For years, the commercial links between U.S. companies and the European Union have been like a smooth, well-worn road, with no barriers on the journey. However, this was before Brexit, which comes into force on March 29, 2019. Given the strong chance of a “hard” Brexit, in which the United Kingdom fully leaves the EU and its free trade zone, this much-traveled road will suddenly become more difficult to navigate. A lot is at stake.
According to the U.S. Bureau of Economic Analysis, American exports of goods and services to the EU in 2017 reached approximately $503 billion, with countless U.S. firms having established European offices to sell into and service this flourishing geography. While Brexit doesn’t mean the end for North American businesses in Europe, it will have a sizeable impact. This impact can be mitigated to some degree for those companies that are aware of how Britain’s exit from the EU could influence their European sales. Here are some areas to consider.
The movement of goods
A hard Brexit will put an end to the free movement of goods between the EU and UK and there’s a strong potential for tariffs and new regulations on goods going in or out of the UK. Not only might this increase the cost of goods sold but the added complexity boosts the cost of doing business. Consider the case of pharma giant Pfizer, which reported it will spend $100 million to revise its manufacturing and supply chain due to Brexit. In the absence of a deal after March 29, as well as the uncertainty over tariffs, U.S. tech companies selling into Europe from the UK may not know what the total cost of exports will be. Furthermore, they will also have to make sure that they have all the legal and tax regulations in place.
To manage this uncertainty, savvy American companies are now setting up a hub in the EU and a smaller one in the UK to deal with the UK market. For example, Britain’s English-speaking neighbor, Ireland, is one of the more popular locations for relocation and on the tech side, many American firms, particularly those with large data centers, are migrating to Ireland, as are multinationals in a variety of industries.
Labor and immigration issues
The movement of people will get much more complicated after Brexit as visas may be instituted in the UK for non-citizens, making life very difficult for U.S. firms that have sales offices or other operations there. With so much ambiguity, some EU citizens now working in the UK have apprehensions about their future status and some are moving out of Britain as a result. Fortunately, those American firms that already have or will soon set up offices in an EU location can avoid the uncertainty around EU visas and immigration.
EU members have benefitted from the free movement of goods and services as well as harmonized regulations that vary from industry to industry. For example, any financial institution holding a license in one EU country can use that license to sell to customers in other EU countries, which is known as “passporting.”
After March 29, companies holding such a license in the UK may no longer be eligible to sell to EU citizens and will likely require additional licensing. Given the lengthy time needed to get licenses, many UK-based financial services firms have already set up new offices outside the UK to maintain full EU market access, with 100 multinational financial institutions now applying for regulatory approval in Ireland, as one example. Even the digital currency arena is reacting to Brexit, with American firm Coinbase, one of the world’s largest cryptocurrency exchanges, opening a Dublin office to help deal with Brexit fallout.
Brexit will also create regulatory issues for medical device manufacturers. UK approval will not necessarily equate with pan-European approval so manufacturers will have to seek their European licensing from within the EU going forward.
Data privacy gets more complicated
For U.S. companies with customers in Europe, complying with the EU’s newly adopted General Data Protection Rule (GDPR) gets even more challenging thanks to Brexit. GDPR mandates a strict new approach toward consumer data privacy in the EU that covers any customer data stored there, with large fines for non compliance. This means American companies with UK operations cannot keep their customer data in the UK but must place their servers in the EU country where they have their largest, non-UK operation and must work with the “regulatory authority” in that country. Savvy companies have been moving their data centers into countries known for having easy-to-work-with data authorities.
Choose a reputable hub
The watchword for 2019 is uncertainty. U.S. companies with customers abroad should take the time now to plan how they will reach their customers and be aware that rules and regulations will be in flux for a few years to come. Setting up an EU office has long simplified the process of selling within the EU and complying with EU regulations and this is truer still post Brexit. To that end, a smart strategy is to seek out an EU country with a proven business-friendly government, large supply of educated workers and history of successfully hosting American companies.
Countries such as Denmark, the Netherlands and Ireland are emerging as popular bases. Ireland is particularly attractive as a location that boasts a strong supply of tech talent as well as an ecosystem of tech and financial services companies. Its common-law environment and English-speaking population make for an easier transition, in particular, for American companies that want to sell in Europe.