Observers watch for ripple effect in U.S., Kentucky after United Kingdom's decision to split from European Union

06/26/2016 08:00 AM

With the second-highest importer of Kentucky goods voting to leave the European Union on Thursday, officials and observers are taking a wait-and-see approach as the United Kingdom hammers out an exit agreement in the coming years.

The UK imported nearly $2.6 billion in Kentucky products last year, a 9.4 percent increase from 2014 and the second-most among state exports, according to data from the Cabinet for Economic Development. Through the first quarter of this year, Britain received about $684.3 million in exports from the state, a 1.9 percent improvement from the first quarter of 2015 and third-most so far this year.

Thursday’s 52-48 vote by Britain on a referendum dubbed Brexit sent global markets into a panic, with the Dow Jones index closing Friday down 608 points.

The pound sterling dropped in value relative to the U.S. dollar, finishing at $1.37 after starting at $1.50.

Jack Mazurak, spokesman for the Cabinet for Economic Development, said his agency will be closely monitoring the situation as it’s too early to tell exactly how the UK’s decision will impact the state’s exports of bourbons, cars, aerospace parts and more.

“In terms of the market actions this morning and today and the dollar gaining strength, if that were to last long-term that would not be beneficial to Kentucky or U.S. exports, having a stronger dollar,” Mazurak said in a phone interview Friday. “But the market tends to be very volatile and reactionary too, so a lot will depend on how that smooths out.”

Dr. Susan Roberts, an economics professor at the University of Kentucky, said U.S. exports will cost Brits more in the immediate future with the pound’s decline.

“Right now it’s going to be bad for the U.S. exporters,” she said. “Now if you’re importing things from Britain, then you’re going to be happy because those things will be cheaper, relatively speaking.”

Dr. Jason Abbott, a political science professor at the University of Louisville, said he expects the markets will stabilize over time.

He noted that Greenland left the European Union’s predecessor – the European Economic Community – in a process that took two years, leaving plenty of time for the market panic to subside.

“In the short-term it will be advantageous for Americans to go on holiday in the United Kingdom,” Abbott said in an interview on Friday. “The dollar will go further, but the short-term effects, I think, are likely to be less prolonged than some are expecting. At the end of the day, the economic fundamentals of the British economy haven’t changed. They are the same today as they were yesterday.

“What’s happened is a political decision that was unexpected, that no one had predicted, and the markets don’t like uncertainty.”

What sort of agreement the UK reaches with the European Union will be key, he said. Norway, Iceland, Liechtenstein and Switzerland for example, aren’t members of the multinational group, but they has access to the union’s single market through the European Free Trade Association, which also requires free movement of workers.

“While exports to the rest of the world have grown significantly in the last decade, the European Union collectively is the United Kingdom’s largest export market,” Abbott said.

“About 44 percent of all exports go to the EU, and so for manufacturing companies, for service companies who trade with Europe, there’ll be concerns about will there be tariffs? Will the cost of doing business with Europe increase? Will they have access to that single market, or will they face a climate very similar to what United States exporters face when they export to the European Union?”

Abbott, who is originally from Manchester, England, was able to vote in the referendum as an expatriate. He said he voted to leave the union for Britain’s sovereignty and self-determination.

“I ultimately believe that many of the decisions that are taken at the European level should be taken by the Parliament in Westminster,” he said. “For many people who voted, immigration was the main concern, but that was not mine.”

U.S. automakers with stakes in Kentucky say they, too, will be keeping an eye on the market reaction to Britain’s exit from the European Union.

Toyota Motor Corp., which has a manufacturing facility in Georgetown, said in a statement that it “will closely monitor and analyze the impact on our business operations in the UK and how we can maintain competitiveness and secure sustainable growth together with the UK automotive industry and other stakeholders.”

Ford Motor Co., which has a manufacturing facility in Louisville, said it “will continue working toward this goal with key stakeholders in the UK and across the other Member States and EU institutions to ensure they understand our concerns which mirror those of the majority of the UK and European auto industry.”

“While Ford will take whatever action is needed to ensure that our European business remains competitive and keeps to the path toward sustainable profitability, we have made no changes to our current investment plans and will not do so unless there is clear evidence that action is needed,” the company said in a statement.

Kevin Wheatley

Kevin Wheatley is a reporter for Pure Politics. He joined cn|2 in September 2014 after five years at The State Journal in Frankfort, where he covered Kentucky government and politics. You can reach him at kevin.wheatley@charter.com or 502-792-1135 and follow him on Twitter at @KWheatley_cn2.

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