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How a messy Brexit could hit U.S. businesses

Theresa May to seek another Brexit extension
  • The U.K. is America's fifth-largest export market and its top foreign investor.
  • Through the U.K., the U.S. has a strong voice in shaping EU policy, but with Brexit, that's gone.
  • The U.S. Chamber of Commerce has implored the U.K. government to come to a Brexit solution.
  • U.S. banks doing business in the EU from London could find their operations seriously disrupted.

As many Americans watch with a mixture of confusion and fascination, yet another Brexit deadline is looming. That's prompting British Prime Minister Theresa May to now engage in talks with opposition Labour Party leader Jeremy Corbyn after May's triple failure in Parliament to win support for the Brexit agreement she had hammered out with the European Union. With the April 12 date for the U.K. to leave the EU (itself an extension of the original March 29 deadline) drawing near, May says she'll seek another extension from the EU.

That means the U.K. remains in turmoil over how, when -- or even if -- it will leave the European Union. With no resolution in sight, do U.S. businesses and consumers have reasons to worry? 

Here are a few things to consider:

The U.K. is a big U.S. export market

The U.K. was America's fifth-largest export market in 2018, and the U.S. posts a trade surplus with the country, according to U.S. census data. The U.S. was the U.K.'s top trading partner in 2018, according to U.K. statistics.

Goods include everything from machinery to technology to food. For example, the U.K. is the fifth-largest export market for U.S.-made autos and auto parts. No wonder Ford in January warned that Brexit could cost the automaker up to $1 billion.

"The U.K. is one of our biggest customers," Terrence Guay, a clinical professor of international business Pennsylvania State University, told CBS MoneyWatch. "To the extent that the U.K.'s economy does well, with or without Brexit, that's going to have an impact on Americans who have jobs and industries that export to the U.K."

Also, without the U.K. at the table in Europe, America's influence will diminish, Guay added. The U.S. has often depended on U.K. help in negotiations or regulations to help serve U.S. interests. "The political side of this is that in Europe, the U.K. is America's greatest friend and has been for decades," Guay said. "If we've lost that important ally there, then the U.S. has less influence in what the EU does."

Foreign investment is at risk

The U.K. is the biggest foreign direct investor in the U.S., at about $615 billion, while U.S. holds the same position in the U.K., at roughly $540 billion, according to statistics from both governments. Most economists predict the U.K.'s economy will slow in the near term, at least while businesses hold back on spending until the U.K. government decides how exactly to separate from the EU. 

It's a situation the U.S. Chamber of Commerce finds troubling, and it implored the U.K. government to come to a solution in a statement last week. "We urge MPs to find consensus immediately on a way forward that avoids what surely would be a disastrous development for consumers, workers and businesses alike," the Chamber said.

U.S. companies employ nearly 1.4 million U.K. citizens, and British companies employ more than 1.1 million Americans in the U.S., according Chamber figures

A game-changer for big U.S. banks

Another concern: the disruptive impact to global financial markets under a no-deal Brexit will hit American banks. There's a "systemic risk" to U.S. banks, according to the Financial Stability Oversight Council, a group of U.S. federal and state regulators created under the 2010 Dodd-Frank financial reform law.

U.S. financial firms with substantial operations in London wouldn't have EU "passporting rights" and would need to be authorized separately "by applicable EU member states, raising contract continuity concerns for a substantial value and volume of financial contracts," the FOSC wrote. 

With thousands of employees in London, U.S. banks could see significant disruption. Take global derivatives, the catch-all term for financial instruments tied to currency and other financial instruments including futures, options, forwards and swaps. U.S. banks and financial institutions, which account for 40 percent to 60 percent of activity in global derivative markets, "use London as a platform to service non-U.K. clients in the EU," the FOSC wrote. "A no-deal Brexit, in which U.K. firms immediately lose access to the EU market, could create significant risks to the cohesion and continuity of financial markets, particularly derivatives markets."

"If the U.K., in my view, comes to its senses 50 years from now and realizes 'oops, we made a mistake here,' then companies will reassess their strategies at that point of time," Penn State's Guay said. "But companies can't just leave now and then once the U.K. finally comes to some resolution to Brexit, move back. It's not going to work that way."

Cheaper British trips for U.S. tourists

Not all the news is bad for Americans, at least not for those looking to vacation in Britain. The U.K.'s currency is hovering around $1.30, a low not seen since the early 2000s. That means more pounds for your dollar if you want to visit London and other British destinations.

Flights to Europe overall are the cheapest in three years, and London is the most popular destination for millennials, according to online travel app Hopper. The British pound's drop is boosting that attractiveness. The average flight to London in 2019 is $782, down from $796 last year and $814 in 2017.

"When the U.K. officially leaves the EU this spring (pending negotiations), the pound will likely see an additional drop in value, meaning the dollar will go even further in the U.K. for U.S. tourists," Hopper said in a recent blog post.

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