Article and Graphic by Dave Sebastian
Foreign companies in the United Kingdom are in the crosshairs of uncertain regulations as the U.K. prepares to leave the European Union in March 2019.
The predicament: Companies have yet to figure out which new regulations to brace for, as it is still unclear which Brexit model the U.K. is pursuing. Brexit has negatively affected eight in 10 U.K.-based companies in their investment decisions, according to a Confederation of British Industry survey released 21 October.
Brexit, for companies, means losing hassle-free access to the EU market. Hurdles that could entail include tariffs on goods trade between the U.K. and the EU, as well as the restrictions on cross-channel immigration that could impede staffing in the services sector, analysts told “KCW Today”.
More than half of 236 surveyed companies have developed contingency plans, which include adjusting supply chains outside the U.K., cutting jobs and relocating operations overseas, the CBI survey reported.
But companies are reluctant to disclose what exact strategies they are employing amidst the Brexit impasse, Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, D.C., told “KCW Today”.
“Most firms are likely to take a wait-and-see approach and not really publicly publish or make clear what their contingency [plans] are until they absolutely have to,” Kirkegaard said. “There will be reputational risks for suddenly declaring, ‘Well, I’m not going to invest in the U.K. because of Brexit and other things.’”
Amidst the brewing uncertainty, don’t expect foreign manufacturers to make high-risk investments in the U.K. any time soon, Alex de Ruyter, director of the Centre for Brexit Studies at Birmingham City University, told ”KCW Today”.
“It’s really hard to plan for something,” de Ruyter said. “[Companies] are a bit reluctant to start spending money on, say, inventories and warehouses.”
U.K. consumers, in return, could see a supply shock if foreign companies decide to pull out of the U.K. market, de Ruyter said.
At stake are £1.56 trillion in foreign direct investment in the U.K., according to 2017 Office of National Statistics data. U.S. companies comprised a third of all inward FDI in 2016, the data show, while the Netherlands, Germany, France, Japan, Switzerland, Luxembourg and Spain were among 10 countries that made up a quarter of all FDI in the U.K.
International precaution, domestic ambivalence
Under the so-called hard Brexit,the U.K. would be able to strike independent trade deals by leaving the EU’s customs union and single market. The caveat: Production costs could rise as London and Brussels impose tariffs on each other under World Trade Organisation regulations.
The scenario has sent cautionary waves among London’s trading partners. David Malpass, U.S. Treasury undersecretary for international affairs, said on 16 October that a hard Brexit could jeopardise global financial stability, and that the U.S. will “closely monitor” developments in Europe, Bloomberg reported.
U.S. businesses in 2016 contributed £308.1 billion in FDI to the U.K., ONS data show. The U.S. Chamber of Commerce, the largest business lobbying organization in the U.S., declined to comment for this article.
The Norway model, which would keep the U.K. within the EU’s customs union and single market, is a softer alternative — at the cost of relinquishing London’s say in decisions made in Brussels, analysts said. But Prime Minister Theresa May faces criticism from Brexiteers in her own Conservative Party over the prospect of temporarily keeping the U.K. in the customs union for too long.
Auto and aeroplane manufacturers in limbo
Automobile and aerospace industries, both of which rely on vast supply chains in the EU, are among those taking the largest hit because of Brexit, Kirkegaard said.
Almost half of every U.K.-produced vehicle’s components are imported from or through the EU, Kirkegaard added, and a “vast majority of [U.K.] car plants will, over the next five to 10 years, close” if London withdraws from the customs union and single market.
The EU in July agreed to remove the 10-percent tariff on Japanese cars and 3 percent on most car parts in exchange for duty-free EU imports of cheese and wine from Japan. With Brexit, the U.K. risks losing Japanese FDI in automobile production, de Ruyter said.
The German company BMW Group, which manufactures Mini cars, plans to shut its Oxford plant for a month after 29 March 2019; the official Brexit date — to minimise the impacts of potential shortage of car parts,“the Guardian” reported.
Other foreign carmakers in the U.K. include the Japanese company Honda Motor Co., Ltd. and U.S. car manufacturer Ford Motor Co. Foreign aeroplane manufacturers include U.S.-headquartered Boeing Co. and French company Airbus SE.