The current UK Government is focused on delivering economic growth and positioning the UK as an important economic and diplomatic player internationally. The relationship with the EU is probably the most crucial bit in this jigsaw, and the deal struck on Monday, outlined in a “Common Understanding”, indicates the direction of travel: cautiously and selectively rebuilding closer relations with the EU along a number of dimensions, first and foremost on security and defence matters, but also including energy, environmental, and some economic aspects.
We will discuss three particular areas that are related to trade in the ‘common understanding’: fisheries and trade in agri-food products, youth mobility, and cooperation on energy markets and carbon emissions, respectively. We explain why the deal delivers in two out of three areas. More could have been done, and with firmer commitments. The document essentially represents a negotiating agenda with mostly aspirational language, whereby the two parties agree to “work towards” certain outcomes and everything has to be finally negotiated. Yet every journey starts with a single step, and the one taken on Monday is a sensible step in the right direction.
A core, perhaps the main, EU demand in these negotiations was to extend its access to UK fishing waters for a reasonably long period of time beyond the June 2026 deadline, which was established in the UK-EU Trade and Cooperation Agreement (TCA). In principle, the agreement on fisheries is reciprocal but access the other party’s waters matters much more to the EU than to the UK.
The UK agreed to extend the agreement on fishing by 12 years, a concession which may have led the EU to unlock negotiations on a core demand of the UK: an agreement on Sanitary and Phytosanitary Standards (SPS) to reduce trade barriers on agri-food exports to the EU. The benefits of such an agreement in terms of reduced documentation and border inspections are directly proportional to the degree of regulatory alignment achieved. For UK exporters, therefore, it is good news that the UK and the EU agreed a comprehensive SPS agreement based on dynamic alignment to EU rules.
The UK fishing industry considers a 12-year extension excessive. However, the annual negotiation that the industry advocates for is a recipe for tension and discourages firms from taking advantage of agreements. Moreover, UK fish sales will benefit from the SPS agreement, as the latter will reportedly not be time-bound, and it delivers substantial access to EU markets (70% of UK exports of fish go to the EU). Whereas fishing has historical and cultural significance for coastal communities in the UK, it is also true that the industry only represents 0.03% of GDP, and that to support its development in terms of modernising its fleet and upskilling the workforce, the UK Government announced a support package worth £360 million concurrently to the deal with the EU.
On the dynamic alignment, this could be seen as a loss of sovereignty for the UK, who will now have to implement rules made in Brussels without being allowed to vote on them (the UK will be invited to contribute to the “decision shaping process”, however). The UK will also have to make contributions to the EU for work in this area, and accept the European Court of Justice as the ultimate authority in EU law in a dispute settlement arbitration panel. While the agreement on fish merely re-confirms and extends a deal made in the TCA, the provisions of the SPS agreement appear to be significant departures from Brexit positions. The approach appears sensible because, firstly, as agri-food standards in the UK and the EU are extremely similar, UK producers will not struggle to comply with them; secondly, UK producers will (re-)gain easier and cheaper access to a very large market, and thirdly, this partial alignment allows the UK Government to remain within its self-imposed red lines.
The alignment of the UK’s and EU’s ETSs has benefits for both sides. It is a necessary condition for avoiding the bureaucracy of the UK and EU ‘Carbon Border Adjustment Mechanisms’ (CBAMs) on mutual trade, it saves wasting resources on creating two different bureaucratic systems, and it creates a larger and more stable market for emissions allowances. What is slightly surprising is that the statement does not explicitly mention aligning the UK and EU CBAMs. Not only would the creation of separate structures be very wasteful, but any potential difference in coverage of the two schemes then requires rules of origin on the bits of EU-UK trade for which coverage differed – the very opposite of eliminating barriers to trade.
Combining the electricity markets is also an obvious win, reducing prices on both sides by allowing the efficient trading of temporary surpluses with each other. This is important for North Sea installations which would be able to direct power to either the UK or EU according to demands. An omission here is the mention of the carbon market, for which agreements are required to allow carbon captured in one partner (usually the EU) to be stored in the other (usually the UK).
Another core demand of the EU is to establish a scheme that would allow 18-30-year-olds to move freely between the UK and the EU to study and work. This was discussed together with the UK re-joining the Erasmus+ programme, the possibility for EU students to pay “home” fees at UK Universities, and simplifying access to the EU for touring artists.
No substantial progress was made in this area. The word “mobility” was replaced with “experience” (mobility is only used once, to refer to military material and personnel), and the parties agreed to keep working towards a scheme which will be time-limited, capped, and with a dedicated visa path. As this was a disappointing outcome for the EU, a similar disappointment hit the UK insofar as the EU simply is to “recognise the value of travel and cultural and artistic exchanges, including the activities of touring artists”. The EU request to pay home fees was rejected by the UK, and on the Erasmus+ the terms of the UK’s association to the programme are yet to be agreed.
Mobility issues are currently highly politically charged in the UK, so it does not come as a surprise that an agreement could not be found. While a UK opening on youth mobility would be beneficial to UK growth, e.g. thanks to reduced vacancies and an inflow of skills, the cautious and incremental approach pursued by the UK Government can hopefully deliver said gains sooner rather than later, as it allows it to avoid harsh criticism internally now, and it sets the scene for making progress on the scheme in the near future.
Of course. The obvious elephant in the room is services trade, which is a particular strength of the UK economy. Last year the UK exported more services (an estimated £183 billion) to the EU than goods (£174bn). More importantly perhaps, UK global services exports grew by 7.7% in 2024 whereas its global goods exports fell by 7.5%. The omission of services trade from the ‘Common Understanding’ is thus somewhat surprising, the more so as Article 126 of the TCA readily provides for a review of non-financial services provisions of the TCA in the five-yearly review.
It seems that the lamppost phenomenon has struck again: the deal aspires to facilitate activities of touring artists (because everyone knows, say, Ed Sheeran) whereas the more anonymous £65 billion of UK business services delivered to the EU could presumably well do with some help too. Mobility of business persons, the potential recognition of professional qualifications, and competition cooperation at least receive an honorary mention in the latter half of the common understanding.
Putting services to one side, the mutual recognition of conformity assessment is a very important issue for the UK and is partly within the realm of SPS; however, it is an area on which the EU has for the time being indicated an unwillingness to move. Yet, it is not unimaginable to potentially broaden mutual recognition, for example, the TCA includes this for the car industry and extensions to other industries would reduce costs for EU supply chains. The inclusion of UK businesses in the EU’s Import One Stop Shop (IOSS) for selling low-value goods to final consumers in the EU would have presumably helped small and medium-sized businesses (SMEs) a great deal.
Setting the right tone and mapping out the first steps in selected areas is a big achievement. All told, what has tentatively been agreed is expected to add approximately £9bn to the UK’s GDP by 2040, which is about the same as the expected gains from the recent free trade agreements with India, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Australia and New Zealand combined.
At the same time, with a view towards economic growth and consumer prosperity, it is worth noting that frictions across large swathes of economic activity between the UK and the EU yet remain to be addressed. In addition, there is much that the UK could do independently to improve access to the EU for UK businesses – ranging from the suspended rollout of the Single Trade Window; arrangements for VAT recovery, trade finance and export support. The importance of such more ‘technical’ and practical issues should not be underestimated.
Monday’s ‘Common Understanding’ with the EU comes hot on the heels of a trade agreement with India and a geopolitical US-UK ‘deal.’ In each case, the approach to put the UK’s trade relations with important partners such as the US, India and the EU on a new footing has been distinctly different. What we are now seeing with the UK-EU agreement is a cautious measured approach that seems to avoid being overly sloganistic, aiming at not alienating partners, but instead at removing barriers for UK businesses and people. Most of this is pretty sensible.
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