The UK is facing a precarious and volatile period for global trade.
The volume of global goods flows is back on the rise after a difficult 2023 caused by inflation and interest rate hikes. But with the return of President Trump to the White House, the outlook is deeply uncertain. Trade tensions are expected to escalate in the coming years, as economies become increasingly concerned over the risks of supply chain disruption. There has already been significant fragmentation in trade flows: the number of trade restrictions in 2022 was nearly 3,000, compared to under 300 a decade earlier, and from 2018 there has been a ‘decoupling’ of supply chains between the US and China.
The picture for UK trade has been lacklustre in recent years. The UK exercised its post-Brexit independent trade policy to rack up a series of roll-over deals and new trade agreements with countries such as Australia and New Zealand. But the new free trade agreements (FTAs) the government has negotiated have offered limited economic benefits, while larger deals with the US and India have proved elusive. At the same time, the change to the UK-EU relationship has reduced goods trade flows in both directions. The government’s approach has translated into a disappointing picture for goods trade with both the EU and the rest of the world: by the end of 2023, there was a 10 per cent fall in UK goods trade from 2019 levels, compared with an average 5 per cent rise for other G7 countries by the third quarter of 2023. However, services trade has performed much better: trade in services increased by 12 per cent by the end of 2023 compared to 2019 levels and the UK ranks only behind the US as the world’s largest services exporter. The Department for Business and Trade is planning a new UK trade strategy. The trade strategy is integral to the government’s growth mission and complementary to its proposed industrial strategy, which intends to develop a proactive approach to driving forward economic growth. This is an important opportunity to revitalise the government’s approach to trade and adapt it to respond to the current geopolitical context.
The focus of the government’s trade strategy should be green, inclusive growth, while meeting the UK’s geopolitical objectives and securing economic resilience for critical sectors. Trade policy should be directed towards growth for all the UK’s regions and nations; growth which benefits living standards and working conditions; and growth which supports the green transition. At the same time, this must be delivered within a framework of economic resilience: that is, for certain industries critical for our economic and national security – including energy, defence, food, communications, and healthcare and pharmaceuticals – the government should take a proactive approach to safeguard supply chains against the risk of future disruption. At a time of growing global instability, trade policy must also align with the government’s agenda on foreign relations, security, migration, climate, development, and other geopolitical priorities.
The new trade strategy should identify priority sectors for exports. These priorities should be identified by looking at areas of existing or potential comparative advantage. Recent research suggests the UK has a revealed comparative advantage in a number of goods and services, including financial services, insurance and other business services; personal, cultural and recreational services; aircraft; art; beverages; and pharmaceuticals. The UK also has a specialisation in innovation in areas including life sciences and clean technologies. Moreover, reflecting the focus of green, inclusive growth, the government should identify sectors where there are regional strengths outside London and the South East, as well as UK strengths in the green economy.
An effective strategy should be underpinned by a transparent approach to developing trade policy. Under the last government, trade stakeholders were often kept at arm’s length, draft FTA texts were not shared externally, and Parliament had few opportunities for meaningful scrutiny of new agreements. A new approach to trade policy would reset the relationship with stakeholders. This should include revitalising the government’s trade stakeholder forums and bringing back the Strategic Trade Advisory Group, engaging substantively on trade with the new Council of the Regions and Nations, and introducing legislation to expand parliamentary scrutiny of trade agreements.
The government should take a number of unilateral trade actions as part of its trade strategy, in order to promote priority exports for green, inclusive growth, support the smooth flow of imports – especially for inputs in sectors important to the UK’s industrial strategy – while ensuring appropriate safeguards are in place to protect against economic and geopolitical risk. These measures should include the following.
- Reviewing the UK Global Tariff in light of the government’s current priorities for green inclusive growth and economic resilience. This could involve the targeted reduction of tariffs for inputs for products which are important for the UK’s industrial strategy or for products critical to economic security and where the UK does not have a strong defensive interest (eg certain food items that are not produced in the UK).
- Providing bundled packages of trade advice, information, and coordination through a new cross-cutting, locally-driven programme of export support. This should be delivered by local bodies such as Chambers of Commerce – and where they have the skills and capacity, combined authorities. For priority export sectors, government should support industry trade associations to provide specialist sectoral advice in coordination with local bodies. The Foreign, Commonwealth and Development Office (FCDO) should also secure trade and sector specialists seconded from the Department of Business and Trade (DBT) and from the private sector to support in-country trade promotion.
- Strengthening the UK’s trade defence regime. In particular, the economic interest test applied by the Trade Remedies Authority should be reviewed, with a view to expanding it to consider as a key factor the implications of new trade measures on the UK’s economic resilience. The UK should also consider introducing a new specific mechanism for imposing countermeasures – including import tariffs as well as other measures – in response to countries using economic coercion, similar to the EU’s recent Anti-Coercion Instrument. This would give the UK a swift and structured deterrent to protect against future trade threats.
The UK should seek to deepen its trade relations with the EU, building on the Trade and Cooperation Agreement (TCA). As the UK’s closest trading partner, addressing the current weaknesses in UK-EU trade relations will be critical for growth. In negotiations with the EU, the UK should do the following.
- Seek a mutual recognition agreement (MRA) with the EU to allow for the acceptance of the results of conformity assessments from each other’s conformity assessment bodies. This would help to remove technical barriers to trade in goods, and there is a clear precedent with other MRAs the EU has with third countries.
- Look to negotiate a veterinary agreement with the EU to reduce checks on trade in agri-food products. According to a recent study, this could increase UK agri-food exports to the EU by up to 22.5 per cent. This may involve the UK harmonising its food safety and animal and plant health rules with the EU’s. A deal of this type would remove significant barriers to trade while maintaining high food safety standards, which command broad public support.
- Urge the TCA Partnership Council to conduct a full investigation of UK-EU customs procedures and technical barriers to trade as part of the five-year TCA review, with the intention of identifying areas to build on the TCA to facilitate the flow of trade. This would help to galvanise a wider effort to recognise and resolve some of the practical barriers to trade in goods which have emerged since the beginning of 2021.
- Propose adding a mobility chapter to the TCA to give UK professionals greater flexibility to provide temporary services in EU member states and vice versa. The UK and the EU should also coordinate a forum for their respective professional bodies to jointly agree recommendations on the mutual recognition of professional qualifications across a number of key professions, including architects and lawyers. Together, these deals would help to smooth trade in services. As a quid pro quo for any deal, the UK will likely need to engage seriously on the EU’s proposal for a youth mobility deal. Provided it is capped and time limited, this would reflect similar deals between the UK and countries such as Australia and Canada.
- Pursue a deal to link the UK and the EU’s emissions trading systems, in order to support more cost-effective decarbonisation and eliminate new barriers to trade resulting from the EU’s carbon border adjustment mechanism.
The UK should modernise its approach to trade agreements with the rest of the world. In a tumultuous global context where protectionist measures are on the rise, the UK will have to navigate its trading relationships with care to support green inclusive growth while meeting its geopolitical objectives and securing economic resilience. This means pursuing agreements which go beyond the traditional coverage of FTAs – that is, market access for goods – and which include the following.
- Supply chain resilience – including commitments on identifying and monitoring supply chain risks in critical sectors, the development of action plans to strengthen resilience and manage the risk of disruption, and joint investments in improving transport infrastructure.
- Regulatory cooperation for services trade – including cooperation between regulatory bodies with the aim of anticipating and managing future regulatory changes which could impact on trade, as well as laying the groundwork for mutual recognition of regulations.
- Digital trade – including negotiating provisions on preventing data localisation requirements, upholding shared standards on data protection and online consumer protection, and supporting the use of electronic contracts and signatures.
The UK must also be pragmatic in navigating its trade relationships with key partners. In practice this means the following.
- Signalling openness to an FTA with the US under the new Trump administration, provided it aligns with the objectives of the UK’s trade strategy. There are clear opportunities for the UK given the US is one of its largest trade partners. The UK also has an interest in engaging with the US early to avoid or mitigate future tariffs (even if this does not amount to a full
FTA). At the same time, the UK will need to go into negotiations with clear red lines, including maintaining current food safety standards – especially given lowering these standards could jeopardise a veterinary deal with the EU. - Continuing to pursue a deal with India, while recognising the challenges involved in securing a comprehensive deal. An offer on a social security agreement – a key point of contention in previous discussions – could help to move the negotiations forward.
- Actively exploring opportunities for plurilateral agreements, especially in the area of green trade. For instance, the UK should consider joining the Agreement on Climate Change, Trade and Sustainability (ACCTS), a trade agreement between New Zealand, Costa Rica, Iceland and Switzerland which is focused on environmental objectives. In the long run, the UK could explore the potential of joining ‘climate clubs’ with countries with equivalent carbon pricing systems.
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