Impact of an increase in tariffs
Several US-based industrial conglomerates such as Stanley Black & Decker (SWK), Honeywell International (HON), and Caterpillar (CAT) have operations in the United Kingdom. These companies manufacture products in the United Kingdom and export them to the single market structure of the EU (European Union). Some of these companies may be importing raw materials from the EU to make finished products for export. Similarly, some companies produce goods in the EU and export them to the United Kingdom. If the United Kingdom doesn’t strike a deal with EU, tariffs on industrial goods and services would range between 0% and 16%, depending on the nature of the products.
For example, aerospace components and parts attract tariffs of 2.7%, whereas automobiles and their components can attract tariffs between 10% and 16%. Generally the more technologically advanced the product, the lower the tariffs are. A lot of companies such as 3M (MMM) already have very poor margins in the EU. An additional burden of tariffs would make the EU an unattractive destination for future investments.
Brexit’s impact on employment
The nature of a post-Brexit trade deal would also determine whether staff members from different countries in the European region would be allowed to continue working for subsidiaries of US companies within the United Kingdom. Similarly, there are question marks over British staff members working in the EU. Several industries such as the automobile industry are already complaining about a talent crunch in the United Kingdom. If the United Kingdom makes it even more difficult for immigrants to work within its borders, businesses will take a hit on production and quality.
Best possible outcome
In sum, whether these companies would want to duplicate their operations by having a presence in both the EU and United Kingdom would depend on the tariff structure, which currently is a matter of speculation. Investors should also note that a Norwegian or Swiss type of trade deal could lead to a tariff-free supply chain with minimal impact on operations. Companies would then only have to deal with the macroeconomic effects of Brexit.
In the next part of this series, we’ll look at how Brexit affects Caterpillar and Stanley Black & Decker.