EU-UK trade progress prompts hype and hope

UK Prime Minister Sir Keir Starmer declared that “Britain is back”, while European Commission President Ursula von der Leyen called it a "historic moment". After months of negotiations, the UK and EU passed a post-Brexit trade deal in May that aims to reset the relationship between the European neighbours. 

Whether it can live up to the hype is another question. The deal makes tangible progress in a number of areas, especially animal and food exports. But compared to the systemic shock of Brexit, any economic impact is likely to be limited and modest. The deal may be more important symbolically than economically. 

That’s not what you might infer from reaction in the UK, which has been predictably polarised. EU relations minister Nick Thomas-Symonds talked of Britain “back on the world stage”. Chief Brexiteer and Reform UK MP Nigel Farage decried the government’s “surrender” to Brussels.

In reality, the deal is a small step towards closer relations in a limited number of areas, with minor economic impact. While far from trivial, it falls a long way short of ushering in major economic or political change in the short term.

Edging towards economic progress

There are concrete measures in the deal, though much of the detail is still to be worked out. Progress on reducing border checks for animals and food products - in return for accepting some EU oversight - is the biggest business win, followed by the potential opening of the EU’s defence procurement fund to UK companies. 

“Nevertheless, economically the results of the agreement are rather small,” says Theo Smid, economist at Atradius. “Large economic gains that would substantially reduce the damage to UK growth prospects caused by Brexit will require much closer integration.”

But viewed as a first step, the deal takes on wider significance. For the UK, breaking the taboo of EU oversight for something - anything - is a symbolic moment. In addition, if the deal is seen as a starting point for further negotiations in future it could lift business confidence and draw much-needed investment on both sides of the English Channel. 

“Improvements in the UK-EU trading relationship are likely to be limited to small, sector-specific deals in the mid-term,” says Smid. “Years of negotiations now lie ahead. Perhaps the deal’s best feature is the establishment of a system of annual summits, with working parties implementing future agreements.”

A thawing of political permafrost

Is the UK ready for the kind of deeper ties that would bring more fundamental economic benefits? If that means membership of the single market or customs unit, the answer is no, at least for the foreseeable future. Despite the Labour government’s strong majority, London retains red lines it refuses to cross.

“London stuck firmly to its red lines of not joining the single market or customs union and not accepting free movement of people,” says Christian Bürger, senior editor at Atradius. “These are non-negotiables, even though Labour is an instinctively more pro-European government than the Conservative party that led the country through Brexit.”

Nevertheless, the twin threats of a militaristic Russia and an isolationist US have helped Brussels and London forge a more conciliatory path over the last few years. Relations that were badly damaged after years of Brexit arguments are being slowly rebuilt. There’s a hint of spring in the air.

In particular, there is a real chance that deeper security cooperation could lead to further economic benefits. But as the current deal shows, small, incremental gains are likely to be the fruits of this thawing relationship in the short- to medium-term. Despite the UK’s reliance on EU markets - 40% of UK exports end up there, twice as much as end up in the US - a more substantive integration is still considered politically unpalatable in Westminster.

Agri-food is the biggest winner

So what does the agreement do now? Perhaps most important are moves to establish a Sanitary and Phytosanitary Area (SPS), which would reduce paperwork and checks for the vast majority of movements of animals, animal products, plants and plant products.

“The UK's departure from the EU introduced significant non-tariff barriers to bilateral trade,” says James Napier, senior underwriter at Atradius UK. “A common SPS area would remove some routine checks on animal and plant products entirely and reduce others.”

The result will be quicker, lower cost exports on both sides, a significant step forward considering UK food and drink exports to the EU were worth £14bn in 2023 and the eurozone accounted for 57% of the sector’s overseas sales. A 34% drop in volume terms in 2024 compared to 2019 is blamed partly on Brexit red tape.

But the deal comes with conditions. “The UK will need to follow future EU food standards and accept that the European Court of Justice will have the final say in any disputes in this area,” says Napier.   

Defence integration: a no-brainer

The UK has a highly-developed defence sector and significant arms manufacturing capacity. Europe as a whole is looking to rearm in the face of Russian aggression. An integration of UK companies into EU procurement plans seems like an obvious step.

The details are still being worked out, but the likelihood is that UK defence-focused companies will be given access to the EU’s Security Action for Europe fund (SAFE), a EUR 150 billion loan pool available to member states.

“Both sides recognised that strengthening European defence against Russia without British participation would not be sensible,” says Bürger. “Building a credible European system of security requires not just more money but also the participation of one of Western Europe´s largest military powers.”

The wider hope is that warmer relations driven by security spending and cooperation could lead to further economic collaboration. 

Emissions and electricity offer opportunities

The other obvious win is an agreement to link emissions trading schemes that would see UK businesses sidestep the EU’s carbon tax, due for implementation next year. The parties will also explore ways for the UK to enter the EU single electricity market.

“This should, for instance, allow excess UK wind power to be exported to France and French nuclear power to be exported to the UK, reducing costs and improving export opportunities, while also improving supply stability,” says Smid.

A small step forward

These sector wins are useful, if modest. Food exports to the EU only account for 4% of total UK goods exports and just 0.6% of UK GDP. The SPS deal has been welcomed by food producers and supermarkets in the UK, but its overall economic impact will be small.

The roadblocks to more substantive integrations were amply demonstrated by outraged opposition reaction to the agreement, which focused on a 12-year extension in access for EU fishing boats to UK waters. Fishing accounts for just 0.03% of UK GDP but has taken on symbolic importance to Brexiteers. 

That said, the deal is a clear sign of a warming relationship. If it leads to tangible benefits for businesses and consumers, the next steps on the path to closer political and economic cooperation could be easier to take.