Brexit: 10 years on, what next for the UK-EU relationship?

In this episode of Trade Links, host Tim Phillips is joined by Aastha Gupta and Scott Livingstone to revisit two major trade stories shaping the global economy: 10 years on from Brexit, and one year after the US “Liberation Day” tariff announcements.

The discussion explores how trade relationships have evolved, where economic frictions remain, and why geopolitics is increasingly influencing global commerce. 

Brexit – Ten Years On

1. UK–EU trade has stabilised, but at a lower level

• UK goods trade with the EU remains around 10–15% below its pre-Brexit trajectory in volume terms, even though trade values have recovered due to inflation and higher prices.
• Manufacturing sectors including automotive and chemicals continue to struggle, while food and agriculture recovered after an early shock but remain more volatile.
• UK services exports have stayed resilient overall, largely thanks to growth in non-EU markets such as the US, masking weaker EU performance.

2. Non-tariff barriers remain the biggest drag on trade

• Although Brexit avoided tariffs, businesses continue to face customs paperwork, rules-of-origin requirements, and border checks.
• These non-tariff barriers are estimated to create costs equivalent to 7–10% tariffs on goods trade.
• Smaller exporters have been disproportionately affected, with some firms deciding exporting to the EU is no longer commercially worthwhile.

3. Political and economic pressures are encouraging closer alignment

• The UK and EU are increasingly pursuing pragmatic cooperation in areas such as energy, customs data sharing, food standards, and youth mobility.
• Sectors including agri-food, pharmaceuticals, chemicals, and electric vehicles could benefit significantly from regulatory alignment.
• Broader geopolitical pressures — including Russia’s aggression and uncertainty around US policy toward Europe — are creating incentives for deeper UK–EU cooperation without full reintegration.

One Year After US “Liberation Day” Tariffs

1. The tariffs were dramatic politically, but economically less effective

• US headline tariff rates jumped from roughly 2.5% to over 20%, levels not seen for more than a century.
• In practice, exemptions, carve-outs, and negotiations reduced the effective tariff burden closer to around 10%.
• Despite the scale of the announcements, the US goods trade deficit widened rather than narrowed over the following year.

2. Tariffs changed behaviour more than outcomes

• Companies accelerated imports ahead of tariff implementation before reducing volumes once measures took effect.
• Firms adapted supply chains through rerouting, exemptions, and alternative sourcing strategies.
• Businesses increasingly shifted from “just-in-time” supply chains to “just-in-case” inventory models, embedding higher costs into global trade.

3. Trade has become a geopolitical weapon

• Countries responded with bilateral negotiations, retaliatory tariffs, supply-chain diversification, and efforts to avoid provoking Washington.
• China’s restrictions on rare earth exports highlighted the strategic importance of trade choke points and critical supply chains.
• The panel argues that the world is entering a more fragmented era of globalisation, where resilience and geopolitical alignment increasingly matter more than pure economic efficiency.

All details correct at time of recording.

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Transcript

SPEAKER_01 0:16

Welcome back to Trade Links from NatWest. I'm Tim Phillips, and we have the A-List panel with us today. So welcome to Asta Gupta, who is European economist, Economics and Market Strategy, NatWest Markets.

SPEAKER_00 0:31

Hi Tim.

SPEAKER_01 0:32

Hello, Asta. Asta, how long have we known each other? How many of these episodes have we done? Quite a few.

SPEAKER_00 0:37

Quite a few.

SPEAKER_01 0:38

I still have to read out your job title from a piece of paper. And with a simpler job title. Scott Livingston, International Advisor, NatWest Group. Hello, Scott. Tim Gruffnan, good to be here again. It's what your job title doesn't say that's the interesting thing. Was it really 10 years ago that the UK voted to leave the EU? Well, the drama is in the past. But the trade stories still got legs. What frictions in trade remain and which ones have been sorted out? And with the EU and the UK both looking for growth, could maybe a closer trade relationship, help both parties. So today I'm going to say something that I swore I would never say again. Let's talk about Brexit. Scott, first of all, for anyone in the audience who was lucky enough to miss it the first time round, bring us up to date where we are with Brexit. Oh. And how we got here. And how we got here.

SPEAKER_02 1:48

Okay, in s in really quick summary, Tim, um the the the UK has always been sort of semi-detached from the community. Ever since we joined the expanding European communities in 1973, we had reservations about sovereignty and the depth of the integration required. So we had that posture all the way through in 73. It led to opt-outs from the Schengen area, from the Euro, for example. So, in effect, really quite a selective participation while we were members, or while the UK were members. It led to polarisation of domestic politics, ultimately, particularly within the Conservative Party, leading to a referendum in 2013, led by Prime Minister David Cameron. The referendum, 52% voted to leave, but with deep divides in regions. So Scotland, Northern Ireland voting to stay, and also big differences in generation, so young people voting to stay on the whole. It was a significant distraction of UK foreign policy, and I speak from experience and capacity. And don't forget, that was at a pivotal time in global geopolitics. It led to some bigger geopolitical impacts, I would argue. The exit from the community, it it led to challenges to supranational um uh governance uh everywhere, including um other encouraging other populist parties in Europe, for example. I would argue that it in geopolitical terms, Tim, it it weakened Europe, the absence of our country from the community. Um it removed one angle of the UK's geopolitical added value, um particularly to America, for example, our membership of the community. But that's the short story of where we were. We were never fully committed to the community, and it came to a head in 2013 with the call of the referendum, but then that's a long period of distraction, like you say, and and we're out.

SPEAKER_01 3:51

Thank you for making it the short story, because having lived through the long story, I don't want to go there again. But Asta, talk to me about trade. Trade between UK and the EU. Where is it? Is it down, up, sideways?

SPEAKER_00 4:07

I think to answer this question, we have to step backwards because trade needs to be looked at from two angles. One in terms of volume, the second one is in terms of value. So trade in value terms has recovered, but that is basically because of higher prices. But in terms of volumes, it has not recovered back to its old momentum. So if you look at in volume terms, trade UK's goods trade with EU is about 10 to 15% below where it would have been if pre-Brexit trends had continued. And over the years, that gap hasn't really closed, which means that basically this is the new normal. And sector-wise, the story is mixed. Some sectors have taken the hit a lot harder than the others. So manufacturing, cars, and chemicals have never really gotten back their old pre-Brexit momentum. So other sectors like food and agriculture were hit hard early on, but these flows have recovered, but at the same time, they have become a lot more volatile. Services, on the other hand, is a different story. So UK services exports to the overall world have been stable or I would say more resilient. But there's an underlying hidden story there that the growth has been driven by other markets such as US, and that is why services exports have been a lot healthier, but it hides the weaker performance with the EU.

SPEAKER_01 5:41

One phrase that we all learned during uh Brexit was non-tariff barriers. The current state of non-tariff barriers, how much of an effect do they have on trade?

SPEAKER_00 5:52

I think this is where the story gets a lot more interesting. Because of course there were no tariffs after the Brexit. But non-tariff barriers are actually the hidden cost of Brexit. Because when you add up the customs paperwork, rules of origin, and border checks, these costs add up to you know of doing business, and these are meaningful. So most estimates suggest that this is equivalent to about 7 to 10% tariffs of goods trade. Of course, bear in mind that as a firm, you don't really feel these numbers dramatically on day one. But if they're sustained, then yes, it does impact your decisions as to how you price your products, whether you invest, and most importantly, whether small firms actually bother to export at all or not.

SPEAKER_01 6:43

Scott, uh, with one or two notable exceptions, we have different politicians now than we had 10 years ago. Do these political changes make closer trading relationships between the UK and the EU more feasible now? What would that look like if it happened?

SPEAKER_02 7:03

Well, maybe we'll come on to what the m what it would look like if it happened. But in terms of does it make more feasible? I would say yes, Tim. I think we have seen some changes to to the some of the key political job holders. Um I think we've seen a shift, particularly under the Starmer government, um, a shift towards resetting to stability rather than confrontation and sniping across the Channel. I think we've seen a drive to improve the Brexit arrangement in pragmatic areas. So rather than rerun the arguments. Um, for example, the I think the Windsor framework in 2023 helped resolve some disputes around the Irish border and restore some trust, albeit with some with a refresh still still still still required to satisfy some Unionist anxieties. And in the European Union, we I think we've we have seen a willingness to build some sector-specific cooperation and also to recognise the UK as a key partner, um, particularly security and energy. So, for example, we've seen a move to align um some regulatory frameworks, food and agricultural standards, for example, data sharing around customs, um, youth mobility schemes, and then pursuing energy or infrastructure integration. So, a good example of that last one is the Hamburg Agreement of this year, uh, Tim aiming to build um and develop new offshore wind capacity in the North Sea, where the UK is is a vital partner in that arrangement.

SPEAKER_01 8:32

If the parties get closer in trade terms, Astor, which sectors are gonna benefit from that?

SPEAKER_00 8:39

I think the potential upside uh is quite concentrated if they actually got closer. And I for me, three sectors stand out. The first one, Scott already mentioned, which is the most obvious choice to me, which is agri-food. And this one is a low-hanging fruit, pun intended. So small changes to border procedures could remove the large share of existing frictions that are there. The second one would be chemicals and pharmaceuticals, because these industries are highly regulated, but at the same time, they account for tens of billions in bilateral trade. So even a partial alignment here could make a noticeable difference. And lastly, automobiles, especially electrical vehicles, they stand out because the supply chains in this sector are very integrated across the channel. And I think there's this shared interest between the two countries in terms of coming closer when and remaining competitive when we are seeing that there is this existing pressure which is mounting up from different markets, notably from China.

SPEAKER_01 9:47

As to the EU really, really does need to find some growth from somewhere. How might this affect the relationship? Do you think that might make it closer?

SPEAKER_00 9:58

I think it really changes the incentives. So the trend growth in Euro area is close to about 1%, and even the larger economies are struggling to expand. So in that environment, friction with a nearby high-income economy like the UK looks expensive. So from EU's angle, I think reducing barriers with the UK is the lowest effort that could actually uh bring growth impulse. And from the UK's side, I think the maths is very clear. Improving trade with the EU could bring a lot more growth than any new trade deal could actually accomplish.

SPEAKER_02 10:38

Scott, what's gonna happen in the next three or five years? I think there is a and we've spoken before about the broader geopolitical picture, Tim, and I I think that those geopolitics, those glow that global picture presents a sort of an unavoidable, sort of almost a gravitational pull towards greater alignment between the UK and and the EU and i i in the coming years. I think the underpinning of that force, firstly, we've got a hostility coming towards our uh geography from from Russia, and you've heard me argue that that will persist for some time. And then I think we've also seen signs of long-lasting isolationist tendencies from from the US. Plus, plus a quite a quite a profound uncertainty as to the as to US attitudes or US government attitudes to towards Europe. And I think there is a growing acceptance that this is for the long haul. This is not a this is not a a cyclical political phenomenon. So I think there is a we like I say these these very compelling forces uh are will be shifting the UK towards uh greater greater um uh greater alignment. However, equally there is a countervailing sort of set of pressures and and um uh and and uh and compelling obstacles to not going too far too fast. So we're seeing, I think, a pragmatic incremental tempo um and uh returning to alignment rather than institutional reintegration. And I think there is a difference. I I I mean it's a quote that I've used before, Tim. I I I think the the the broad geopolitical picture is heading towards a world of spheres of influence, uh, a Chinese sphere of influence, an American sphere of influence. And I really do think that this the next half dozen years or so is the time for Europe and the UK to decide where it stands in this world. And the quote is if you don't have a sphere of influence, then you're probably in someone else's.

SPEAKER_01 12:31

There is still a constituency, certainly in the UK, that would consider any alignment to be too far too fast into that. Okay, we will be talking about this again, I am sure. Okay, so it's a double birthday episode this time round because it's just over a year since Liberation Day. Now, we've discussed this before on Trade Links, and we all recall Donald Trump sitting there holding up those charts with all the tariffs on them 60% and 70%. Now, it was the time, however, Asta, when tariffs and those tariff numbers became the central tool of US trade policy. One year on, how do the tariffs charged represent uh the tariffs that were nominally imposed?

SPEAKER_00 13:35

So, with a year's distance, I think it's a lot easier to actually differentiate the initial shock from the unreality underneath.

SPEAKER_01 13:43

Yeah.

SPEAKER_00 13:44

So Liberation Day was meant to look like a clean break, a big reset of US trade policy. And initially the shock really was quite big. Within months, we saw that the headline US tariff rate jumped from around 2.5% to over 20%. And these are levels which we haven't really seen in over a century. So on paper, it really looked like that evolve was actually going up around the US. But almost immediately the reality kicked in. Exemptions appeared, carve-outs multiplied, and the system became a lot more flexible. It was reciprocal, but also at the same time messier than the actual original announcement had suggested. So the shock was quite real, but it was opaque, flexible, and messier.

SPEAKER_01 14:38

This is a real test of trade economics, is whether what it predicted actually happens. How have these tariffs affected prices and volumes and revenues for the US government?

SPEAKER_00 14:50

So I think the simple way, simplest way to think about this is that tariffs actually change behavior more than they change outcomes. So on prices, yes, some of those costs did get passed through, especially industrial goods, but they were nowhere close to the headline tariffs that we saw, dramatic numbers. So even though the headline tariffs went above 20% last year, but what actually firms are paying is closer to around 10% because of exemptions, negotiations, and the workarounds. On volumes, I think the biggest effect was on timing because we saw that the firms front-loaded their imports ahead of the April announcement with imports running at double-digit growth in the first half of the year. And then obviously volumes went back and fell again once the tariffs fully kicked in in August. So, yes, we saw a spike, a drop, rather than a clear decline. On revenue, the receipts rose. But they were much less than what the tariffs suggested. And the gap between the headline tariff rates and the actual customs revenue collected actually shows that how firms adjusted the supply chains and actually rerouted trade through different countries. And I think crucially, despite all of this, the tariffs didn't really achieve their main aim that they had actually talked about. The US goods trade deficit didn't narrow. It actually widened over the year. So yes, the policy was loud, but economically it was surprisingly leaky.

SPEAKER_01 16:30

Scott, I I imagine if I was sitting in the Ministry of Trade in China, I would have been expecting something from that announcement. But I imagine that there were uh people sitting in ministries of trade all over the world who are watching television and going, hey, hang on, he's talking about us now. In this world where trading partners with the US have to deal with constant changes in tariffs or the threat of tariffs or the punishment of tariffs, how has that changed the way in which they're conducting trade?

SPEAKER_02 16:59

Well, first of all, I think you're right. It w it it wasn't even across the world, depending on the the power that you felt or the position. Some countries responded quite um urgently to you recall the Trump administration saying, you know, it's almost like there's a move early advantage, settle the deal early, otherwise it it just gets worse. Um but the playbook really for all countries across the world had a couple of some a couple of common uh components. The first one was negotiate, negotiate, negotiate, and negotiate some more. And really to expect this would not be easy and that the the discussions would last a long time, but to make it narrow, to really do it bilaterally, step away from multilateral frameworks and engage on a bilateral basis. I think many countries launched into into that and tried to carve out some exemptions wherever they could. Some countries, the second piece like was retaliation. Canada kind of tried China the most dramatic um impact in that particular tactic. Another tactic, a third tactic I would say was reducing the risk of provoking Washington's anger. So um increasing US imports, addressing the any imbalance, creating jobs in America was a tactic used by a couple of a couple of countries, Japan, for example. And on the whole, keeping a low profile, not being not being the target for the anger from DC. And then I think the final one really over a longer term is is diversification, de-risking and hedging, finding alternatives really, and so dealing with the the pressure from the US tariffs, but really looking to reshape trade links uh so that they can um uh so that there is an alternative to the US trade.

SPEAKER_01 18:41

Are these trade borders, is this fragmentation that started at Liberation Day? Is it here to stay now?

SPEAKER_02 18:48

Yeah, I th I think it is. And I it's really interesting to hear Astor's comment on the overall impact on this year. I think that's a f that's a fascinating point. But I think that in geopolitical terms, the the the sort of weaponization of trade, maybe in a a more structured way than we've seen during Liberation Year, but I think the weaponization of trade is with us. We're seeing it now in the Strait of Hormos. So I think this this is now part of the this this much more fragmented, complex, um holistic sort of geopolitical competition between countries.

SPEAKER_00 19:20

If I may, so the tariffs might themselves might just change, but the uncertainty you know feels permanent because economically the risk premium attached to all of this has become like a permanent feature of global supply chains. So even if all the tariffs were scrapped tomorrow, the uncertainty that the f firms have to face has actually forced them to you know shift their inventory model. They've moved from just in time to just in case model, and which does mean that the higher inventory costs are already baked in. So we've actually entered an era of fragmented globalization where trade is determined more by resilience rather than pure comparative advantage. And this is here to stay.

SPEAKER_01 20:07

Scott, you you mentioned uh some of the tactics that countries have used to deflect tariffs over the last year. Looking forward, is this the playbook now if they want to trade with the US?

SPEAKER_02 20:19

Yes, it it is. Uh uh stay uh go bilateral, match them on a transactional sort of tone, um, give some concessions up front. Another one is to bundle other aspects into the relationship. So South Korea and Japan, for example, on security and uh uh successfully putting that in there. Um how successful this be, I I think it's too early to tell. I think it will be expensive. And the early signs are that having having reached that that deal with the Trump administration, that doesn't guarantee a stable, predictable, positive relationship with Washington.

SPEAKER_01 20:55

Okay, so I want you to be future historians now. Looking back on the history of the 12 months after Liberation Day, economically and politically, economically for you, Asta, politically for you, Scott. What's the story we're gonna write about this, Asta?

SPEAKER_00 21:13

So economically, I think the history will probably say that with respect to tariffs, the bark was thunderbite. Because they raised costs and uncertainty, but they didn't deliver as to what they promised. Trade deficits didn't fall, your supply chains didn't suddenly come back home. And at the same time, the actual tariff rate was a lot lower than the headline tariffs that they were announced earlier. But I think the shift is lasting because trade policy is no longer a rare tool to actually negotiate. It's becoming it's becoming a strategic lever to negotiate and get what they want. So the legacy isn't really the globalization, but a more fragile, fragmented, and a

SPEAKER_02 22:02

Yeah, I would agree. I think in geopolitical terms, I think history will show this to be an inflection point in how geopolitics are conducted. So trade shifting to center stage and of of geopolitical competition and away from an agreed rules, rules-based order. And I think I'd draw out two particular geopolitical lessons for history, Tim. I think the first one is the shock of uh President Trump's really hard transactionalism on allies as well as adversaries. So the likes of the UK or Australia or the Philippines, who didn't run large structural surpluses with the US, were whacked with unexpected tariffs just as much as adversaries were. I think that has developed or led to an erosion of the West's cohesion and trust, the crucial element being being trust. So I think that's point number one, the impact on the community of Western allies. The second one is China. And I mentioned it earlier on. I think China's retaliation to 135, 145% tariffs was effectively initially turning off agricultural imports, but really causing some pain by turning down the supply or restricting the supply of rare earths or rare earth products, you know, permanent magnets, for example. And I think that was a that was a wake-up call to the world about China's power to control trade choke points. And as I've said, we saw it again this year with Iran and the Strait of Harmours. So I think I think the manner of geopolitics now very much includes uh trade choke points as a lever to pool, to coerce, as as Asta said. But China pretty much led the way with that um with that that that control of rare earths.

SPEAKER_01 23:50

The future history of Liberation Day. What a time to be alive. Okay, now we get to my favorite bit of the show, where both of you tell me something that is on your agenda, something that the rest of us might well have missed. Aster.

SPEAKER_00 24:14

So I think I'll be keeping an eye on the sanitary and phytosanitary agreement. So there is some momentum happening in this space within with UK and EU. If that actually goes through, then it could bring down the border checks uh on food and drinks by around 80%. So for the UK, it is a quick win uh for small, especially for small exporters. Yes, it might be a boring technical detail on paper, but it could have growth implications next year.

SPEAKER_01 24:46

It's definitely not a boring technical detail for many of them, is it?

SPEAKER_02 24:50

Absolutely, Scott. So, Tim, I think my point for the radar is the is the the the sense of divergence that we're seeing between the United Arab Emirates and Saudi Arabia. Now we've seen them in April, we've seen two big events happen. Uh we've seen the Emirates uh pull back a loan that they made to Pakistan back, I think, in 2019, that was expected to roll over, but it's been sharply pulled back in. Now, Saudi Arabia made good the shortfall into Pakistan coffers, and so Pakistan still has the funds, the foreign exchange funds, but the the it is a demonstration of a change in Abu Dhabi in terms of how they see the region and how they're diverging from Saudi Arabia. And then secondly, we've seen the Emirates declare their intention to leave OPEC, which again suggests that we are seeing divergence, not convergence. And I would argue that that matters, it matters between the two countries. Obviously, it matters in the region and it matters beyond.

SPEAKER_01 25:45

There's a good news, bad news story on your agendas today. Thank you very much for both. Thank you, uh both of you, for your contribution today. Yeah, I was making fun of it, but it is really important to look back, and it's very interesting and very instructive. Thank you very much, Asta.

SPEAKER_00 26:03

Thank you so much, Anna.

SPEAKER_01 26:04

And Scott, thank you too. And thank you to all of you for watching and listening. If there is something that you want us to cover on Trade Links, let us know, and we will, of course. Uh, please leave us a review. Tell someone else about us if uh you like trade links. We'll see you soon.