How Brexit Will Affect the U.S.?

Europe: it lays an ocean away from the United States and often marches to its own unique beat, putting it farther from our daily thoughts. But with Britain having recently voted to leave the European Union, American attention has been aimed squarely at the continent as international stock markets took a massive hit and economic uncertainty suddenly reigned worldwide. Now, as volatility in the financial and political climates continues, many Americans are wondering if the March of Europe’s post-Brexit beat will have lasting repercussions for us here in the U.S.

Unfortunately, the answer remains uncertain. Though the immediate post-vote panic seems to have subsided, economic and political indications across the world point to two divergent paths: the U.S. economy may remain strong and healthy as our security apparatus strengthens, or it will slow down and leave us more vulnerable as Britain completes its two-year exit process.

The U.S.-U.K. trade relationship likely will not suffer, but trade with the U.K. is also the least important indicator of a healthy American economy. With $56.4 billion in exports and $57.8 billion in imports to the United Kingdom, Britain is our seventh-largest trading partner, accounting for just 3% of all U.S. trade. By contrast, Canada accounts for 15.4% of all our trade with a combined $575.5 billion in exports and imports. Because Britain’s decision to leave the E.U. primarily affects its trade relationships with European powers, it is unlikely to change the U.S.-British trade relationship.

However, Brexit strengthens the value of the dollar, which hurts our trade relationships with other countries because our exports are suddenly more expensive. With prices for their products rising, giants like Apple, Coca-Cola, and Nike were particularly affected right after the Brexit vote.

Where Brexit is likely to hurt us most is in continued market volatility. If stock markets persist in tumbling like they did immediately following the vote, when over $3 billion in global stock wealth was destroyed in just two days, American consumers may reconsider their spending habits as extra income disappears. Because our citizenry needs to spend money for our economy to grow, prolonged market volatility will slow the growth of the U.S. economy.

Fortunately, after falling 5.3% immediately after the Brexit vote, global stock markets have grown by 3.3% and are continuing to try and recover the remaining 2% loss.

“The key to whether the U.S. economy is affected significantly will be whether equities tumble enough to have a major impact on business and consumer confidence,” observedJim O’Sullivan, Chief U.S. Economist at High Frequency Economics. Thus far, most executives of 15 S&P 500 companies have not felt a major impact, instead indicating that “Brexit is more of a scary headline than an actual business worry.” Scott Morrison, packing maker Ball’s Chief Financial Officer, told investors that he does not think that Brexit is “gigantic” when compared to what actually “happens on a day-to-day basis.”

Nevertheless, executives’ optimism depends on the U.K. and Europe working out a good and fair deal for all parties involved.

Another area of uncertain impact is in the security sphere. Although the U.S. and Britain will remain close allies, Brexit will likely change E.U. Security and NATO operations. Although the E.U. is primarily an economic organization, it has undertaken some security missions, to which Britain contributes 15% of all funding. Brexit will obviously remove that funding source and will alter the E.U.’s Common Security and Defense Policy. However, the U.S. does not consider the EU a major security player.

Economic repercussions of Brexit on the British economy will also likely lower the amount of money the U.K. will be able to contribute to NATO, the post-World War II military alliance formed to counter the former Soviet Union that the U.S. does consider critical. Additionally, if Scotland chooses to leave the U.K. so that it can remain in the E.U., Britain will lose its only nuclear submarine base, weakening the west’s defenses against a resurgent and aggressive Russia.

However, critical foreign policy experts believe that Brexit actually strengthen America’s security because it will strengthen NATO. Secretary of State John Kerry is very optimistic about NATO following Brexit and retired U.S. Admiral James Stavridis, NATO’s former top commander, also believes this to be true. In addition, joint U.S.-U.K. intelligence gathering operations are expected to continue in E.U. member nations even after Britain leaves.

For now, we remain optimistic that the effects of Brexit on the U.S. will be minimal and temporary, but we should continue to closely watch what happens in the weeks and months ahead.

This article was originally published on Dr. Ping Jiang’s LinkedIn

2016-08-01T16:58:45+00:00 August 1st, 2016|Global Markets|0 Comments

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