Why BREXIT Could Hurt the US Economy

When US Secretary of State John Kerry came to visit London after the Brexit, he declared that the U.S. “could not ask for a better ally” than the U.K.

True, the U.S. and the U.K. have had mutually beneficial relations for a long time, and are connected by a common thread, from trade and industry and commerce to culture and even international relations.

That said, nothing immediate will happen to the US economy after UK decided to leave the European Union. Take note, I said “immediate”.

But of course, there will be some ramifications.

According to a report in Time, the U.S. “exported $56.4 billion worth of goods to the U.K. in 2015, and imported $57.8 billion worth from the U.K. That makes the U.K. our seventh-largest trading partner, accounting for 3 percent of total trade. Canada, by contrast, accounts for 15.4 percent of total U.S. goods trade, with $575.5 billion of combined exports and imports.”

As a whole, trade between the two nations only makes up 0.5% of U.S. economic activity. However, the connections go well beyond direct trade between the two global powers.

Here are four ways the wake of Brexit could hurt the U.S. economy:

  • The U.S relies on Britain to help garner broader European buy-in when it comes to major security, trade or foreign policy issues. But the Brexit decision drives home the cold, hard fact that the U.K. is unlikely to have that kind of clout with the European Union again — and U.S. now needs to rethink its relations with European nations. There’s also the possibility of other members of the EU following U.K.’s example, France one of them. If more members of the EU leave, there’s a big chance it will disintegrate. The EU is one of the world’s largest trading blocs and it’s a major trade partner with China and the United States. If it breaks, it could lead to a lot of global uncertainty and many trade deals would need to be restructured.
  • The Brexit issue comes at a critical juncture for U.S. and Europe. The U.S. government is trying to galvanize a multibillion-dollar trade deal, the Transatlantic Trade and Investment Partnership, with the EU, the largest single market in the world. The White House looked to Britain to help sell a wary EU on entering this trade bloc with the U.S. Brexit has left U.S.’s chances of making the deal hanging in the air.
  • Brexit has affected and is continuously affecting the global stock market. If the trend continues for months, it could cause American business owners and consumers to reconsider their spending plans. This is where Gross Domestic Product or GDP will come into play. See, American consumers make up the majority of U.S. economic activity. If they don’t spend, the economy doesn’t grow. And how much they spend often depends on how they feel good about where the country is heading. Generally, Americans don’t buy homes and cars and splurge on travels and the finer things in life if things look bleak. A cutback by consumers would be particularly bad news at the moment.
  • Brexit weakens the pound and triggers a strong dollar. A strong dollar sounds good — and it is for American travelers — but it’s bad for U.S. businesses that sell products overseas, and ultimately, to U.S. trade. In fact, many observers believe that economically, the biggest impact of Brexit is what they call the “dollar impact”. The day after Brexit, CNN reported that the U.S. dollar quickly gained against the British pound, up 6.3% Friday, its biggest one-day gain in almost four decades, according to FactSet, a financial data firm. A strong dollar makes company’s products more expensive — and less attractive — to buyers outside the U.S. That hurts sales for your favorite brands like Apple and Coca-Cola and Nike.

In the long run, the global financial system is likely safer with the U.K. independent of the European Union. If you ask the Brits, the EU does not seem to foster financial competitiveness. Many analysts share the same opinion.

For Americans, look at the bright side. It’s a lot cheaper now to take a vacation to the U.K.

 

 

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Sources:

time.com, bloomberg.com, money.cnn.com, politico.com, wsj.com, foxbusiness.com