Certainty without conviction: Why has the Trade and Cooperation Agreement failed to reverse Brexit relocations?

Executive summary

UK firms have permanently relocated high-value operations into the EU in response to Brexit, and the Trade and Cooperation Agreement (TCA) has not reversed this.

The May 2025 UK–EU Summit re-established political dialogue but left the most consequential areas – regulatory cooperation in services, financial services equivalence and professional qualifications – for future negotiation. The next summit and 2026 TCA review are the critical window to address the underlying cause of relocation: regulatory friction, not tariff barriers.

Breinlich et al. (2024) estimate that the Brexit vote generated £21.2 billion of additional UK investment into the EU by 2019. Our causal estimates corroborate this finding: we estimate that Brexit redirected approximately $29 billion (£22 billion) of additional UK greenfield investment to the EU between 2016 and 2019 alone, creating over 101,000 additional jobs and approximately 1,280 additional projects. The reallocation continued and deepened well beyond the referendum period, and the TCA has not reversed it.

Using synthetic difference-in-differences and Poisson pseudo-maximum likelihood methods applied to greenfield Foreign Direct Investment (FDI) data, we examine:

• Aggregate shifts in UK outward FDI flows to EU and non-EU destinations
• Shifts in investment motives, particularly market-seeking, efficiency-seeking, and strategic asset-seeking projects
• Sectoral changes, with emphasis on manufacturing, business services, and R&D-intensive industries

Key findings

Brexit reshaped UK outward investment decisively. Firms shifted projects and jobs into the EU to preserve regulatory alignment and, to a lesser extent, market access. Between 2016 and 2019, Brexit redirected an estimated $29 billion (£22 billion) of additional UK investment to the EU, created over 101,000 additional jobs, and generated approximately 1,280 additional greenfield projects. Outward FDI to the EU increased by 86% in value, 61% in project numbers, and 90% in job creation – concentrated in mining, professional services, finance, and advanced manufacturing. The absence of a similar increase to non-EU destinations confirms this was a Brexit-specific reallocation, not a broader expansion of UK outward investment.

The TCA stabilised but did not reverse relocations. Even taking point estimates at face value, the TCA recovered at most a third of what Brexit displaced – approximately $9 billion in value and 28,000 jobs – and these effects are statistically insignificant, absent in robustness checks. EU subsidiaries established post-Brexit have become embedded in firms’ strategies, developing local supply chains, client relationships, and operational networks that will not easily unwind.

Drivers differ fundamentally by sector:

• Services: the pattern is consistent with institutionally driven relocation –  firms maintaining regulatory compliance and professional recognition, rather than seeking larger markets or cheaper labour.
• Advanced manufacturing: relocations reflect supply chain restructuring and competitiveness pressures arising from regulatory divergence.
• Pharmaceuticals: Brexit initially drove EU relocations, but targeted TCA provisions on regulatory cooperation significantly reduced this pressure, demonstrating that addressing specific regulatory barriers works.

What policymakers should do now

• Prioritise regulatory cooperation over further trade liberalisation. Deeper regulatory alignment in high-integration sectors (mutual recognition of qualifications, financial services equivalence, data governance stability) will do more to retain domestic activities than tariff reductions. The pharmaceuticals evidence proves this approach works.
• Elevate strategic cooperation to Summit level. The structural drivers of relocation are partnership questions requiring political commitment, beyond technical trade adjustments. The next summit must deliver substantive agreements on services, manufacturing supply chains, and data governance.
• Rebalance investment policy from attraction to retention. Current policy emphasises inward FDI. Retention of existing high-value operations matters equally. Firms respond to long-term regulatory stability and credible industrial strategy with cross-party support.
• Act within the narrowing window. Within 3–5 years, UK subsidiaries already established in the EU will become locked in through sunk costs and network effects – regardless of broader EU economic performance. The damage is the embedding of past relocations and the erosion of UK capabilities, not future exodus. The 2026 TCA review and second UK–EU Summit are the decisive opportunities to convert the May 2025 commitments into binding regulatory cooperation frameworks before these relocations become irreversible.

Authors Nigel Driffield, Jun Du, Oleksandr Shepotylo, Xiaocan Yuan