Brexit seems to be back on the agenda.
Chancellor Rachel Reeves and Governor Andrew Bailey focused their Mansion House speeches on the UK’s sluggish economic performance since the financial crisis. Brexit featured in both of their speeches.
Reeves said that the economy faced “structural challenges” as a result of Brexit, which simply added to an already long list of obstacles to economic growth.
“We will not be reversing Brexit or re-entering the single market or customs union but we must reset our relationship,” she said.
Like Reeves, Bailey discussed the challenges facing the economy more broadly. But, before long, he was discussing Brexit too.
The trade barriers that resulted from Brexit had “weighed on the level of potential supply,” he argued. “It underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people”.
It is no surprise that the UK’s relationship with the EU is creeping back up the list of priorities. The new government has put growth at the centre of its agenda and most economists think Brexit is one of the few issues that could meaningfully address the UK’s underlying growth rate.
The Office for Budget Responsibility (OBR) forecast that Brexit will lead to a four per cent reduction in the potential productivity in the economy, relative to remaining in the EU.
This largely comes through lower trade intensity, which ends up shielding UK firms from the pressures of competing against European firms. But Brexit trade barriers can also put up costs for importing firms and make it more difficult to trade overseas.
“Strengthening the relationship with Europe is a top priority for our members so we welcome the Chancellor and the Bank of England Governor’s comments about the importance of economic openness,” Scott Devine, Europe head at TheCityUK, said.
“This is important not just in the context of our relations with Europe, but globally,” he added.
Emma Rowland, trade policy adviser at the Institute of Directors (IoD) agreed, suggesting that businesses were “feeling the sting” from Brexit-related trade barriers.
“The Chancellor’s positive rhetoric about resetting our relationship with the EU is welcome and a top priority for IoD members,” she said.
Resetting relationships
So what would a ‘reset’ actually look like?
Emily Fry, senior economist at the Resolution Foundation, said the government had “limited room for manoeuvre” given its red lines on the single market and customs union.
“The government must be strategic in pursuing ‘pro growth’ closer alignment with the EU. High-value manufacturing sectors, such as chemicals and vehicles, which have both high trade intensity with the EU and have been hit hard by Brexit are a natural starting point,” she said.
As far as City firms are concerned, the most likely area where there could be progress is on the mutual recognition for professional qualifications.
Following the Canadian example, the 2021 Brexit deal allowed for mutual recognition agreements to be negotiated on a sector-by-sector basis.
But the EU has only ever concluded one such deal. In 2022 it reached an agreement with Canada on the ‘semi-automatic’ recognition to architects after two years of negotiation.
“It is a framework that does not work,” Devine said.
Labour argues that reaching an agreement on a mutual recognition agreement would “help open up markets for UK service exporters.”
But the government is likely to have to make concessions on a youth mobility deal if it wants to make progress on professional services, which some in the government are reportedly unwilling to concede.
While business groups have long been pushing for closer ties with the EU, their cause may have been given added impetus thanks to Donald Trump’s re-election as President.
Trump has threatened to impose a blanket 10 per cent tariff on all foreign imports, rising to 60 per cent on imports from China. If he goes ahead with this threat, other countries are likely to retaliate which could spark a global trade war.
“A Trump presidency raises concerns that the US will be increasing trade barriers with key trading partners,” Rowland at the IoD said.
“The combined impact of trade barriers from both the US and EU would be incredibly challenging for UK businesses involved in international trade. It’s therefore important that the UK reinforces our trade ties with other countries.”