by Jim Martin
While the exit advocates celebrated Thursday’s Brexit vote, those who preferred to stay were left stunned by the thought of what an exit from the European Union could mean. Economists forecast that the separation will lead to the devaluation of the British Sterling, the decline of foreign investment in the country and a shake-up of global financial markets. What about the impact on American small businesses? That question faces many small business owners, and the answers are painfully mixed.
British entrepreneur Tom Cridland felt leaving the EU could lead to the destruction of his business. While sold in the UK, his clothing is manufactured in Portugal, an arrangement the open trading policy of the EU made cost effective. His fear is that import tariffs could price him out of the market. Sasha Kocho-Williams, the owner of a London-based microbrewery, agrees; many of her ingredients and equipment come from Europe.
Pessimism appears to be the prevailing mindset among many UK small business owners contemplating the Brexit business impact. According to a survey from Bidvine, a professional services marketplace, conducted before the June 23 vote, many small businesses in the UK believe they would be forced to raise their prices for local services. 30 percent of business owners felt they would have to raise prices and 81 percent felt prices would rise as much as 10 percent. Eight percent of those surveyed expected prices could rise as much as 50 percent. Just 28 percent of respondents felt leaving the EU was a good idea, and 56 percent didn’t expect to grow their business if Britain left.
Not every small business owner agrees that leaving the EU is a bad thing, however. One hundred small business owners sent a letter to the Sun newspaper calling on readers to vote to leave. They argued that the ideals of the EU no longer represent the “best interest of British businesses or the British people. “ Part of their reasoning had to do with EU bureaucracy. Their letter said small and medium-sized businesses are constantly held back by unnecessary EU regulations and red tape. They felt this could improve if they left the EU. One small business expert, Professor Stephen Roper of the Enterprise Research Center at Warwick Business School, Coventry, England, said, “Small businesses need to prepare for a period of volatility as markets react. Gains in terms of reduced regulation and EU membership costs may follow, but are probably some years off.”
He noted that a weakening pound could boost exports, but would make euro imports (parts and raw materials) more expensive. Interest rates might rise, and European firms might also switch orders away from the UK to insulate themselves from any changes in trading relations between Britain and the EU.
How much Brexit business impact will be felt here in the U.S. remains to be seen — especially for small businesses. Forbes felt trade agreements between Great Britain and the EU could be disrupted, and the potential loss of access to the 27 countries still in the union could “negatively impact” American companies with operations based in England. In reality, It will take years for England to untangle itself from the EU and to determine whether independence is bane or boon. The impact of reduced regulation and new trade deals remain uncertain. Outside the EU, the UK will be free of EU competition and state aid rules, allowing the UK government to provide more direct domestic support. (The UK provided much more funding to the EU than it received in return.)
The British tech industry had three concerns prior to the Brexit vote:
The first was a skills shortage. Industry experts say leaving the EU would impact access to highly qualified European tech workers and exacerbate a skills shortage in industry. Nearly 80% of tech workers believe Brexit will make it more difficult to address the current skills gap, according to a survey released this month by Tech London Advocates. Just over 1.5 million people work in digital-related jobs in the U.K., and the industry is growing about three times faster than the rest of the economy. A third of workers come from outside the UK.
The second was regulatory headaches. The EU draws up regulations that apply across all member states. Many feel this creates extra red tape and restrictions; others say it helps their business by creating a level playing field in the vast multi-nation market. The truth is that the regulation burden will now apply only to exports. Within the UK, businesses will be less burdened.
The third concern was that investment will drop. Investments and deals in the industry have been put on hold in the lead up to the referendum as investors worry that Brexit could damage business operations and growth plans. There is, however, a possibility that investors might find a decrease in regulations more attractive and less risky.
With the long term impact in the UK unclear, it is perhaps a little harder to define impact for U.S. small businesses. Small businesses doing business in either the UK or the EU should see no significant short term impact, with the possible exception of those who have used the UK as an entry point to the Continent. They will share in whatever problems UK firms encounter. But those problems will be buffered by one immutable fact: the EU still needs the UK. It is both a source and a market, and it is unlikely that the bureaucrats who set EU policy (notoriously slow moving to begin with) will rush to restrict or redraw current business relationships.
There is one positive for American businesses. With other countries contemplating withdrawal, trade alliances with U.S. small businesses could become more rather than less attractive. The U.S. could appear as a source of stability.
A second positive is that the U.S. government might take note of the fact that regulatory excess was one of the two factors most strongly driving the British decision. That might incentivize the government to begin a review and streamlining of the excessive regulation burden U.S. small businesses currently face. That deregulation would make U.S. firms more competitive internationally. Accomplishing anything in that regard, however, will require pressure from the business community on elected representatives.
At the bottom line, the best way to view the aftermath of Brexit is this: if membership in the EU offered only benefits, no exodus would have been likely. Perhaps both parties in the divorce will find ways of salvaging EU’s benefits while correcting its faults. That would have a positive impact in the U.S. as well. Those who carefully watch the future as it unfolds will probably react to it more profitably.