Rebooting Brexit: Opportunities and challenges from resetting UK-EU trade relations

Britain has left the EU almost five years ago, and the economic damage – particularly when it comes to trade – is now clear. The new Government has put resetting UK-EU relations at the heart of its growth mission. But the concrete actions announced so far are unlikely to make much difference. A far more ambitious approach to rebooting our trading relations will be needed to really shift the economic dial.

How much difference will reducing uncertainty make, compared to actively removing barriers to trade? Should the UK pursue closer regulatory alignment with the EU, and if so which sectors should be prioritised? What meaningful changes can be made within the UK protocol, and where might the UK need to rethink existing agreements? And how much is both economically and politically feasible?

1. Rebooting Brexit Opportunities and challenges from resetting UK-EU trade relations Anand Menon, Chief Executive of UK in a Changing Europe Peter Foster, Public Policy Editor at the Financial Times Sophie Hale, Principal Economist, Resolution Foundation Chair: David Willetts, President, Resolution Foundation October 24 @ resfoundation

2. 2 The new Government says it wants a reset with the EU @resfoundation

3. 3 Index of goods and services exports, current prices (2010=100): OECD & UK Notes: Current prices. US dollar exchange rate converted. Data includes precious metals. Source: RF analysis of OECD, Balance of Payments. @resfoundation Goods trade has been weak since we left the EU

4. 4 But Labour’s “red lines” are already tying its hands @resfoundation

5. 5 But manifesto commitments fall short of the ambition required @resfoundation

6. Labour has indicated openness to closer regulatory alignment with the EU: Product regulation Chemicals And there are substantial economic gains available from reducing regulatory divergence But the breadth and depth of future arrangements is key to the overall impact – and prioritisation is needed 6 Delivering dynamic alignment with the EU @resfoundation

7. 7 Sectors by trade intensity in 2019 (vertical axis) and nominal output per hour by industry in Q4 2019 (horizontal axis): UK Notes: Bubble size represent gross value added in 2019. Trade intensity is calculated as total imports and exports over total supply (at purchaser’s prices). Sectors are categorised as high productivity if sectoral productivity is greater than the whole economy average and as high trade intensity if trade intensity is above the unweighted average of all goods sectors. Source: RF analysis of ONS, Supply and Use Tables and ONS, Labour productivity statistics. @resfoundation 1. Sectors that are productive and trade intensive

8. 8 Regulatory intensity indices by HS section (left panel) and non-tariff measures introduced between 2019 and 2022 (right panel): EU Notes: Both use the harmonised system for classifying traded products – left panel uses HS sections and right panel uses HS 2-digit categories (which are more disaggregated) but is limited to categories where UK exports to the EU exceed £1.5 billion in 2018. Triangle (left panel) gives total regulatory intensity index for animal products in 2021. Source: UK Trade Policy Observatory, Regulatory Intensity Indices (left panel) and UNCTAD TRAINS (right panel). @resfoundation 2. Sectors at highest risks of regulatory divergence

9. 9 Number of regulatory alignment and divergence actions taken by the EU and UK between Q2 2023 and Q1 2024 Notes: Measures are not strictly additive as several actions could relate to the same bit of regulatory divergence. Lighter bars represent active divergence (actions taken by the UK) and darker colours represent passive divergence (actions taken by the EU) with the colour corresponding to the relevant quarter and year action is taken. Source: RF analysis of UK in a Changing Europe, Regulatory Divergence Tracker. @resfoundation 3. Cross-cutting regulatory areas affecting priority sectors

10. More ambition is needed to deliver growth-enhancing improvements The Government has indicated openness to dynamic alignment and there are substantial gains on the table But unilateral alignment won’t automatically deliver improved market access and deeper agreements come with tradeoffs 10 Summary @resfoundation

11. Rebooting Brexit Opportunities and challenges from resetting UK-EU trade relations Anand Menon, Chief Executive of UK in a Changing Europe Peter Foster, Public Policy Editor at the Financial Times Sophie Hale, Principal Economist, Resolution Foundation Chair: David Willetts, President, Resolution Foundation October 24 @ resfoundation