Brexit pain is not over for UK, non-UK businesses

Brexit may be a blueprint for a deregulated economy. And the EU’s Department for Exiting Europe (DfEE) has expressed fears the UK will become a tax haven.

But according to new research from London Business School, global firms — including those headquartered in the UAE — do not expect a positive impact on business following the UK’s departure from the EU. As one of the authors of the research, “The Global Impact of Brexit Uncertainty UK”, I can report that UK and non-UK firms alike overwhelmingly expect negative consequences from Brexit.

Our investigation, which involved talking to more than 7,000 listed companies from 71 countries — including 14 headquartered in the UAE, five of which have UK-based subsidiaries — indicates overwhelming negative consequences from Brexit uncertainty.

Concerns about Brexit-related uncertainty extend far beyond the UK and the EU. Among non-EU countries most affected by Brexit risk are South Africa, Switzerland, Australia and Singapore, with countries with long-standing colonial ties finding union with many of the non-EU countries with relatively high Brexit risk scores.

Why would this be so?

Deciphering the vote

For many of us who have followed the Brexit narrative since the referendum was first announced, we are now very familiar with the well-worn positions proffered by the “Nays” and the “Ayes”.

The “ayes” argument goes something like this: when it leaves the EU, the UK will be far more flexible and have far fewer demands placed upon it, and encumbered with less red-tape than its former EU bedfellows. In sum, come the end of January 2020, an unfettered UK will be able to focus on its own offensive and defensive interests, with business opportunities opening up throughout the world.

The opposing version

The opposing argument has it that the world no longer trades in a dynamically mercantile way anymore. Trade with blocs — that’s how the world is and to attempt to vault this status quo with independent ambitions that hark back to the 18th and 19th centuries is nothing more than an exhibition of ignorance and arrogance.

Over ensuing months, and extending into several years since the referendum was first proposed, serious consideration was given to the knock-on effect on business confidence. Individual companies, most notably Airbus, have dared to break ranks and speak out, while the CBI (Confederation of British Industry) maintained a stalwart position — in short, business hates uncertainty.

While the rhetorical aspects of the Brexit discussion are extremely familiar to many, hard evidence of the impact is having on business confidence has been lacking. The research that I have been engaged in finds that UK and non-UK firms alike overwhelmingly expect negative consequences from Brexit.

As an example, my colleagues and I estimate that, due to perceived Brexit risk, the average Irish firm decreased investment by 3.9 per cent and reduced its employment growth rate by 4.2 per cent relative to the mean in every year since the 2016 referendum. For US-based firms (which are, on average, less exposed to Brexit than Irish firms), reductions in average investment and employment growth rates are 0.4 per cent and 1.2 per cent, respectively.

No evidence of gains

The research also found no evidence of any of the major economic benefits touted by the “Leave” campaign, such as looser regulation or better trade deals being felt by firms.

This negative sentiment is recognised and priced in by stock markets, but has not yet had significant effect on actions, foreshadowing likely even larger adverse effects on international businesses when Brexit comes to pass.

More companies expect Brexit to bring difficulties than opportunities. At the individual business level, even apparent “Brexit winners” most often point out that they are currently not much affected — as yet — by the UK leaving the EU.

Problems across fronts

Two of the most worrying issues for non-UK firms is the prospect of deteriorating trade access, and having to deal with multiple regulatory regimes. For UK firms, the primary concern was also a weak pound, followed by adjustments and transition costs when dealing with new and multiple currency regimes, labour market frictions, worsening trade access and falling consumer confidence.

Our research also flies in the face of the confidence in “New World” nations, and the anticipation that countries such as Singapore and Australia will readily do deals with a revitalised — and freed — Great Britain. For example, Australia might be positioning to be the first country to sign a comprehensive post-Brexit trade deal with it, but according to our research, Australian firms anticipate a negative impact from Brexit.

With a total of 426 companies surveyed in Australia, which included those headquartered in the UK as well as subsidiary companies, Australia ranked 14th by country in a list of businesses expecting a challenging outcome from Brexit.

It is clear that when the referendum result was declared more than three years ago, there was no immediate break in British-EU trade, and no cessation of trade through usual channels with the rest of the world.

What our research identified was the slow-fuse effect of several years’ of bruising negotiations and heated debates. Whether this narrative and mood will change remains to be seen.

— Ahmed Tahoun is Associate Professor of Accounting, London Business School.