Trader Talk

Brexit could bring a little discussed drag on the US economy

An employee manually counts 20 sterling pound notes in this arranged photograph at a Travelex store in London, United Kingdom, on March 6, 2013.
Simon Dawson | Bloomberg | Getty Images

It's the latest Wall Street parlor game: parsing the effect of Brexit on the U.S. economy.

While the effect on U.S. stocks has been fairly muted so far, with the S&P 500 down only roughly 1 percent since the vote, we can already see broader effects on the global economy. Notably, we have seen tighter financial conditions, some bank contagion, and some dramatic currency moves, with the British pound down 13 percent against the dollar, and the yen up 5 percent.

But there's one other effect of Brexit that has been little discussed: The effect on direct foreign investment in the U.S.

I'm not talking about buying or selling U.S. stocks or bonds. Those are indirect investments. Direct investments are when a foreign company sets up a subsidiary in the U.S., or merges with a U.S. company, or engages in a joint venture.

In 2015, the U.K. was the largest single source of foreign direct investment in the U.S. It accounted for $483 billion of the $3.1 trillion in foreign direct investment in the U.S. that year. That's about 16 percent of all foreign investment.

Only Japan was even close:

Foreign Direct Investment in the U.S. in 2015 (billions)

  1. UK $483
  2. Japan $411
  3. Luxembourg $328
  4. Netherlands $282
  5. Canada $268
  6. Switzerland $257
  7. Germany $255
  8. France $233
  9. United Kingdom Islands, Caribbean $93
  10. Belgium $80

Source: BEA

A 2014 report by the Confederation of British Industry (CBI) cited by Forbes said that UK foreign investment supports nearly one million jobs across the U.S., with almost one in four of those in the manufacturing sector.

How much will this investment be impacted by Brexit? We don't know yet, but this is another example of how interconnected the world has become. The Brits don't live on a financial island, and neither do we.