says. “It’s an island nation and they recognize their economy exists only so far that it’s focused outward. This decision was an indication of Britons saying, ‘We want to be the masters of our own destiny and control the rules by which we live and trade. We don’t want a group across the channel dictating what we can and can’t do.’ They see what’s happening in other parts of Europe with immigration problems, like infiltration from radical Islamists, as well as economic and national security issues. What they’ll do is take the time they need to do this right. Markets crave stability and predictability.”
The new game
Because the UK is Utah’s largest trading partner (there were over $3 million in exports from Utah to the UK in 2015 alone), Utah companies understand the importance of keeping trade going.
“Utah companies want to continue to do trade, so we need to know what the rules are,” Miller says. “If the UK communicates and makes those rules easy to understand, trade will continue. That was the value of having the UK as part of the EU. The rules were what companies understood. I believe the UK will continue to have very strong pro-free trade rules in place, because they’re an island nation and they rely on trade for their existence. It’s to their benefit to promote free trade.”
Mayne adds the impact of trade deals will directly be affected by the tenor with which the parties approach negotiations, which will set the stage for all future discussions and agreements. “There will definitely be an added layer of consideration with more parties and agendas at play,” he says.
“It’s important that every Utah company focuses on compliance and gets a good attorney if they don’t have one already—someone who understands what the new rules will be and make sure you are living by those rules,” Miller says. “This is just the beginning of the conversation; we don’t know how it’ll all shake out. Utah companies need to pay attention.”
In addition, Utah companies need to look out for EU benefits, Brubaker says. There is a system of registered trademarks for the EU that isn’t going to apply to the UK going forward. Brubaker adds that because Utah has a large life sciences sector, if any of those organizations are doing any medicine-based trade, that will also change quite a bit.
“Right now the European Medicines Agency is based in the UK, but with the UK leaving, it’s going to move,” he says. “And if there are any mergers and acquisitions taking place with UK companies, that’s likely to change as well. UK law will take precedence over EU law.”
Because of uncertainty, Utah companies need to make sure their contracts take into consideration changes in currency. “As we go through the process of Brexit, the market will be up and down dramatically,” Brubaker says. “We need to address currency fluctuation in contracts, rather than just trust it won’t change too much.”
Miller believes that more than anything, Utah companies want Brexit to be done thoroughly and the right way. “Once the UK figures out how it’s going to move forward, we want to know, because Utah companies are in the business of doing business,” he says. “We get it. The game has changed. What’s the new game?”
Trade between Utah and the European Union in 2015
$4.3 billion in exports to the EU
Of that, $3 billion was to the UK
Utah’s top three exports to the UK are metals at $2.8 billion, computers/electronics at $44 million and chemicals at $33 million