UK risks losing American investment unless post-Brexit trade disruption is fixed

The UK risks forgoing a wave of US investment unless it irons out its post-Brexit trading relationship with the European Union (EU), a new report published today warned.

The UK-US economic corridor remains strong, but would be strengthened by London cooling tensions with Brussels, according to a report by consultancy Bain and Company and BritishAmerican Business.

The UK-EU trade agreement kicked in in January 2021 after the post-Brexit transition period ended.

Heightened political and regulatory risk has tempered American companies’ plans to expand in the UK, the report said.

The UK government has threatened to tear up the Northern Ireland protocol, raising the risk of the post-Brexit trade deal with the EU falling through and casting doubt over how British firms will trade with their counterparts on the Continent.

London and Brussels have yet to reach a deal to recognise each other’s financial services regulatory regime, known as an equivalence agreement.

New chancellor Nadhim Zahawi – who bowed out of the Tory leadership contest at the first hurdle – is expected tomorrow at his Mansion House speech to outline a plan to remove legacy EU rules governing the UK’s financial services sector, according to reports today in the Financial Times.

A more cumbersome tax regime was identified as a key factor driving US firms’ confidence in Britain lower.

Corporation tax is set to rise from 19 per cent to 25 per cent next April. Employers also now have to pay a 1.25 percentage point national insurance rate. 

Several candidates vying for the Tory leadership crown have pledged to reverse the corporation tax and national insurance rise. Critics have argued unfunded tax cuts will increase borrowing and inflation, which is already running at a 40-year high of 9.1 per cent.

The overall UK tax burden is forecast to hit the highest level since the late 1940s, mainly to finance greater healthcare spending to cope with an ageing population.

While still high, Bain and BritishAmerican Business’s transatlantic confidence index dipped to 7.3 (out of 10) this year from 7.8 2021.

A scarcity of skilled workers also weighed on optimism, with US firms citing the UK’s more restrictive post-Brexit immigration system as the most common drag on investment intentions.

“Concerns over the UK’s post-Brexit relationship with the European Union, its future tax competitiveness, and perceived restrictions to labour mobility and access to talent are the driving force behind this slip in confidence,” Duncan Edwards, chief executive of BritishAmerican Business, said.

Edwards called on the winner of the Conservative leadership contest to fix these problems or risk the UK losing its place as “the leading place to do business for transatlantic investors”.

A government spokesperson told Morning Wire: “We have a thriving £200bn trade and investment relationship with the US. American investment supports over a million jobs in the UK, and US investor confidence in the UK remains high with the latest figures showing a £19bn increase in annual foreign direct investment from the US.”

“We are boosting UK-US trade and unlocking opportunities for businesses on both sides of the Atlantic,” they added.