We have been working with our European partner firm Buck Consultants International (BCI) to monitor Brexit and its potential impact on location strategies. As you would expect, the most dramatic impacts are anticipated to be on European location strategy, and, on that topic, I captured some of the highlights from a recent BCI webinar in my earlier blog Brexit: Should I Stay or Should I Go Now? [The update to that blog is that we now know that Prime Minister Theresa May is moving forward with a “hard exit,” planned for March of 2017. This rules out some potential scenarios but most questions remain.]
In this post, given BLS & Co.’s focus on North America, I want to address potential impacts on North American location strategies. Could there be ripple effects – or perhaps even direct effects – from Brexit on investment patterns in this part of the world?
Let’s start with a quick reminder of macroeconomic forces at work:
Brexit = more uncertainty.
More uncertainty = slower growth.
More uncertainty + slower growth = low interest rates.
Extended period of low interest rates = potentially weak fundamentals and repercussions down the road.
Got it? Got it!
But does any of this translate directly to effects on North American location strategy? Probably not, other than making corporations a little more cautious, which may lead to a preference for – other factors allowing -- job creation and equipment investment in the stability of the U.S. market. Further, we were already experiencing uncertainty and slow global growth; Brexit may be a compounding factor, but it should not be considered the sole, or even primary, cause of a weak global economy.
What about currency fluctuations? A material change in exchange rates can impact trade flows and ultimately manufacturing/assembly location strategies. Here’s what we’ve seen:
If not currency exchange rates, are there other potential impacts? In fact, the most likely source of impacts will be tariff structures, but we simply don’t know what the future holds in this regard. Not only will the UK need to establish new trading rules with the European Union, it will have to do the same with the U.S., Canada and Mexico, or potentially with the region as a unit. Right now it’s not feasible to predict whether the tariffs for your company’s good will go up or down. Similarly, coming negotiations will bring new regulations on capital movement and professional services. Meanwhile, we’re in the middle of the TTIP (Transatlantic Trade and investment Partnership between EU and the U.S.) and CETA (Comprehensive Economic and Trade Agreement between EU and Canada) trade pact negotiations. Is your company counting on adoption of certain provisions?
Changing regulations may also affect inversions – the process by which a company moves its headquarters overseas to reduce the tax burden on income while retaining its principal operations in the higher-tax country. If UK tax regimes change, companies that have already completed inversions may find the benefits are not what they had hoped. Companies considering inversions may pause and wait for further clarity.
The key right now is to focus on understanding your company’s exposure – whether manufacturing or service provider – to the UK market and to begin conceptualizing a course of action if deemed prudent.
Will Brexit have the same level of impact on the North American location strategy as it will on European location strategy? Certainly not in the sense of direct impacts, but there will be ripple effects we will all want to be watching, and companies with heavy ties to the UK will want to do some contingency planning.
Please feel free to reach out to us if this is a topic you would like to explore further!
Tracey Hyatt Bosman is a Managing Director at Biggins Lacy Shapiro & Co., one of the largest, most highly regarded site selection and incentives advisory firms in North America. BLS & Co. helps manage the complexities associated with finding optimal location and securing incentives to support new ventures.