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Charting the UK Referendum’s Transatlantic Effect
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Charting the UK Referendum’s
Transatlantic Effect
By Nick Petrillo, Sarah Turk and Darryle Ulama
June 2016
The United Kingdom’s recent vote to leave the European Union
casts uncertainty into the future of the international economy
The depreciation
of the pound and
the strength of
the dollar will
negatively impact
US exporters
The historic referendum in the United
Kingdom continues to make headlines
around the world, sending shockwaves
throughout global financial markets and
destabilizing the country’s internal politics.
David Cameron’s Prime Minister seat
and Britain’s credit rating are just some
of the casualties of “Brexit,” and both the
Conservative Party and Labour Party
are facing crises in leadership. The small
multinational state of 65.0 million people
now faces a policy vacuum that will have
far-reaching implications, including the
potential for both Scotland and Northern
Ireland to hold their own referendums and
possibly separate from Britain. Although
the decision to leave the European Union is
nonbinding, EU officials are now pushing
for a speedy divorce with their long-
reluctant neighbor across the Channel.
US Trade
Uncertainty surrounds Brexit’s impact
on US-UK trade, and the proposed
Transatlantic Trade and Investment
Partnership (TTIP) is now in limbo. In
the short term, the depreciation of the
pound and the strength of the dollar will
negatively impact US exporters, which
have already suffered from the EU’s
economic malaise. In 2015, the United
States exported $56.1 bn worth of goods to
the United Kingdom, with machinery
and transport equipment claiming the
largest share. For example, IBISWorld
estimates that the United Kingdom
claims 7.1% of total exports in the US
Aircraft, Engine and Parts Manufacturing
industry. In nonmerchandise trade,
financial services, intellectual property
and telecommunication are major services
exporters to the United Kingdom.
US investment
US companies have long viewed the
United Kingdom as the gateway into
the broader European market, and US
investments into the United Kingdom are
significant. In 2014, total US investments
into the United Kingdom was valued at
$588.0 billion, according to the Bureau of
Economic Analysis. A little more than a
quarter of this portfolio is in finance and
insurance, 8.0% in manufacturing and
5.0% in information. Major operators in
the Investment Banking and Securities
Dealing industry, including Goldman
Sachs and JPMorgan Chase, which base
their European business in the United
Kingdom, may need to relocate at least
a portion of their operations to EU
financial capitals such as Paris. Pending
negotiations, US manufacturers that
operate in the United Kingdom may face
tariffs and duties when transporting
goods to EU countries, which could
2. WWW.IBISWORLD.COM June 2016 2
Charting the UK Referendum’s Transatlantic Effect
discourage manufacturers from investing
in UK facilities.
Global investment
Although Britain’s exit decision may not
impact previously scheduled foreign
infrastructure investments, its planned
restructuring may make investment in the
region less attractive to potential foreign
suitors. A 2015 partnership between
Prime Minister Cameron and Chinese
President Xi Jinping secured an estimated
£30.0 billion in the form of infrastructure
investment on behalf of several key Chinese
manufacturers. These deals, which include
projects ranging from the construction of
200 electric commuter buses, investments
in zero-emission vehicles for London’s
taxi fleet (Global Car and Automobile
Manufacturing) and the construction of a
new nuclear power plant in Somerset, had
initially appeared to be secured and ready
to commence over the next five years.
However, heightened uncertainty
surrounding the United Kingdom’s
economic stature in a post-EU economy
may threaten these and future partnerships
between nations. Although the United
Kingdom has yet to renegotiate trade terms
with its European neighbors, the likelihood
of restructured trade agreements, new
border protocols and additional bureaucracy
will make it increasingly difficult for
capital to be freely moved from China and
elsewhere across the globe, particularly if
goods must first flow through European
Union nations prior to their arrival in the
United Kingdom. Projected added costs
and delays associated with the change in
policy may deter the global economy from
pursuing infrastructure projects of the same
scope and frequency as in prior years.
EU Trade
Brexit will likely have long-term
ramifications for the trading of goods and
Agriculture 0.2% 11.2%
Automotive 0.2% 14.9%
Chemicals 0.3% 9.5%
Clothing 0.0% 12.4%
Electronic Data
Processing Office Equipment
0.0% 14.5%
Food 0.1% 11.5%
Fuels and Mining 0.3% 8.8%
Iron and Steel 0.0% 5.8%
Integrated Circuits Electronic Components 0.0% 8.0%
Machinery Transport Equipment 0.7% 12.6%
Manufacturers 1.4% 11.3%
Office Telecommunications Equipment 0.1% 12.3%
Pharmaceuticals 0.1% 11.5%
Textiles 0.0% 8.9%
Transportation Equipment 0.3% 14.5%
SOURCE: WORLD TRADE ORGANIZATION
International Trade UK % Share of Total
EU ImportsType of Product
UK % Share of Total
EU Exports
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Charting the UK Referendum’s Transatlantic Effect
services within the European Union and the
global economy. According to data from the
UK Office of National Statistics (ONC), the
United Kingdom derives 43.7% and 53.1%
of its total exports and imports (including
both goods and services), respectively, from
trading with EU nations. However, Brexit
will mostly likely dampen the UK services
sector, evidenced by the United Kingdom
exporting more than $1.3 trillion in services
to the world economy. In total, the country
accounts for 16.0% of total services exported
by the European Union as a whole.
To examine the potential effect of Brexit
on trade volumes by commodity and type
of service offered, IBISWorld has compiled
data from the World Trade Organization
(WTO). By analyzing how much of global
demand for EU exports and imports is
satisfied by the UK market, it is possible
to glean insight into the potential trade
implications of Brexit. Please view the
export and import trade data by type of
product in the table below. The United
Kingdom accounts for a significant share
of total EU exports of services to the world,
with the table below providing a detailed
breakdown of the United Kingdom’s share
of total EU exports by type of service.
In particular, the United Kingdom
accounts for a significant 39.2% and
31.0% of total EU exports of financial and
insurance services, respectively, to the world
economy. As a key provider of services,
particularly financial services, the nation
will likely focus on securing a trade deal
with the European Union and other trading
partners that protect the interests of the
services sector as a whole. Most notably,
the aftermath of Brexit may have adverse
implications for both foreign and domestic
(i.e. UK-based) companies that operate
within the services sector. Thanks to its EU
membership, some UK businesses have
been able to engage in “passporting,” or the
ability to provide services throughout the
European Union so long as the company
also has a base in the United Kingdom.
Communication Services 16.4%
Computer and Information Services 10.4%
Construction 6.6%
Commercial Services
(excluding Government Services) 14.6%
Financial Services 39.2%
Government Services 19.5%
Insurance Services 31.0%
Personal, Cultural and Recreational Services 20.7%
Other Buisiness Services 15.0%
Other Commercial Services 18.0%
Other Services 18.0%
Services 14.7%
Transportation 9.0%
Travel 10.1%
Royalties and License Fees 12.1%
SOURCE: WORLD TRADE ORGANIZATION
UK’s Share of Total EU Service Exports (%)
Type of Service Shares (%)
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Charting the UK Referendum’s Transatlantic Effect
If a new UK-EU trade deal requires
financial companies to operate subsidiaries
throughout Europe, this may adversely
affect financial services companies’
bottom lines. A new trade deal may spur
establishment growth for many industries,
including the Global Commercial Banks
industry and Global Investment Banking
and Brokerage industry, among several
other service-oriented industries. According
to IBISWorld data, the number of mergers
and acquisitions (MA) that involve UK
companies is projected to rise at a robust
annualized rate of 13.3% from 2016 to 2021.
Due to UK MA activity being largely driven
by the financial services and IT sectors,
Brexit may cause this projection to rise at
a faster pace in line with UK-based service
companies expanding their EU presence.
Additionally, Brexit will likely result in the
United Kingdom no longer being able to
negotiate new EU regulations, particularly
those related to the financial services
sector, though the country will still need to
comply with these regulations to provide
services throughout the European Union.
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