By Globalization PartnersFebruary 2021
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The historical ties between the UK and the U.S. have endured and prospered to the point that the Land of the Rose is the fourth largest export destination of American goods and services and the U.S.’ seventh largest business partner. Both nations act as a fundamental and reciprocal pole of economic growth, which is why addressing the consequences of Brexit for U.S. companies is essential to gauging future challenges and opportunities.
What risks are U.S. companies facing as a result of Brexit?
U.S. businesses with varying levels of ties with the UK will most certainly need to keep their eyes on multiple fronts as Brexit’s provisions are implemented. Here is a list of the essential factors they need to look out for in the next chapter of U.S.-UK economic and commercial relations:
Mergers and Acquisitions: U.S. businesses with UK corporations in their portfolios or U.S. companies looking to add UK corporations to capitalize on a favorable M&A environment need to pay a closer look at the specifics of the entity they want to acquire or partner with. Registration for UK companies already in their portfolios might be due for an upgrade depending on whether the business is a European entity formed under EU law, a UK company with a European Economic Area (EEA) corporate officer, a UK company involved in a cross-border merger, or an EEA company.
Supply Chain: With the common market exit, U.S. businesses using supply chains in the UK may need to quickly integrate complex trade rules imposed by multiple entities, including the EU, post-Brexit UK, and the World Trade Organization (WTO). While a Free Trade Agreement (FTA) between the U.S. and the UK remains a sought-after option for both parties, without it, several businesses are looking at longer lead times in each link of their supply chains. This is a result of stringent customs controls that can delay the shipment of goods between the UK and EU.
Privacy and Data Protection: The varying degrees of implementation of the Union’s Data Protection Directive among EU countries led to the enactment of the General Data Protection Regulation (GDPR) on May 24, 2016. GDPR’s primary goal is to establish the rules under which the Digital Single Market companies operate to strengthen EU citizens’ rights to privacy in the digital landscape.
The GDPR prohibits personal data transfers outside the EU unless its receiver guarantees acceptable protection levels for said data. GDPR compliance from the UK is unlikely to change under Brexit, especially if the UK wishes to join the European Economic Area. Therefore, U.S.-based companies with UK operations should determine whether they anticipate substantial personal data transfers from EU states to the UK, and consult EU regulators to ensure compliance throughout the process.
UK-EU Data Transfers: While the UK government has established that both EU and EEA member states provide adequate data protection, the EU launched an adequacy assessment to determine whether the UK is compliant with the GDPR. While the ongoing evaluation reaches a close, the EU agreed to extend bidirectional data transfers without additional safeguards for a period of four months starting Jan. 1, 2021.
Tariffs: Pre-Brexit, the UK would serve as a launching pad for U.S. businesses looking to expand in the rest of the EU, whether for trade or investment purposes. With Brexit, U.S. companies may be required to pay double tariffs on goods exported to the UK meant for re-export to the EU, as outlined by the rules of origin stipulated in the Trade and Co-operation Agreement (Annex Orig-1, 2 and 2A).
Employment: EU nationals working in the UK for U.S. companies were covered by the EU Settlement Scheme. Now, there are conditions on new immigrants coming into the UK to work for your company, regardless of their country of origin. The new rules enacted Jan. 1, 2021 stipulate that newly arrived non-UK workers require a visa. To be eligible, the need to ascertain their job offer comes from an approved employer sponsor.
To be allowed to continue working in the UK, your existing employees who are EU, EEA, or Swiss citizens employed in the UK as of the end of the transition period will be required to apply for the EU Settlement Scheme before June 30, 2021. Throughout the process, continuous verifications of the EU, EEA, or Swiss job applicant’s right to work status are a must. Two status types are now awarded to those who apply to the Settlement Scheme:
- Settled: For those who have lived in the UK for a continuous five-year period as of Dec. 31, 2020
- Pre-Settled: For those who have not lived in the UK for a continuous five-year period as of Dec. 31, 2020.
Note: The EU Settlement Scheme application requirement does not apply to Irish citizens able to move and work freely in the UK.
The UK’s points-based immigration system is expected to limit employers’ ability to hire low-skilled or unskilled workers. In turn, this could increase hiring costs. U.S. companies must be ready for the possibility of a wage uptick to entice quality employees, particularly in highly competitive sectors facing talent shortages.The UK’s points-based immigration system is expected to limit employers’ ability to hire low-skilled or unskilled workers. In turn, this could increase hiring costs. Click To Tweet
What new opportunities has Brexit created for U.S. companies?
Lower costs to importing: The tariff side of things in the UK for U.S. companies is not all bleak. Since the Brexit deal transition period ended on Dec. 31, 2020, The EU’s Common External Tariff (CET) was replaced by the UK Global Tariff (UKGT). Enforced beginning in January 2021, the UKGT includes a UK-applied Most Favored Nation (MFN) tariff to apply to all countries. The list may change as trade arrangements with the EU are still underway. Countries exempt of the UKGT include:
- Those with a trade deal with the UK
- Those part of the UK’s “Generalised Scheme of Preferences”
- Relief or tariff suspension cases
Another key modification, compared to the CET, is an increase in the number of products that are tariff-free, going from 27 percent under CET to 47 percent under UKGT. Moreover, the UKGT average tariff decreases to 5.7 percent from the CET’s 7.2 percent. Stevens & Bolton LLP expects local businesses importing goods into the UK from non-EU countries to benefit from the UKGT.
This is in large part because the British government is working to liberalize, simplify, and reduce tariff rates on a number of goods, making imports cheaper than they were under CET standards. This favorable import setting can translate into a business boon for U.S.-based exporters. It will also be to the benefit of the 30,000 Small and Medium-sized Enterprises (SMEs) across the UK currently trading with the U.S., and an added opportunity for those looking to do so.
It should be noted that despite Brexit, the UK-US Mutual Recognition Agreement (MRA) still stands, meaning that the conformity assessment results of electromagnetic compatibility (EMC), telecommunication equipment, and good manufacturing practice (GMP) of pharmaceuticals done by either country are accepted by its peer.
A level financial playing field: On the financial front, most London-based financial institutions are losing free access to the EU market. This, in turn, corners them to establish new offices in the EU markets of interest. In contrast, several U.S.-based retail and investment banks already have “passporting rights.” Passporting rights in the EU allow financial institutions authorized in any EU or EEA member state to trade freely in any other member state with minimal additional permitting. This means U.S. banks can immediately conduct business for clients in the EU and the UK.
On the trade side of Brexit, should significant trade barriers be raised between the UK and the EU, the U.S. could capitalize on expanded trade with the UK now that the playing field is level with the rest of the EU. The extent to which the U.S. stands to benefit will also greatly rely on the assertive timing and expediency of a UK-U.S. trade agreement, which is still in its early discussions stage. U.S. companies and businesses stand to gain significant advantages should they lobby American policy makers to push for favorable terms of trade.
Gaining competitive footing: On the higher education front, Brexit’s immediate consequence for EU, EEA, or Swiss students looking to study in the UK is they will no longer benefit from access to UK student loans and will be charged the same tuition fees as local students in the UK. This new development places U.S. and other international students vying for a spot in the UK’s higher education institutions on equal footing.
Moreover, EU students who arrived in the UK after Dec. 21, 2020 will require visas if they intend to take courses longer than six months. Considering that the UK is aiming at redesigning its immigration system to attract highly-skilled labor, it is likely that the primary lens through which the UK government will look at student visa applications will be leaning heavily toward the students’ academic discipline, with a preference for STEM programs.EU students who arrived in the UK after Dec. 21, 2020 will require visas if they intend to take courses longer than six months. Click To Tweet
Explore Hiring Options in the UK and the EU
UK’s changing landscape looks as challenging as it is ripe for opportunity for companies looking to capitalize on a first-mover advantage. The landscape is still changing, and the dust has yet to settle over the final details of the country’s Brexit process. For those who navigate the Brexit learning curve slope early, the rest of the way will be a seamless process. U.S.-based companies stand to gain commercial advantages from testing the waters.
That could start today with making your first hire in the UK market, in addition to the EU, and we can help you explore which location is the best launching pad for your European growth.
Learn more about Brexit by visiting our resource hub.