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Four Reasons for Economic Optimism in the UK After Brexit

By November 17, 2020September 5th, 2022No Comments

Brexit created much uncertainty in the business world after it passed in 2016. Though the United Kingdom (UK) officially left the European Union (EU) in January of 2020, the two entities are now in an official transition period while attempting to reach a trade deal to take effect on January 1, 2021. It is unclear whether the two sides will agree on a deal before the transition period ends.

For companies doing business in or with the UK, a “no-deal” Brexit requires navigating new tariffs and more complicated customs regulations. As a result, analysts and industry insiders are worried that a no-deal Brexit will create extra business challenges and damage the UK’s economy.

Amidst these legitimate concerns, experts seek reasons for economic optimism in the UK after Brexit. This post examines how four aspects of Brexit could positively impact domestic and foreign companies doing business in the UK—with or without a trade agreement in place.

Brexit Forces Manufacturers to Consider New Opportunities

While part of the European Union, UK manufacturers exported over 50% of their products to European countries. Manufacturers in the UK also relied heavily on EU supply chains. New tariffs increase the challenges of trading with EU countries, forcing UK manufacturers to both invest in-country and open themselves up to new trading partners.

In an attempt to offset decreased trade with the EU, the UK strikes trade agreements elsewhere. In October, the country forged a deal with Japan, guaranteeing the two nations will trade largely free of tariffs. UK officials hope this agreement will inspire more trade deals in the future. International Trade Secretary Liz Truss believes that the partnership with Japan will boost the UK’s bid to join the Trans-Pacific Partnership, further opening up UK manufacturers to trading opportunities.

As a member of the EU, the UK was subject to some of the world’s strictest anti-subsidy rules. These restrictions severely limited how much the UK could invest in its industries. Leaving the EU gives the UK government power to strengthen domestic supply chains by creating subsidies for specific sectors. Furthermore, tariffs with EU countries will incentivize UK manufacturers to turn to local suppliers. This inward investment presents both challenges and benefits to international firms. While state subsidies will provide a direct advantage to domestic companies, foreign firms also stand to benefit from stronger UK manufacturing partners.

Despite the potential windfall from subsidies and internal investment, UK manufacturers are divided about Brexit’s possible outcomes. Nearly one in three see a no-deal Brexit as beneficial, while 44% see it as bad for business. Regardless of whether the two sides strike a trade deal, 81% of UK manufacturers have already prepared themselves to operate independently of the EU.

The UK Government Will Ease Insurance Rules

The EU forces countries to adhere to its Solvency II insurance law, which some UK insurers found excessively complicated and costly. Free from these regulations, the UK indicated it planned to re-examine its insurance standards to make them more friendly to insurers—and more affordable to the businesses they serve.

Under the EU’s Solvency II law, insurers in the UK must hold significant surplus capital to protect certain long-term business investments, like annuities. This extra capital is known as a risk margin. Since the EU implemented the Solvency II Mandate in 2016, UK insurers have contested that the regulation’s risk margins are overly expensive and difficult to comply with, driving up business costs and creating unnecessary complications.

The UK Treasury will re-examine the risk margin when the Brexit transition period concludes at the end of 2020. By helping insurers decrease operating costs, the Treasury will enable them to “increase the choice and affordability of products available to businesses.” In other words, revised UK insurance regulations present businesses with more options at lower costs.

The Treasury also expressed interest in easing regulations that impact insurers’ ability to invest in long-term infrastructure projects. By making it easier for insurers to proceed with infrastructure investments, the Treasury can spur growth in adjacent sectors, such as contracting and engineering.

The UK Has Increased Power to Set Business-Friendly Taxes

Once separate from the EU, the UK must find new ways to attract overseas businesses. That’s why some experts see Brexit as an opportunity to create more favorable tax conditions for companies operating in-country.

Brexit gives the UK more control over its tax rates, which EU regulations currently influence. By exercising its power to lower taxes, the UK creates a favorable business environment for overseas companies—and better competes with the EU for investment from foreign firms.

The Tax Foundation, a Washington DC think tank, sees reason for the UK to lower taxes following Brexit. A recent Tax Foundation report on Brexit noted that businesses looking to invest overseas are very conscious of how taxes influence their profits. If tax rates in the UK are too high, the report states, “investment is likely to go elsewhere, and economic growth is likely to suffer.”

The Tax Foundation ranks the UK as only 17th out of 36 OECD (Organisation for Economic Co-operation and Development) countries in its corporate tax competitiveness. In other words, the UK’s corporate tax structure is not currently a strong draw for international businesses. To boost appeal to overseas companies following Brexit, the UK must take a pro-growth, business-friendly approach to tax reform.

London Remains a European Financial Hub Post-Transition

Financial professionals regard London as the business capital of Europe. While the city has been a prominent financial center since it underwent massive deregulation in the 1980s, London also benefited from the UK’s inclusion in the EU. Under the EU, investors could bank in London and freely move money into markets across the EU. New tariffs and regulations make it more complicated for companies to use London as a base for doing business across Europe, threatening the city’s role as Europe’s financial capital.

Despite Brexit’s challenges for companies doing business between London and the EU, experts believe London will remain a prominent European financial hub. According to Bloomberg editors Mark Whitehouse and Clive Crook, Europe is currently too economically divided to unseat London as the region’s financial capital. Many European countries have their own rules for financial processes such as bankruptcy and accounting, increasing the challenge of doing business across borders.

Furthermore, the EU has grown less financially integrated as countries like France, Luxembourg, and Ireland compete to become financial hubs. Though these countries stand to benefit from no longer competing with the UK within the EU, experts believe they are not currently ready to overtake London as a top financial center.

Other experts point to London’s continued economic and social cache. James Butland, Vice President of Global Banking at fintech Airwallex, states that “London remains an attractive place where people want to live and work. The UK has always been, and continues to be at least for now, a world leader in financial services, eclipsing many of its EU rivals across the sector.”

Similarly, Alastair Holt, Partner at global law firm Linklaters, sees London continuing to serve as Europe’s business epicenter. “Other European cities will not be as influential as London, at least in the short to medium term,” Holt says. As the world continues to globalize, Holt also believes that “London can play a critical role in bridging the East and West.”

The numbers prove that London will remain Europe’s financial center at least for the near term. Over 1,400 EU financial institutions applied for operating licenses in the UK at the beginning of 2020, with more than 1,000 of these seeking to set up their first UK office.

Overcome Brexit Uncertainty with a Global Expansion Expert

The details of Brexit are continuously changing—and the UK’s economic future hangs in the balance. Companies doing business in the UK must continue to track updates regarding a Brexit trade deal. An international expansion partner like Velocity Global helps companies maximize opportunity and minimize risk in evolving economic situations like Brexit.

With expertise in over 185 countries worldwide, we help companies like yours meet their global expansion goals, regardless of changing business regulations. Whether you’re looking to test market viability, hire new workers, or complete any expansion goal in the UK and beyond, we’re here to help you every step of the way. Reach out today to find out how International PEO can streamline your global expansion.