News Coverage

Britain’s Latest Export: Uncertainty

11/18/2016
Radius International Expansion News Coverage - The New York Times

SUNDERLAND, England — Among the consequences Britain unleashed in voting to abandon the European Union was making Tom Hurst’s job vastly more challenging.

Mr. Hurst is the chief investment officer of Make It Sunderland, a local economic development agency. He lobbies investors on the benefits of setting up factories here in this industrial city in the northeast of England.

 

Before the referendum, that job largely involved telling the story of Nissan: How, three decades ago, the Japanese automaker established a plant here in a community hard hit by factory closings. Now that plant now employs 7,500 and makes 500,000 vehicles a year. How other companies from around the world flocked here to cash in on supplying Nissan, making things like auto parts, car seats and dashboard instruments.

 

But since the referendum on June 23, Mr. Hurst increasingly has to explain the implications of Britain’s looming exit from the European Union, known as Brexit. He must justify how this low-slung city on the North Sea can remain an important locale for global business, even as its links to Europe are suddenly uncertain. He must reassure investors who are inclined to explore other shores.

 

“The vast majority of the meetings I have start off with a 20-minute talk about Brexit,” Mr. Hurst said. “We are where we are.”

 

The vote has effectively redrawn the geography of global trade. It raises the prospect that Britain will depart not only the European Union but also the European single market, which now enables goods made here to be sold duty-free from Ireland to Romania — a swath of the globe home to some 500 million people. The European market collectively buys nearly half of Britain’s exports.

 

No one knows what sort of trading relationship Britain will forge with Europe once the exit is completed. No one can be sure whether tariffs eventually will be attached to British-made cars and other manufactured goods.

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The only thing that seems certain is that uncertainty will hover over businesses here and across Europe for some time.

 

Britain’s prime minister, Theresa May, has said that sometime in March, she will begin notifying European authorities that her government is formally initiating an exit from the union. But even that timeline is uncertain after a recent court ruling that Parliament must vote to approve such a decision.

 

Assuming Britain moves ahead, negotiations will begin with the 27 remaining members of the union on the terms of dissolution. Those talks would last two years, barring an extension. If no agreement results — and any deal would need to be ratified by all 27 remaining members — Britain’s trade with the rest of Europe would be governed by the rules of the World Trade Organization. That would allow for the imposition of tariffs on a range of goods.

 

Already, ambiguity over the future has diminished the appeal of Britain as a hub for regional business.

“The U.K. was a fantastic springboard to Europe, and with Brexit, that no longer applies,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a geopolitical consulting firm.

 

One major decision just broke Sunderland’s way, however. Nissan late last month announced plans to produce its next version of a top-selling sport utility vehicle, the Qashqai, at its plant here. The announcement came days after face-to-face talks between Mrs. May and Nissan’s chief executive, Carlos Ghosn.

 

In Sunderland, a city of about 275,000 people, the news was celebrated as a sign that the apocalypse had been averted.

Before the vote, Nissan had hinted that a vote to leave the union could prompt it to consider shifting production of the next model to other plants in Europe or at least limit its production in Britain.

 

Such a move would have eliminated thousands of jobs at Nissan and about 35,000 jobs within the companies that supply its parts.

 

The details of the negotiations between the government and Nissan that overcame the company’s doubts remain unclear.

 

How ‘Brexit’ Could Change Business in Britain

 

Several months on, little is clear. Britain’s trading relationship with the E.U. looks to be in limbo. Companies are reassessing their long-term investments in Britain. Here’s what’s happened so far.

 

Nissan sought compensation for any tariffs it might face exporting cars from Britain as a result of Brexit, a step that might have been viewed as an illegal subsidy under trade law.

 

But the British government said that it merely promised to continue its support of the British auto industry, by training workers, financing research and courting needed suppliers.

 

In any case, Nissan’s decision to stay underscores Britain’s continued industrial strengths. Yet the Brexit process is so laced with unpredictability that some investors are leery of making the next deal.

 

Major investment banks are exploring plans to shift jobs elsewhere — to Frankfurt, Paris, New York — in anticipation that Brexit will effectively destroy their ability to operate across the single market.

 

American companies control investments worth $590 billion in Britain, according to the United States Chamber of Commerce, and these operations directly employ 1.2 million Britons. The chamber recently issued a report warning that Brexit potentially imperils the profitability of these investments.

 

“Already some U.S. businesses have indicated that, without continued seamless free market access to Europe, investment and hiring decisions likely would favor other locations,” the report said.

Among multinational companies, London retains allure as a uniquely cosmopolitan, English-speaking city.

 

“There is still anxiety about certain locations in continental Europe,” said Stephen M. Chipman, chief executive of Radius, a Boston-based consulting firm that advises countries exploring global expansions. “Companies worry about German law. They hear nightmare stories about hiring people in France, and not being able to get rid of people. These worries weigh pretty heavily.”

 

And yet some of his clients are now looking around for backup plans.

 

“Clients that do have inventory are much more inclined to at least ask the questions, or are thinking about alternatives,” Mr. Chipman said. “We are seeing more caution, taking more time.”

Economic data in Britain and Europe has held up better than many expected, with no discernible shock. But many economists and government officials assume a Brexit-related slowdown in investment is already underway.

 

The vote has sent the value of the British pound plunging, increasing the costs Nissan and other companies must pay for imported components. Over all, some 59 percent of the components going into the average British-built car are imported, according to the Society of Motor Manufacturers and Traders, a leading trade group.

 

Ryanair, a discount airline with a major presence in Britain, recently declared plans to scale back an expansion, instead shifting growth to Belgium, Italy and Germany. The company’s revenue has been diminished by the drop in the value of the British pound. “Until the final outcome of Brexit has been determined, we will continue to adapt to changing circumstances,” the carrier’s chief executive, Michael O’Leary, said in a written statement.

 

In opting for Brexit, British voters were in part reflecting desires to limit immigration. But free movement of labor is a cardinal principle of the European single market. Britain could either limit European immigration, or maintain its place in the European marketplace — not both.

 

Last month, Mrs. May effectively picked a side. “We will decide for ourselves how we control immigration,” she told a gathering of her governing Conservative Party.

 

This city voted heavily in favor of leaving the European Union, despite the warnings from Nissan that jobs here could be imperiled. Many local voters took the referendum as an opportunity to express dissatisfaction with the British elite.

 

Yet now, as the pound drops and prices of imported goods rise, some of these voters are experiencing a new sentiment — a so-called Regrexit.

 

“People didn’t realize we’ve got two years to sort all this out,” said Daniel Luke, assistant manager at the Dun Cow, a cozy downtown pub with paisley carpets and stained glass windows.

 

At the Spice Empire, a South Asian restaurant, the owner Luk Hussain said he wished he had better understood the economic ramifications of Brexit when he voted to leave Europe.

“You’d see these Romanians coming here with their six or seven children, not working, just collecting the dole, and I’d think, ‘These people are stealing my children’s future,” he said. “I thought, ‘We’re going to clean out the riffraff.’”

 

Now he finds himself paying 20 and 30 percent more for onions from the Netherlands and lettuce from Spain. And he must pay more for dishwashers, because the Eastern European immigrants he used to hire have stopped arriving.

 

“We’re suffering,” Mr. Hussain said. “I made a heavy mistake.”