On 24 December 2020, after a tumultuous year dominated by the Covid-19 crisis, the UK and EU came to an agreement and a Brexit deal was announced. On the face of it, the deal is much better than the feared no-deal scenario. However, there are several areas that require further examination with regards to foreign investment.
To put the deal into context, Investment Monitor looked at how important trade and investment with the EU is to the UK.
Trade and investment between the UK and the EU
- In 2019–20, the UK received 37.6% of its total foreign direct investment (FDI) projects from the EU. These projects accounted for 34.5% of total new FDI jobs created in the UK.
- In 2019, 38.9% of the UK’s total service exports (£123.7bn) were destined for the EU. This fell slightly to 36.6% (£51.5bn) in the first half of 2020.
- Six of the top ten countries to which the UK exports services are based in the EU (France, Germany, Ireland, Italy, the Netherlands and Spain).
- The US is the UK’s biggest trade partner in terms of exports, with the UK exporting around one-quarter of its total exports to the country.
- The UK imported almost half (48.8%) of its total service imports from the EU in 2019. In the first half of 2020, this proportion had fallen to 42.86%.
- In 2019, six of the top ten countries from which the UK imports services were based in the EU – France, Germany, Ireland, the Netherlands, Spain and Sweden. In the first half of 2020, Sweden fell from eighth place to 11th.
- The UK imported almost half of its commodity imports (49.5%) from the EU in 2019. These imports totalled almost £270bn. This had reduced to 45.7% for the period January to October 2020 (£183bn).
- The US is the UK’s largest import trade partner. The UK imported £43.7bn-worth of services in 2019 (one-fifth of its total imports). In the first half of 2020, the UK was importing almost one-quarter (24%) of its services from the US. Other notable import partners include India, Japan, Switzerland and Singapore.
- In 2019, the UK exported £170.54bn-worth of commodities to the EU – 46.4% of its total commodity exports. More recent data (January to October 2020) shows a similar proportion of its total imports – 46.7%, or £120bn.
Can the UK continue to trade as normal?
Given the importance to the UK of trade and investment with the EU, a solid Brexit deal is crucial. As hoped, the movement of goods between the UK and EU will continue to benefit from tariff and quota-free trade with no taxes or limits on the exchange of goods. However, there is more red tape, with additional procedures and paperwork to accompany the movement of goods. Northern Ireland will continue to follow many of the EU’s rules to avoid a hardening of its border with Ireland. This will result in new checks being introduced on goods entering Northern Ireland from the rest of the UK.
The omission of tariffs on goods is certainly good news for manufacturers. Existing investors may feel more assured that their costs will not have to be raised. Also, for large manufacturing companies already present in the UK it can be a more difficult decision to uproot an existing facility due to the scale of the existing operation – for example, the company needs to source a new plant and recruit hundreds or thousands of workers – although smaller operations and those in sectors such as services may have more flexibility of movement. However, we feel the UK has put itself at a potential disadvantage when it comes to attracting new FDI projects. Investors are put off by uncertainty and the potential for tariffs to be added in the future (should the UK not comply with existing agreements with the EU, the EU can impose tariffs).
Supply chains stand to be affected as goods are bound by rules of origin, with companies having to self-certify the origin of goods in order to be able to trade tariff-free.
The UK is also now free to set its own trade policy and can negotiate deals with other countries. Talks are being held with the US, Australia and New Zealand – countries that currently do not have free trade deals with the EU – while it had already signed a new deal with Japan in October 2020.
The agreement on fishing has seen the UK acquire 25% of fishing rights in UK waters from EU vessels. While this was a highly contentious matter, it is not one that brings a significant volume of FDI projects or jobs to the UK. Chemicals and agriculture – the industrial grouping that fishing falls under – accounted for 3.6% of the UK’s total inbound FDI projects in 2019–20, and only 0.76% of new jobs created by foreign investment, with the majority of these attributed to the chemicals sector.
The UK is already facing an increasingly competitive and difficult environment when it comes to attracting FDI. Covid-19 has caused FDI volumes to fall significantly across the world, with a high number of investment agencies competing for a smaller number of projects. Competition is rife across Europe for FDI and Brexit provides a further obstacle for the UK to navigate in order to attract foreign companies.
The number of FDI projects in the UK in 2018 and 2019 fell below the 2,000 mark that had been reached in the three years prior, with 1,782 and 1,852 projects recorded, respectively.
By contrast, France brought in 1,468 FDI projects in 2019, the third year in a row it had enjoyed record FDI project numbers. Spain’s FDI has been increasing since 2017, with 813 projects recorded in 2019, and in the Netherlands the number of FDI projects increased yet again when measured year on year, going from 323 projects in 2015 to 397 in 2019. FDI in Ireland in 2018 and 2019 also went above 2017 levels, while Germany witnessed a record year in 2018, attracting 2,062 projects.
Market access is a key driver for FDI. Many companies have established operations in the UK to access the EU market as well as the UK domestic market. Although the UK has a large domestic market of 66 million people, it is dwarfed by the likes of the US and China. The EU added another 520 million to the market the UK offered access to. Foreign companies may therefore look to establish a presence in both the UK and the EU going forward, or potentially prioritise being in the EU given its larger market.
With professional qualifications no longer automatically recognised by both the UK and EU, the skilled workforce that attracts many companies to set up in UK to serve the European market will be impacted.
Lack of information regarding services
Despite the fanfare, the UK–EU agreement is far from complete, with further negotiations set to take place. Financial service companies have received no insight on access to the EU market, while professional services companies such as law and accounting firms have many uncertainties over issues such as data-sharing regulations. Service-based FDI projects accounted for 62.6% of total UK FDI in 2019–20, while financial services alone accounted for 7.5% of FDI projects and 7.5% of new FDI jobs in that time period, highlighting the need for clarity for investors.
Overall, the agreement addresses some important areas, including trade, but there are still many questions to be answered, especially with regards to the services sectors, which contribute significantly to FDI in the UK. Until these questions are answered and a full Brexit agreement is in place, investors are likely to remain hesitant. The longer the negotiations take, the more detrimental this will prove for FDI in the UK.