By Eric Vandenbroeck and co-workers

America’s Brexit Phase, Trump’s Tariffs, and the Price of Economic Uncertainty

The chaotic trade policies of U.S. President Donald Trump have created a climate of uncertainty that does not bode well for the U.S. economy. In his second inaugural address, in January, Trump declared his intention to fundamentally restructure the United States’ place in the global economy. In April, following his announcement of the so-called Liberation Day tariffs, his administration embarked on a wholesale reshaping of generations’ worth of international trade policies. But in the weeks since, Washington has reversed course on some tariffs and begun negotiations on others with major trading partners such as China. Meanwhile, U.S. policymakers are making sweeping changes to immigration policy and contemplating restrictions on foreign direct investment. Little wonder that U.S. Treasury Secretary Scott Bessent recently described the administration’s approach as “strategic uncertainty.”

The outcome of this supposedly strategic uncertainty, however, is predictable. Unless Washington changes course fast, the United States will suffer many of the same consequences that the United Kingdom did in the aftermath of Brexit. By voting to leave the European Union in June of 2016, after nearly half a century of membership, the United Kingdom opted to upend its trade, immigration, and investment arrangements with the rest of the bloc. Brexit ended up being a protracted process, not a single event, as changes to British economic policies took years to negotiate and implement. Policy uncertainty facing the country’s businesses surged and remained high for years. That sustained uncertainty did not fundamentally alter the United Kingdom’s trade outlook; trade policies that had been in place before the Brexit vote remained mostly unchanged for some time. Indeed, for five years, British exports and imports remained almost constant; only after higher trade barriers with the EU were permanently in place in 2021 did trade volumes begin to fall.

But despite little change in trade policy and volume for the first five years after the Brexit vote, the British economy suffered. The period of prolonged uncertainty ushered in by the Brexit vote hampered business investment. Beginning in 2016, years of stagnant investment slowed the country’s growth in labor productivity and real incomes. If Washington continues to embrace “strategic uncertainty,” the United States, too, will likely face years of stagnating investment, sluggish growth in its economic output, and flat or even falling standards of living.

 

“A Process, Not an Event”

Many initial economic forecasts projecting Brexit’s impact predicted that the United Kingdom’s trade would fall, leading to lower output. In April 2016, two months before the Brexit vote, the British treasury projected that the United Kingdom’s gross domestic product would fall by nearly four percent over 15 years. Other forecasts predicted an immediate post-vote decline in trade and output. But for five years after the Brexit vote, the country’s trade changed little. Trade openness, even allowing for the pandemic, moved more or less in line with other peer countries.

Sir Ivan Rogers, the former British ambassador to the EU, presaged the more important, more damaging impact of Brexit in a 2018 speech, when he said, “Brexit is a process, not an event.” Soon after the Brexit referendum, it became clear that British policymakers had little idea what the post-Brexit trade regime with the EU would look like. Around half of the United Kingdom’s exports and imports were with the EU and were thus covered by an agreement that the United Kingdom and the EU would need to renegotiate. Non-EU trade was also governed by EU agreements that likewise needed to be replaced.

The major British political parties were split on what to do. “Soft” Brexiteers proposed making minimal changes, hoping to maintain common product safety standards, liberal movement of labor, highly integrated supply chains, and the existing, nearly frictionless trade in goods and services. “Hard” Brexiteers argued that minimal changes would betray the people’s wishes and decried the government’s slow-going approach as “Brexit in name only.” They preferred independent product standards, limited labor mobility, and the renegotiation of non-EU trade relations. Indeed, in June 2018, the then Brexit secretary David Davis, predicted that new trade deals with Canada and the United States would be secured within two years.

In terms of actual policy changes, virtually nothing happened for nearly five years, as parliamentary and judicial challenges to Brexit came and went. It was not until January 2020 that the United Kingdom exited the EU, and it was not until May of 2021 that the new EU-UK Trade and Cooperation Agreement came into force. And since 2020, no comprehensive new trade agreement has been reached with any substantial non-EU countries, either, despite years of negotiations. Instead, existing EU trade deals with all other nations were effectively rolled over. To this day, Britain’s Brexit path remains meandering and slow. In May, the United Kingdom and the EU convened their first summit since the United Kingdom officially departed in late 2020, and contentious negotiations continue in key economic areas such as fisheries and agriculture.

A U.S. flag fluttering at a port in San Pedro, California, May 2025

 

Brake On Investment

Brexit’s years-long process of economic and judicial proposals, disagreements, and negotiations meant sustained policy uncertainty for British companies. And that policy uncertainty turned out to be ruinous for business capital investment. In 1983, Ben Bernanke, later the chairman of the Federal Reserve during the Bush and Obama administrations who was then a young economist at Stanford, published a paper on uncertainty and investment. Bernanke’s key insight was that when confronted with high or rising uncertainty, companies with greater sunk investments—those that are unrecoverable—are more likely to delay making additional investments. Such companies will rationally wait for greater clarity on market demand and input costs, which are influenced greatly by government policies, to make innovation efforts.

In reality, a great deal of business investment involves sunk costs, particularly for globally integrated companies. So if a country announces a fundamental change in its global economic relations but then leaves it unclear what new policies will prevail and when, the result is likely to be a sharp and sustained slowdown in capital investment by that country’s companies.

This kind of uncertainty-induced investment slowdown is precisely what befell the British economy in the wake of the Brexit vote. British business investment was about $85 billion in the second quarter of 2016; it was barely changed, at about $86.7 billion, in the last quarter of 2024. By contrast, U.S. business investment grew by 35 percent over this period. According to monthly surveys by the Bank of England since 2016, British firms have consistently cited Brexit-related uncertainty as one of their top three concerns. The United Kingdom’s National Institute of Economic and Social Research has noted that despite the signing of the trade and cooperation agreement with the EU, “firms remain cautious due to shifting regulatory requirements, potential market access restrictions, and trade frictions.”

Since the referendum, near-zero growth in British capital investment has also slowed growth in British citizens’ real incomes to near zero, because slow investment slows growth in labor productivity. Over the same period, inflation-adjusted average incomes in the United Kingdom have risen by only about four percent; at that pace, it would take more than a century for average incomes to double. The typical British household would be earning almost $2,000 more a year today had Brexit not slowed growth in investment, innovation, and the economy overall.

 

Déjà Vu

Thus far, the initial impacts of Liberation Day on the United States’ economy look ominously like those of Brexit on the United Kingdom’s. Nearly every possible indicator measuring the uncertainty that faces American businesses has surged. The Economic Policy Uncertainty Index, which tracks indicators including news articles discussing policy uncertainty and disagreement among prominent economic forecasts, nearly doubled when Trump was reelected, and then more than doubled again after Liberation Day. Today, it is higher than it was during the COVID-19 pandemic, the 2007–8 financial crisis, or, indeed, any other time since 1985, the earliest year for which data is available.

Leading publicly traded U.S.-based companies, including Ford, Mattel, Southwest, and UPS, have ceased publishing forecasts of future earnings because they say their business outlook is so unclear. And according to both government and private-sector surveys, business investment expectations have plunged. In April, the Federal Reserve’s Beige Book, a report on the U.S. economy published eight times a year, used the word “uncertainty” an unprecedented 80 times.

The effects of all this uncertainty did not show up in this year’s first-quarter statistics for U.S. gross domestic product. Indeed, private capital investment surged at an annual rate of 24.4 percent, as American companies rushed to import capital goods in advance of tariff increases; first-quarter U.S. imports of goods exploded at an unparalleled annual rate of 53.3 percent. But looking ahead, there is every reason to expect capital investment to stagnate.

According to the CEO Economic Outlook Survey for the first quarter of 2025, published by the Business Roundtable, an association of more than 200 CEOs of leading U.S. companies, 58 percent of member companies have forecast flat or falling U.S. capital investment in the next six months. And during this year’s first quarter, the number of merger-and-acquisition transactions announced in the United States fell by 19 percent relative to the last quarter of 2024. Among small businesses, only 18 percent planned new capital outlays over that same period, the lowest percentage since April 2020, when the pandemic had just been declared. The hiring of workers has also slowed. The monthly hiring rate—the number of new hires as a proportion of overall employment—was 3.4 percent in the first three months of 2025, the lowest for that period for any year in more than a decade, according to the Bureau of Labor Statistics.

The companies most affected by this uncertainty are the same ones that drive innovation and undertake most of the investment in the United States. In 2022, the most recent year for which data is available, the parent companies of U.S.-based multinationals undertook 43.5 percent of all capital investment by U.S. companies and 66.6 percent of all research and development by U.S. companies.

 

A Storm Brewing

Despite the climate of uncertainty that Trump’s policy chaos has fostered, there are some trends that favor the United States. For at least a year before Trump’s reelection, the United States was enjoying a surge in capital investment linked to generative artificial intelligence. Microsoft, for example, has announced plans to invest $80 billion in 2025 in AI-enabled data centers. If the underlying business case for generative AI proves immune to the United States’ trade wars, then this important driver of overall U.S. business investment will not wither. Moreover, Trump has repeatedly called for foreign-based multinationals to expand their investments in the United States rather than export their products here.

But the critical issue facing U.S. companies—profound policy uncertainty—remains. Trump has unleashed a dizzying barrage of tariff increases, decreases, pauses, and negotiations with the United States’ major trading partners. And there is no indication that his administration is ready to move past its disastrous “strategic uncertainty” approach. Under these circumstances, few globally connected U.S. companies are likely to announce large new capital investments. And foreign-based multinationals are facing the same U.S. policy uncertainty that U.S.-based companies are, which may inhibit their investments in the United States, too.

As the United Kingdom learned after Brexit, uncertainty produces grinding stagnation in capital investment and R & D by private companies. That, in turn, leads to plummeting productivity growth and stagnant real incomes. Instead of learning from this bleak recent history, Americans are now painfully absorbing this lesson by repeating it. According to last month’s Surveys of Consumers produced by the University of Michigan, expectations for year-ahead U.S. price inflation have skyrocketed, from 2.8 percent last December to 6.6 percent last month.

The biggest lesson of Brexit is that policy uncertainty can chill business investment, growth in productivity, and incomes—quickly, lastingly, and painfully. The supporters of Trump’s “strategic uncertainty” approach have been forewarned.

 

 

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