Britain needs a new twin-track trade strategy that protects high-value manufacturing while seeking out new markets for its world-leading services firms

The UK’s initial post-Brexit trade plan must be replaced with a far more ambitious strategy to protect Britain’s vulnerable high-value manufacturing firms – reliant on being part of European supply chains – while pioneering a new approach to trade negotiations to capitalise on its strengths as a global services superpower, according to major new research published today (Thursday).

Trading up – the 37^th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation – notes that the UK’s initial post-Brexit trade plan, securing Free Trade Agreements (FTAs) with countries to replace those it had as an EU member, has been largely been successful. Agreements have been signed with more than 90 countries, that jointly account for more than 60 per cent of UK trade.

However, this approach has run out of road as future FTAs with the US and China are not on the horizon. Furthermore, it has not been able to prevent a worrying decline in the volume of Britain’s goods exports – which are 17 per cent below pre-Brexit levels at the outset of 2023, significantly below France, the second weakest G7 performer, whose goods are just 6 per cent lower. It has also failed to open up new markets for Britain’s world-leading services firms.

A new twin-track UK trade strategy is therefore needed, say the authors, with a defensive focus on goods and an innovative new approach to promoting its strengths as the world’s second largest exporter of services.

Trading up notes that for all the rhetorical focus on it from politicians, high-value added manufacturing is particularly vulnerable following the UK’s exit from the EU. It is often reliant on being part of European supply chains, a position that will erode over time due to higher trade costs. Already by the end of 2022, UK exports of cars and chemicals were 11 per cent below and just 2 per above pre- Trade and Cooperation Agreement (TCA) levels respectively – far worse than the G7 average of 4 per cent below and 25 per cent above.

Avoiding this structural decline can only be addressed by fundamentally revisiting our relationship with the EU, say the authors. Tweaks to the current arrangement, or simply joining the EU Customs Union, will not address the underlying challenge posed to firms’ place in European supply chains – the border.

Instead, the UK’s ultimate objective should be to replicate for the UK the position of Northern Ireland – delivering the benefits of both the EU customs territory and single market for goods – with a UK Protocol. This could boost GDP by as much as 1 to 2 per cent – over 12 times the boost from acceding to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. While it would be politically controversial in the UK and Brussels, it is not unimaginable.

That’s because the British public is far more relaxed about closer regulatory alignment that access to the single market for goods would require, than freedom of movement. Furthermore, the impact of lost regulatory freedom would be limited given the UK has already ruled out significant deregulation via level playing field commitments. Brussels as it stands is not open to such an arrangement, but agreed the approach in the Northern Ireland Protocol, and offered it for the whole UK during Theresa May’s premiership.

Alongside this defensive approach on goods, the report says the UK should adopt a more innovative approach to boosting our trade in services with new Services Trade Agreements (STAs) covering sectors such as finance, business services, education and culture.

This new avenue for trade policy reflects both the UK’s strengths and the patterns of global trade growth – services exports with a UK revealed comparative advantage tripled between 2005 and 2021, outpacing goods exports which only doubled over the same period. The UK is also less dependent on the EU market for its services exports (61 per cent went to non-EU markets in 2018, compared to 50 per cent for goods exports).

The report authors argue that STAs should differ from traditional FTAs in both the issues they cover and the way they are negotiated. The content should focus on mobility of workers, mutual recognition of qualifications and digital agreements, rather than tariffs. Negotiations should also be led by regulatory authorities, rather than trade negotiators.

While challenging, the UK can learn from previous experiences in promoting services trade – including in live negotiations with Switzerland – and focus initially on higher income countries with which it already has an FTA, including Australia, Canada, Switzerland and Japan. With the US trade policy priority being to onshore manufacturing activity, there may also be more scope to make progress on service trade liberalisation with our biggest trading partner.

The prize for negotiating innovative new STAs could be significant. Successfully removing barriers could boost the UK’s services exports by as much as 40 per cent, equivalent to additional exports worth £6 billion for business services alone if achieved with the countries above, and to up to £17 billion if an agreement with the US could also be reached.

Successfully riding the wave of growing services exports could be transformative in the decade ahead, say the report authors. Maintaining the UK’s current market share as global services exports thrive, compared to the modelled post-Brexit path, could ultimately boost exports by up to £200 billion by 2035.

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

“For the first time in half a century Britain needs a trade strategy. But it does not have one.

“The recent focus on signing Free Trade Agreements to limit the loss of post-Brexit of market access has been successful, but has now run out of road, with no prospect of further significant agreements.

“A new strategy must recognise the nature of the UK economy, developments in global trade patterns, and rising geopolitical tensions regarding goods trade in particular. That requires a twin-track approach, protecting important high value manufacturing sectors, from cars to chemicals, struggling to retain their place in European supply chains, while focusing on new markets for its world-leading services firms.

“This won’t be easy, requiring a closer relationship with the EU on goods and the innovative development of Services Trade Agreements. But understanding what your objectives are is the first step in trying to achieve them.”