Reset moment

Trade with the EU, the new Labour government has said, is a priority. It must be improved and smoothed. So what are the opportunities to pursue those options? What obstacles are in the way, and what, if anything, can be done to facilitate trade and streamline the regulatory regime for small and medium-sized enterprises (SMEs)? And what of multinational businesses with global operations and value chains?

The prime minister has made it clear that the UK will not be rejoining the EU. To quote the Labour party manifesto: ‘Britain will stay outside of the EU. But to seize the opportunities ahead, we must make Brexit work. We will reset the relationship and seek to deepen ties with our European friends, neighbours and allies… There will be no return to the single market, the customs union, or freedom of movement. Instead, Labour will work to improve the UK’s trade and investment relationship with the EU, by tearing down unnecessary barriers to trade.’

The party promised to prevent unnecessary border checks, support touring artists and seek mutual recognition for professional qualifications. In other words, a diminished version of membership, in which the more egregious inconveniences of post-Brexit trade are absent. It will be a difficult trick to pull off. 

EU-UK Trade and Cooperation Agreement

Trade between the UK and the EU is governed by the EU-UK Trade and Cooperation Agreement (TCA), which came into force on 1 May 2021. The TCA provides for tariff- and quota-free trade between the UK and the EU, but introduces non-tariff requirements such as customs checks, rules of origin and regulatory standards.

The TCA includes provisions to provide market access for services, and to promote trade in digital services and cooperation on digital trade issues. It includes a governance framework for implementation and a mechanism for dispute resolution.

However, many issues remain unresolved. While it has been suggested that the prospect of revisiting TCA provisions has built instability into bilateral relations, it also gives the new government the time and opportunity to build bridges with the EU and work towards better trading arrangements.

Dr Totis Kotsonis, partner and head of state aid and public procurement at Pinsent Masons, explains: ‘There is a provision that five years after the TCA came into full effect – in May 2026 – the parties can meet and decide whether to revise it. That will depend on the EU’s willingness to reopen substantive negotiations. However, bringing us closer to Europe without rejoining the single market will depend on the appetite for compromise on both sides – i.e. the EU may not be willing to open up substantive discussions.’

Any reduction in red tape and controls would be welcomed by UK businesses which have been disproportionately affected by additional regulations, obligations and paperwork. The EU is the UK’s largest trading partner, accounting for 41% of UK exports of goods and services and 52% of imports in 2023. But while the UK is the EU’s third-biggest trading partner after the US and China, it accounts for only 13% of EU exports.

Furthermore, although the additional bureaucracy and compliance burden is costly and inconvenient – it was predicted that complexities caused by the UK’s introduction of the TCA were likely to contribute to slowing trade flows – so far this has mostly affected the trade in goods. UK services trade continues to thrive post-Brexit.

Small steps

Any changes to the arrangements between the EU and the UK depend on reciprocity. The UK’s Brexit negotiations were predicated on independence from the EU, which now stipulates that non-members should not cherry-pick regulatory alignment as it suits them –at least not without making concessions.

‘In terms of trade, our “red line” of not rejoining the single market and the customs union means that we cannot pick and choose,’ says Sally Shorthose, a partner in Bird & Bird’s life sciences team, whose clients include global pharmaceutical companies.

‘Despite what Boris Johnson used to say,’ she adds, ‘we lost out on the TCA negotiations, so how are we going to encourage the EU to give us better terms without making concessions? We can look at regulations, but having spent millions on putting in new regulation, we can’t just go back to what we had previously. However, we can have a more considered conversation.’

Aline Doussin, who heads Hogan Lovells’ international trade team, is a dual-qualified lawyer working in London and Paris. She agrees with Shorthose: ‘Labour is not prepared to reopen customs union discussions, so it is likely they will take a sector-by-sector approach.’

Regulatory challenges

The biggest barriers to trade post-Brexit are the TCA regulations and border controls. These include ‘rules of origin’, which are used to determine the source of products moving between the UK and the EU for the purpose of deciding whether they are subject to tariffs. There are also new VAT rules.

Doussin explains that if the UK government brought regulatory standards closer to EU rules, while this would improve clarity, and streamline processes, it would not expedite goods crossing the border.  

‘If you are not part of a customs union, you will always have paperwork and customs declarations,’ she says. ‘But closer alignment would make it easier for businesses to place their products in the EU27 or UK markets. Currently, when multinationals develop a product they have to comply with two sets of regulatory standards – one for the EU and another for the UK. This is costly, time-consuming and increases the compliance burden.’

She adds that the UK government is working on trade law discussions. But the extent to which there will be alignment, convergence and accountability on supply-chain issues around human rights and compliance obligations, among other considerations, remains undecided.

‘The same applies to the Carbon Border Adjustment Mechanism, where the UK government will have to decide whether to develop something similar to what the EU has done or diverge from that,’ Doussin points out. ‘At this stage, the new UK government is deciding its priorities and what it can do to facilitate border access with the EU. But that is more complex and requires a mandate at EU27 level.’

Another area where the UK could align more closely with European standards is sanitary and phytosanitary (SPS) checks on agricultural and animal-derived food exports between the UK and the EU.

'How much can the Labour government improve on Brexit, given the limits that are being imposed politically? Getting closer to Europe means accepting/adopting their rules'

Dr Totis Kotsonis, Pinsent Masons

While the EU introduced full controls on SPS imports from the UK on 1 January 2021, the UK is applying a phased implementation. While these additional checks have reduced UK agri-food exports to the EU, alignment with EU rules would limit the UK’s research and development options and potentially its opportunities for other free trade agreements.

On this, Kotsonis agrees with Doussin. He observes that tinkering at the edges will not reproduce single market conditions – the coveted ability to trade without checks, delays and additional paperwork. ‘The open question,’ he says, ‘is how much can the Labour government improve on Brexit, given the limits that are being imposed politically? We aren’t at the table making the rules, so getting closer to Europe means accepting/adopting their rules.’

Shorthose stresses the impact of border checks on SMEs and the trade in perishable goods. ‘We have horrendous delays at Dover, and the amount of red tape is damaging small businesses. One German manufacturer has stopped sending goods to the UK because it’s too much trouble... we are finding it harder to source some medicines.’

Border delays also create challenges for ‘just in time’ manufacturing operations, which bring together components from all over the world. ‘You can’t build a 72-hour delay at Dover into these processes,’ she adds.

Lorand Bartels, counsel at Freshfields and professor of international law at the University of Cambridge, explains that while there is free trade between the EU and the UK, products entering or leaving the UK are subject to zero duty only if they are produced in the UK or majority produced in the UK.

Different product categories have different ‘rules of origin’ stipulating how much non-UK input can go into a product before it is not considered to have originated in the UK. This is a particular problem with electric vehicles and EV batteries – although Tata will build Europe’s largest EV battery factory in Somerset.

The regulatory and practical challenges are reflected in a survey by Statista Research Services from May 2024. It concluded that 14.2% of participating UK businesses experienced challenges exporting due to customs duties or levies; 12.6% faced changes in transportation costs; and 11.9% highlighted additional paperwork.

Over the same period, 20.6% of UK businesses experienced challenges importing due to changing exchange rates and transportation costs; 18% highlighted additional paperwork and 16.5% customs duties or levies; and 10.9% experienced disruption at UK borders.

Qualifications and youth mobility

Doussin highlights the mutual recognition of professional qualifications as a small step forward, particularly as UK services exports remain strong (perhaps because there are fewer non-tariff barriers on services compared with goods).

‘Businesses, including our clients, face hurdles when it comes to professional qualifications,’ she says. ‘And there might be an appetite on both sides of the channel for facilitating recognition on a sector-by-sector basis, as well as for youth movement through schemes such as the Erasmus Programme, which facilitate opportunities without opening the Pandora’s box of the customs union.’

Bartels adds: ‘While there is unlikely to be any change on the free movement of people, mutual recognition of professional qualifications is about organisations being able to send accountants and engineers with transferable skills and standards to work in different locations as and when they are needed. This isn’t about allowing greater market access – it doesn’t mean they can be there for longer than 90 days, but it does mean that they can get to do more things.’

Youth mobility is another area of mutual interest. ‘One reason why youth mobility talks didn’t progress under the previous [UK] government was that they were more interested in talking to individual member states than talking to the European Commission which represents all member states,’ Bartels says. ‘It is the same with mutual recognition of qualifications. It is not entirely clear from an EU point of view who deals with that – whether it should be dealt with at EU level or member state level. So the previous UK government was focused on talking to member states individually in a divide-and-conquer way, and a bit of cherry-picking as our interests may be greater in some countries than others, but there is also a competence issue.’

Doussin predicts there could be agreement on youth mobility and exchange. ‘Brexit has had an impact on European students studying English in Ireland and the Netherlands, whereas before Brexit they would go to the UK to participate in Erasmus and similar schemes. That will be a top priority for the UK government as a lot can be achieved bilaterally, and there will be an appetite in both the UK and EU member states to look at what works, and whether any agreement should only be looking at students, or whether it should also include professions and business generally.’  

Shorthose does not envisage significant changes any time soon. ‘We can look for small changes around the edge, and a better relationship with the EU will support further negotiations. We negotiated a poor agreement, and now we have to give and take to make it better.’

Delivering on Labour’s manifesto promises will require goodwill on both sides. ‘What Starmer is doing is trying to rebuild trust between the EU and the UK,’ says Kotsonis. ‘The previous government’s stance was predicated on a complete break from the EU, which originally offered the UK the opportunity to be part of a common defence and security arrangement, but Johnson said no.’

While Starmer is not renegotiating the TCA, Kotsonis says, ‘he is looking to go where Europe originally offered, and use closer cooperation on defence and security to rebuild mutual trust and set the scene for more fruitful discussions on trading arrangements in 2026’. He adds that this potentially repositions the UK’s negotiating position – the UK is a relatively small market and negotiations are unequal when it comes to trade, ‘so there is a useful link to be made in security and defence, where we are a big player’.

Earlier this month, Jake Benford, senior project manager at non-profit foundation Bertelsmann Stiftung, wrote for the website UK in a Changing Europe on progress on trade relations between the UK and the EU. He said this ‘will require further clarity from the UK, notably on its openness to ECJ oversight, forms of regulatory alignment and also on what its broader investment in Europe might be’.

It will also, he concludes, ‘require a new level of pragmatism, flexibility and political coherence on the part of the EU, which often struggles to think of security and economics as two sides of the same coin’.