To hear the wise heads at the Council of Foreign Relations tell it, the voters of Britain just inflicted on themselves one the most self-destructive own-goals in modern economic history. Referring to Thursday's extraordinary vote to pull Britain out of the European Union, Council president Richard N. Haas said, "We are seeing the beginning of the dissolution of one of the premier nations in the world." When asked to come up with some kind of positive spin on the future, Haas's colleague Sebastian Mallaby, the Council's Paul A. Volcker senior fellow for international economics, could only muster the observation that the U.S. and Western Europe have "some cushion of prosperity" to see them through the recessions and political disruptions he believes are sure to follow. "It won't be like Indonesia in 1997," said Mallaby, "when people didn't have enough to eat." I hope that makes you feel better.
In case you had hopes that being in America might protect your business from Brexit fallout, Haas and Mallaby were quick to dash them. "This is a cloud without a silver lining for the U.S.," asserted Haas. The move has already prompted a rise in the dollar against the pound and euro, which will make any U.S.-made products or services more expensive (or less profitable) in the U.K. and European markets. Since the vote was in many ways a repudiation of globalization, it should make it very hard for Congress to pursue any of the trade deals awaiting approval, yet another impediment to growth if your business relies on customers or suppliers abroad.
Much of the Council of Foreign Relations discussion dealt with global politics. For example, Haas and Mallaby predicted that the withdrawal of Europe's most sophisticated military power from the E.U. will be a body blow to NATO unless it is offset by American action. But the economic implications are many, and certainly not limited to enterprise-size businesses. Among them:
The U.S. economy will slow, and the Fed's ability to respond is limited.
Capital rushing to the U.S. as a safe haven has already begun to elevate the dollar. That inevitably will slow exports and slow economic growth as a result, and what Mallaby sees as a near-inevitable recession in Britain will only further dampen demand. In pre-Great Recession days, the Federal Reserve could offset the drag of the higher dollar by lowering interest rates. With rates already historically low at this point, says Haas, "that conventional tool is no longer available."
Global red tape will get thicker and more tangled.
The U.S. will now have to negotiate separate trade and technical standardization terms with Britain and the E.U. A number of them affect U.S. tech companies doing business in Britain, as Inc.com contributor Joseph Steinberg notes. Mallaby estimated that it will take as long as five or six years before all the necessary new standards are in place. The problem would only magnify if Britain's departure from the E.U. leads to other nationalist breakups, like a (now likely) secession by Scotland from the U.K. or by Catalonia from Spain.
Immigration will become an even more explosive topic on the U.S. political scene.
American entrepreneurs, like Salesforce's Marc Benioff, who favor an expansion of H1-B visas for talented foreign-born workers or farmers looking for seasonal "guest worker" visas, are likely to see no progress in the wake of Thursday's vote. Haas and Mallaby noted that anti-immigrant politicians like Donald Trump and France's Marine Le Pen will take heart. The hope for more enlightened immigration policies, even those designed to aid entrepreneurs, seems more remote than ever.
Probably the most controversial opinion to emerge from the Council executives' gloomy conference had to do with the role of popular direct votes in modern democracies, both here and abroad. "I don't think referenda are necessarily the best way to decide the big, complicated policy issues that nations face today," said Haas, as Mallaby noted that the overwhelming majority of British members of Parliament favored remaining in the E.U. Ordinary Britons went into the voting booths to send a message about their distrust of elites and globalization, said Haas. "But now they are going to have to live with consequences that will go far beyond what they intended."