There are many reasons for the UK to improve relations with Europe, from economic interest to offsetting the risk of reduced US support for European security. We advocate many small steps to make the best of UK–EU contacts while respecting the balance of public and political opinion. But the best strategic move should be to reframe relations more around geopolitical and security cooperation.
Europe presents the next UK government with difficult choices. There are many reasons to seek closer relations – economic above all – but the next government will want to respect the results of the Brexit referendum and the enduring Eurosceptic tendency in British politics. It will need, too, to respect the EU’s own difficult choices, notably the familiar ‘broader or deeper’ question about future enlargement.
How can the Trade and Cooperation Agreement be improved?
Sticking with the status quo offers few benefits when the UK badly needs sources of economic growth. The 2020 Trade and Cooperation Agreement (TCA) removes tariffs and quotas, but it creates other barriers to trade – especially in goods – with the UK’s largest market. These barriers include regulatory, customs and rules-of-origin requirements, all of which increase the costs and bureaucracy of doing business. While there is scope for the next government to pursue some improvements to the TCA (see below), these are unlikely to deliver significant economic and strategic benefits. At the same time, bolder proposals outside the TCA for something like a quasi-single market for goods are unlikely to be embraced by the EU.
Some analyses find that the UK’s economic situation is poorer as a result of Brexit. The Office for Budget Responsibility, drawing on external studies, has suggested that UK productivity is likely to fall by 4 per cent relative to what it would have been had the UK stayed in the EU. The National Institute of Economic and Social Research estimates GDP may be 2–3 per cent lower than if the UK were still in the EU. Admittedly, assessments of economic and trade performance in the past five years are complicated by the effects of the pandemic. Recent revisions by the UK’s national statistics agency suggest the UK economy recovered better from COVID-19, relative to other G7 members, than had previously been assumed. But doing better than comparators is not the same as doing better than a hypothetical UK still in the EU. It remains difficult to see how making it costlier and harder to trade with Britain’s most important market could contribute to UK growth. Indeed, some analyses find new trade obstacles with Europe are affecting the UK’s high-productivity manufacturing, causing a drift towards low-productivity sectors.
Prospects for FTAs with the US or China are limited, and although a UK–India deal might add a slight boost to GDP, few other potential agreements are left that would cover a meaningful share of UK trade.
Nor have the barriers been offset by benefits from FTAs with non-EU countries, even though such deals were touted by some Brexit supporters as part of the rationale for exiting the EU. Prospects for FTAs with the US or China are limited, and although a UK–India deal (see Chapter 2) might add a slight boost to GDP, few other potential agreements are left that would cover a meaningful share of UK trade. The government has nominally finalized over 70 FTAs since Brexit, but almost all of these merely ‘roll over’ terms the UK already enjoyed as an EU member, so these deals will do little to transform the UK’s economic fortunes. FTAs also tend to govern goods; they cannot form a core trade strategy for an 80 per cent service-oriented economy like the UK’s, especially when the EU market accounts for nearly half of UK goods exports. Put another way, opening new markets to merchandise trade will not add enough to export receipts to offset the increased barriers to trade with the EU.
There are some prospects for reducing trade barriers with the EU without significantly reopening negotiation of the current relationship (which would cost political capital and time – and depend on the EU’s support). The TCA is up for review in 2026, and there is scope to pursue agreement of additional provisions within that process. This could include alignment on controls regulating the trade of animals and plants, and mutual recognition of professional qualifications. While such measures would take painstaking negotiation to agree and would be piecemeal in nature, they might still be of value to a future UK government seeking incremental wins. Harmonizing professional qualifications, for instance, could improve post-Brexit labour mobility in some sectors.
There are some prospects for reducing trade barriers with the EU without significantly reopening negotiation of the current relationship. The TCA is up for review in 2026, and there is scope to pursue agreement of additional provisions within that process.
Rejoining the Erasmus Plus scheme might enable greater academic exchange. Youth mobility schemes might help ease some labour shortages, while increased sector-specific mobility – for example, for some seasonal workers and performers – could ease barriers that small and creative businesses have encountered. While cooperation of this sort could conceivably be pursued bilaterally with individual EU states, it would be more efficient to add provision for youth and labour mobility to a TCA review; the European Commission has signalled some openness to this. Indeed, the commission made an offer in early 2024, but the UK government rejected this, citing the end of freedom of movement with the EU – despite the UK having youth mobility schemes with several other non-EU states.
Energy and climate are also areas in which the UK could seek stronger cooperation within the TCA. The treaty’s current provisions for the use of shared energy infrastructure expire in June 2026. Expanding commitments to shared energy interconnectors and efficient transfers of energy between the UK and Europe would lower energy costs and strengthen energy security. On climate policy, cooperation could help to tackle the pressing divergence between the UK’s emissions trading scheme and its EU counterpart. As of February 2024, the UK’s carbon prices had fallen significantly compared to those under the EU’s scheme. The EU’s carbon border tax regime (also known as a ‘carbon border adjustment mechanism’, or CBAM) makes companies selling into the EU pay the difference between prices under any foreign carbon pricing mechanism and the EU’s, so the fall in UK prices potentially imposes hefty costs on UK exporters. The UK is now proposing its own CBAM, covering different sectors and with different reporting mechanisms. The TCA explicitly states that the EU and UK could consider linking their emissions trading schemes in future to ensure they work effectively, and the next government should support this; the longer the two schemes are unlinked, the likelier it is that they will diverge in ways that will be difficult to untangle....
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