A new ‘pro-growth’ UK-EU relationship will require both closer alignment and managed divergence

The new Government needs to be both pragmatic and strategic about where to pursue closer regulatory alignment with the EU, if it’s to make its reset of relations with the EU a growth-boosting one, according to new Resolution Foundation briefing published today (Wednesday).

With the new Government pledging to reset its relationship with the EU, while also maintaining strict ‘red lines’ on future agreements that limit its room for manoeuvre, EU-turn examines how the Starmer administration might seek to pursue ‘pro-growth’ trading relations with the EU.

The report notes that the Government has ruled out the biggest growth dividends available from revisiting the nature of the UK’s trading arrangements with the EU. However, with ongoing regulatory divergence from the EU accounting for close to half of the long-term economic damage from Brexit, the economic prize for resetting relations could still be substantial.

The Government has already announced its plans for some modest, negotiated improvements to the current arrangements with the EU, committing to negotiate agreements on professional qualifications and veterinary standards. However, these alone are not enough to boost growth, and a far more ambitious strategy will be needed.

The report notes too that there are some potential economic costs – as well as gains – to closer EU alignment, for example by the UK not being able to set its own regulations in internationally-focused sectors like finance where we are a global leader. The Government therefore needs to think strategically about where to prioritise closer EU relations.

An obvious place to start when it comes to regulatory alignment is high-value manufacturing, such as chemicals, transport and electronic manufacturing. These sectors have high trade intensity with the EU and have suffered since Brexit.

For example, UK chemicals industry exports to the EU have plunged by 24 per cent since 2016 (compared to an 8 per cent fall outside the EU). So, indications from the Chancellor that alignment with EU chemical regulation is on the table is welcome news, says the Foundation.

When considering where to prioritise new agreements, the Foundation says that any emerging trade strategy must align with the Government’s new industrial strategy, which is due to be set out around the time of the Budget. This should ensure that its strategic priorities are supported by both domestic, EU and international trade policy.

However, with many critical areas of regulation evolving fast – notably on data, digital and the environment – across the EU and internationally, the Government will need to take a stance soon on a wide range of trade issues, even if they are not domestic priorities.

Finally, the Foundation adds that none of these issues are straightforward – it will take many hard yards of diplomacy across the parliamentary term to secure ambitious pro-growth agreements with the EU and other international partners.

Sophie Hale, Principal Economist at the Resolution Foundation, said:

“Britain’s strained trading relations with the EU have caused major economic damage in recent years, so a reset certainly has the potential to boost growth.

“But it will take more than friendlier meetings and a few small-scale tweaks for farmers and touring musicians to shift the economical dial. Instead, the Government will need to strategically approach where it prioritises closer alignment.

“High-value manufacturing sectors, such as chemicals and vehicles, are on obvious place to start as they have high trade intensity with the EU and have been hit hard by Brexit.

“And by aligning trade priorities with its wider industrial strategy, the Government can focus on supporting strategically important sectors in both domestic, EU and international policy.”