washington: A vote by Britons to leave the European Union on Thursday may not drag the United States into recession, but its effects on US monetary policy, trade and corporate profits are causing concern in Washington D.C. and boardrooms alike.
Market volatility in the immediate aftermath of such an unprecedented decision would likely drive down the British pound and push the US dollar up, keeping Federal Reserve interest rate rises on hold for even longer as the damage is assessed and divorce terms are negotiated with the EU.
Federal Reserve Chair Janet Yellen on Tuesday repeated the US central bank’s concerns over the “Brexit” vote, telling lawmakers it could have “significant economic repercussions”, including a flight to the safety of dollar assets that would push up the dollar and further slow US exports.
Britain, the world’s fifth largest economy, is the seventh largest US trading partner, with $56 billion in US goods exports to Britain and $58 billion in imports from the UK in 2015.
Aircraft and aircraft engines are the biggest US exports to Britain, while cars and trucks are the largest US imports from the UK, with two-way pharmaceuticals trade important for both countries. More than half of Britain’s exports go to Europe though, where a vote to leave the EU could put it at a disadvantage.
Leaving the EU would cost Britain its privileged free trading status with the continent, throwing up problems for multinational companies with British operations, including higher tariffs on UK-produced cars and engines as well as uncertainty over how banks and insurers in the London financial hub can operate in Europe.
The United Kingdom also would be excluded from EU free trade agreements with other countries, such as those with Canada, Mexico and South Korea. The EU currently has Preferential Trade Agreements with 52 countries and is negotiating agreements with another 72. A massive trans-Atlantic trade deal under negotiation with the United States would also be in jeopardy. President Barack Obama has warned it could be years before Washington is ready to start talks on a bilateral deal with Britain. “We think a strong UK in a strong and unified European Union is in everybody’s interest,” US Trade Representative Michael Froman said on Tuesday. “We think their voice is stronger as part of a larger entity.”
It could take Britain up to two years to negotiate new trading and regulatory arrangements with Europe, creating a pall of uncertainty that will dampen trade and capital flows and put business decisions on hold, said Michael Arone, chief investment strategist at State Street Global Advisors in New York. “The likely outcome is more of a pause, an additional slowdown. What are economies struggling with? Global demand is low, trade is low. Growth is slow. None of this will help that,” he added.
Foreign direct investment into Britain has been one of the biggest drivers of Britain’s economic growth in recent years, and the biggest source of that investment has been the United States.
In a review of the UK economy released on Saturday, the International Monetary Fund concluded that foreign direct investment into the UK, the top investment destination within Europe, had allowed for higher consumption and incomes. Investment “is drawn to the UK because the UK provides a gateway to the single market,” of 500 million consumers, the IMF said.
London School of Economics researchers recently estimated that investment flows into Britain could fall as much as 22 percent as companies, including American firms, move operations elsewhere or put plans on hold in the wake of a leave vote. This would translate to a $3,234 decline in real income per household, they said.
The study also concluded that two major bright spots in the UK economy, financial services and autos, would suffer from a Brexit.
LSE also said annual UK car manufacturing would decline by 181,000 units, or 12 percent, due to higher European tariffs if Britain reverts to World Trade Organization trading status. It added that financial firms based in Britain would likely see “big cuts” after losing their “passport” arrangements to operate in EU countries without having to set up costly local subsidiaries. JPMorgan CEO Jamie Dimon earlier this month warned staff in Bournemouth, where a quarter of the banking giant’s 16,000 UK employees are based, that this would cost jobs.