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BREXIT

Utah, Brexit and Chaos Theory

When I was in law school, it became popular to cite chaos theory.  The first Jurassic Park movie had come out the year before and familiarized us with the classic analogy of a butterfly flapping its wings in Peking and triggering rain in Central Park.  

Chaos theory is based on complex math, and most of us were horrible at math (which is one of the reasons we ended up in law school), but it didn’t stop us from referencing the concept in key moments, such as during a law and economics discussion that we didn’t fully understand anyway.

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It is tempting to cite something like chaos theory when the topic of Brexit comes up.  It is all so complex; why should we even bother trying to assess the risks? Case-in-point: late, last year, chairperson,  Jay Clayton of the Securities and Exchange Commission expressed concern that companies weren’t appropriately assessing and disclosing the risks that Brexit posed.  He encouraged public reporting companies to do better.

Nonetheless, most companies continued to cite only general risks, like volatility in global economic markets, exchange rates and the added compliance costs of dealing with evolving legal systems.  The reality is that there is a lot we still don’t know.

We don’t know what tariffs will be on the goods flowing back and forth between the UK and the European Union.  We don’t know how the policies of the remaining European Union will evolve without a business friendly UK in the mix.  For that matter, we don’t even know what the UK’s regulatory structure will be in areas historically overseen by the EU.  

Given this ongoing uncertainty, it can be hard to do a risk assessment for a company, let alone a broad economy like Utah’s.  However, one thing in our favor is that prognosticators have had three years to think about it. There are many perspectives to draw from in an effort to identify risks that might be worth considering.  Here are a few of those risks and how they relate to Utah.

The Global Economy

Using the stock market as a proxy, it is clear that Brexit by itself is not seen as a major risk to the global economy.  If a no-deal Brexit were something that, by itself, could lead to global recession, we would see more evidence of that fear in recent trading.  

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That’s not to say the financial markets don’t care.  Pundits have commented that as one of several items that could go the wrong way, a messy Brexit along with other factors, like disappointing recovery in other major economies in the world, could tip the scales in a very negative way.  Utah shares these risks with the rest of the nation. A general downturn would be painful, even for a state with higher growth on average than its peers. For this reason alone, we should all continue to hold out hope for a smooth transition.

Utah Exports

Interestingly, the UK is Utah’s largest trading partner, accounting for $2.3 billion (20 percent) of Utah’s exports in 2017.  However, the bulk of this is all one product: refined gold exports. It’s unclear what impact a no-deal Brexit would have on these, but as a risk factor for Utah, this one seems manageable, given it would be limited to this narrow segment.  

The export question is of course not entirely this simple (chaos theory raising its head).  Many industries have value chains that make a stopover in the UK. The UK has a respectable manufacturing sector that makes or processes things like: textiles, metals, intermediate chemicals, automobiles and aircraft.  Utah companies that are also in these value chains could see disruption that affects inventory levels and needs around the world. Those are issues that would likely be short-to-medium-term but painful if they hit your industry.

London as a Financial Center

Here is an area where chaos theory could have a hay day, given the uncertainties of shifting economic influence triggered by something like Brexit.  London has long been one of the world’s major financial centers. When the Brexit referendum passed, many wondered what it would mean for London’s role in the world as a place businesses can go for capital and deal-making.  

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Late last year, a survey came out concluding that New York had surpassed London as the top financial center in the world, with Brexit being the primary reason.  Why does this matter for Utah? For a long time, London has been a convenient launching pad into all of Europe and even Asia. International joint ventures are often headquartered there because of the sophisticated and business-friendly legal system, the access to capital and the wealth of professional services.  My firm has set up a number of them there.

Utah companies are looking more and more to foreign markets, and with London outside of the common regulatory and trading system of the European Union, accessing those markets just became a little more complicated.  There are of course other great options, but in terms of accessibility, language and, let’s face it—direct flights—London is tops.

We all know how Jurassic Park turned out.  The dinosaurs did some major damage thanks to their friend, chaos theory.  I’m optimistic that a year from now Brexit will be old news, and we’ll all be focused on the next macro-economic uncertainty but it’s difficult to predict.  Brexit, as tiresome as the ongoing debate has become, remains worthy of our ongoing attention and risk assessment.

Troy Keller is an attorney at the international law firm Dorsey & Whitney in its Salt Lake City office. He has a deep experience in M&A, corporate governance and government relations.