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Bates Research  |  07-01-16

BREXIT

Guest Post by Experts Geoff Winkler and Greg Kyle

We had originally planned to continue our discussion on the dangers of employee theft of trade secrets in part two of last week's blog. However, due to the unprecedented and largely unexpected result of the United Kingdom’s decision to leave the European Union, we have decided to push back part two until next week and instead focus on this historic event.

What is Brexit?

Brexit is a portmanteau term coined to describe the potential “British exit” from the European Union (“EU”), based on the results of a referendum held June 23rd. In the referendum, citizens of the United Kingdom (“UK”) were asked “Should the United Kingdom remain a member of the European Union or leave the European Union?” Remain or Leave were the only two options available to voters. Turnout on the referendum was 72.11 percent with more than 33 million people voting, the highest turnout in a UK-wide vote since the 1992 general election. In the resulting vote, the Leave side garnered 52% compared to the Remain side, which ended up with just 48% of the vote.

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Why did the United Kingdom Decide to Leave?

At the end of the day, the UK vote was carried by Britain and Wales, which voted 54.6 and 55.5 percent to Leave respectively. Concerns in those two countries centered around what many felt was a loss of sovereignty and “unlimited migrants” forced on the UK because of EU regulations. A concern of many in Britain was the alleged possibility of increased terrorism due to migrants as well as the fear that large scale immigration would increase unemployment for native Britons and depress wages. 

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Scotland and Northern Ireland voted overwhelmingly to Remain in the EU, with 62.2 and 55.1 percent voting to Remain respectively. Many of those voting to Remain did so because they feared economic disaster if the UK left the EU.   

Potential Impact for the United States

The impact of the surprising Brexit vote was significantly felt in the financial markets, with the Dow Jones falling 870 points (5%) before recovering. The British pound also dropped to $1.315 versus the U.S. dollar, its lowest level since 1985.

 In the short term, the Brexit vote could delay the Fed’s plan to raise interest rates in the coming months, according to Bloomberg, Many economists are now changing their forecasts for an interest rate hike – the first rate change in more than seven years – to December at the earliest, and likely not until next year.

Long term, the impact on the U.S. economy could be negative. Federal Reserve Chair Janet Yellen recently testified before Congress that “subdued foreign growth and the appreciation of the dollar weighed on exports.” This trend would be exacerbated in the aftermath of Brexit. The surging dollar against the British Pound and even the Euro is seen by many economists as a trend which will continue. This would negatively impact American exports as U.S. goods become more expensive overseas. Additionally, lower exports would be a drag on the already soft U.S. economy, limiting economic growth. According to Deutsche Bank AG economist Torsten Slok, a ten-percent gain in the trade-weighted value of the dollar over time would depress U.S. economic growth by 0.4 percentage points.