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What Could the Brexit mean for American Businesses?

On June 23rd, the people of the United Kingdom narrowly voted in a referendum to leave the European Union, ending the UK’s 41-year membership. Immediately, the world experienced negative economic feedback, as the British Pound dropped in value and stockbrokers everywhere missed expected returns. It has been nearly two weeks since the Brexit (British-exit) took place, but there still remains substantial economic uncertainty about the long-term effects of such a decision and its (both good and bad) consequences. What could the Brexit mean for American businesses?

It seems the biggest consequence of such a historic decision is the uncertainty it yields. Many financial decisions across the world are made every day with the assumption that certain institutions will continue to operate without change; once these institutions (such as the EU, the Bank of England, and others) are altered, the resulting discontinuity shocks economic predictability, and consequently, increases the risk of investment. Empirically, when risk increases, so do interest rates; since the Brexit, the United States has already seen interest rates rise to some degree, and such a trend is expected to continue.

Though the Brexit weakens the power of the EU as a whole, there now exists a new possibility for a new free-trade agreement between the UK and the US, which would certainly impact the United States in terms of trade and job growth; however, the political nature of such an agreement would almost certainly be hindered by the static state of politics the US currently experiences. Regardless, now that the UK has dissolved its association with the EU, it is almost certain that the British will seek out new trading partners elsewhere.

The best case scenario for the United States coming out of the Brexit would be strengthened trade agreements, and a relatively stronger dollar. The value of all money is relative, and if one nation’s currency is weakened, then (from a macroeconomic perspective) another’s is de facto strengthened; if the risk of trading and exchanging with the British is disproportionately increased, then the reward for trading elsewhere is comparatively increased as well.

The Brexit was one of the biggest economic events we have witnessed thus far in 2016, its outcomes remain uncertain, but its importance can hardly be underestimated.

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