Trade policy in the UK has reached critical juncture.
The UK spent several years negotiating Free Trade Agreements (FTAs), including an agreement with the European Union (EU) to replace its membership of the EU. Governments over this time were not always explicit about what this flurry of activity was intended to achieve, or how. The economic benefits of many of the new FTAs signed by the UK were, according to official projections, expected to be limited, and lower than the losses incurred by the loss of EU membership. The publication by the current government of a Trade Strategy in 2025 provides a much needed strategic framework for UK trade policymaking. Coincidentally, the state of the UK’s trade policies was also reviewed by the World Trade Organisation (WTO) under its Trade Policy Review Mechanism. This is the first time the UK has been reviewed in its own right since leaving the EU.
Building on this, Frontier Economics, in collaboration with the Centre for Inclusive Trade Policy and the UK Trade Policy Observatory at Sussex University, has just published an independent review of the UK’s trade policies (accessible here). The report draws on analysis by an interdisciplinary team. We have used a mix of methods: data analysis, textual analysis of policy documents using data science techniques, and consultations with stakeholders, including roundtables and a specific “Citizens Jury”.
Our analysis of UK trade policy highlights the contribution trade can make to the UK Government’s overall “mission” of accelerating productivity and growth. It also underscores the challenges that make trade policy more complex than at any time in the post war era, and the policy choices and steps that UK needs to consider.
What is trade policy aiming for?
The UK faces persistently weak productivity and economic growth, which, since the pandemic, has trended below the OECD average. This in turn hinders improvements to living standards. Boosting productivity and economic growth are the current government’s main “mission”: as indeed it has been for previous ones.
Trade policy can help with this mission: there is a long established empirical relationship between trade, productivity and growth. The UK is relatively open to trade, with a trade to GDP ratio of around 65%. Around 6.5 million jobs depend on exports. of which 1.5 million are in manufacturing and 5 million in services. Out of all the firms that export or import goods or services, 95% were small firms (between 1-49 employees). Trading firms tend to be more productive, though a relatively limited share of firms are engaged in international trade - 11.5% of firms export, 12% import and only 6.5% of firms both export and import. The contribution that trade can make to growth is one explanation for the focus by successive governments on FTAs: these collectively cover around 61% of UK imports and 55% of UK exports of goods and services, though as observed above, projected growth payoffs are limited.
At the same time, an examination of government policy statements over the last 5 years reveals the range of other thematic priorities that involve the use of trade policy instruments, or interventions (such as subsidies and regulation) that have significant effects on trade. These priority themes are: economic security, the effects of the digital transformation, sustainability, and social inclusion. These themes, along with the overall objective of increasing productivity and growth as also addressed through the 2025 Modern Industrial Strategy.
Pursuing multiple objectives would be challenging at the best of times. It requires ensuring that policies do not conflict, and that trade-offs between them are addressed. Moreover, these are not the best of times, because of a challenging global context.
Trade in a fragmenting world
One of the challenges for the UK is that trade barriers between the UK and its two largest trade partners, the EU and the US, have increased to levels higher than those seen at any point in the last 40 years or so. In the case of the EU, this is due to the UK’s decision to leave the EU single market and Customs Union. Replacing this with the UK-EU Trade and Cooperation Agreement (TCA) has been associated with falls in goods trade by roughly 30% and services exports by around 16%. The EU remains the UK’s single largest trade partner, accounting for 41% of UK exports and 52% of imports. Recent “reset” negotiations between the UK and the EU may mitigate some of these barriers, but have left major areas of trade, notably services, largely untouched-
In the case of the US, the UK’s second largest partner, increased trade costs reflect the US slide into protectionism, increasing tariffs applied to UK exports from an average of less than 3%, to rates of at least 10%. Granted, the UK and the US signed an “Economic Prosperity Deal” (EPD). But this provides a safeguard against further measures, and a relatively weak one at that, as it is not a legally binding agreement but more of a “handshake”.
Moreover, the structure of the EPD poses significant challenges. These stem from the fact that it does not seek to build on the trade rules of the WTO, as all other agreements signed by the UK have done, but rather to enshrine the US’ departure from these rules, and to an extent, the UK’s willingness to depart from these rules in order to secure a degree of access to UK markets.
In particular, the EPD requires the UK to reduce the role played by countries deemed a threat to the US (essentially, China), and to continue to adjust its approach based on US perceptions of security. Yet China is the UK’s third largest trade partner, and the rise of China’s share in UK imports of goods from less than 3% in 2000, to 11% in 2024, is one of the main observable changes over the last decade Furthermore, 50% of UK imports from China can be described as “high dependency” i.e., products for which China accounts for more than half of the UK’s imports by value. China is also very active in the Asia-Pacific region, which the UK has targeted as a priority in its trade expansion.
These developments are part of a broader global trend of fragmentation driven by geopolitical rivalry. The governance of global trade has shifted from a system based on predictable and enforceable rules, and principles of non-discrimination, to one based on more selective and discretionary arrangements, and in which access to markets is conditioned on other factors, notably security. Whereas trade policy was seen as a way of fostering global geopolitical cooperation, it is now a mechanism through which geopolitical rivalry can be fostered.
Tough choices
This places the UK in a challenging position. The UK has geopolitical interests, as does any other nation. But while cooperation with allies, notably the United States and the EU, has been critical for the UK, so has upholding multilateral rules. It is these that underpin the delivery of global collective or public goods that matter the most to the UK: besides security, an open trade system and climate change mitigation.
Just focusing on the single issue of trade, having an open, rules-based international trading system is important to the UK because it has underpinned the growth of global value chains on which a substantial amount of UK trade relies. For example, around 30% of the value of UK manufacturing exports relies on foreign inputs. The ratio of services imports to goods exports by UK exporters of goods is around 70%.
Looking beyond commercial dynamics, the UK has pursued economic security goals through arrangements such as FTAs with groups of partners. A notable example is with countries in the Asia-Pacific via accession to the CPTPP, which was consistent with the “Indo-Pacific Tilt” espoused by UK foreign policy The key issue, however, is that these agreements have followed a WTO-plus approach, and are based on principles of open-regionalism i.e. membership is open to other countries. That contrasts with the WTO-minus, “closed” model pursued by the United States.
While it is entirely understandable that the UK would try to mitigate the immediate shock of US tariffs, and remain close to a historical ally, the reality is that the current trajectory of UK policy is not consistent with the UK’s longer term interests. The UK Trade Strategy has tried to reconcile the pursuit of multilateral arrangements with “other” arrangements that are in tension with multilateral rules, and has described this as “pragmatic approach”. The reality is that this pragmatism is unlikely to be tenable in the long run, and therefore a cold appraisal of the relative costs and benefits of this approach is needed.
What is the road ahead ?
Our review recommends a series of measures, both in relation to specific themes, and on cross-cutting matters. We highlight three here:
■ Improve the domestic institutional basis for trade policymaking by strengthening parliamentary scrutiny, and investing in evaluation capacity. The latter could focus on the effects of trade agreements signed, especially where types of provisions in one agreement may conflict with approaches and objectives sought through others. It could also evaluate domestic policy measures, adopted pursuant to the Industrial Strategy, that have trade spillovers.
■ Given the rise of economic security as a concept, develop a formal policy position on what this means and how it is pursued. This will stop it from being a catch-all concept. It will help the UK to discern what types of measures and agreements with partners are appropriate given UK security objectives, but also its wider policy agenda on growth and other issues (such as sustainability).
■ The UK needs to work closely with ‘like-minded’ middle-power countries to help steer a cooperative path which respects the principles of the rules-based international trading system. This should include continuing to pursue free trade agreements with partner countries, in a way the builds on WTO rules . Given the role played by the EU in UK trade, reducing the trade costs imposed by the UK’s exit from the EU is an important priority.
In sum, while the UK has taken significant steps in developing an overall strategy around its trade policy, there remains a significant agenda in terms of accurately appraising the trade-offs between objectives that stem from a complex international situation, and developing the institutional processes to ensure the effectiveness of policy.
