Key Takeaways:
Starmer is aligning UK legislation with the EU and pushing for a new security pact, linking trade and security cooperation.
Germany is driving EU-UK reconciliation, motivated by economic concerns and security needs, marking a shift from the EU’s previous hard-line stance post-Brexit.
Facing potential trade conflicts with China, and US election uncertainty, the EU may deepen UK ties to mitigate economic risks.
UK-EU relations are set to improve significantly, benefiting both economies and enhancing security, with increased opportunities for UK defence companies.
The UK Position:
The UK Prime Minister Keir Starmer has indicated a clear desire to strengthen UK-EU relations and secure a favourable deal for its economic and security interests. The UK seeks to acquire a deal with the EU that:
Creates a veterinary agreement allowing free trade of agri-food products by removing unnecessary border checks.
Achieves a mutual recognition agreement for professional qualifications to support UK service exporters.
Establishes a new EU-UK security pact, strengthening cooperation and trust.
Starmer has already begun enabling his desired strengthening, by passing legislation that aligns with that of the EU which would permit frictionless trade. A primary example is The Product Safety and Metrology Bill, introduced at the King’s Speech on July 17th. The Bill will likely pass during this session (year) of the parliament and will cover “nearly all manufactured goods” and consumer products. Such a tangible action so early into Starmer’s premiership indicates a serious willingness to placate the EU to achieve his strengthened relations.
In a recent visit to Brussels, the UK Minister for European Union Relations, Nick Thomas-Symonds stressed that "a strong UK - EU alliance is vital." Through the explicit joining of trade and security together as the bridge to closer relations, the Minister outlined the UK policy as “resetting the relationship with the European Union, to strengthen ties, reinforce our security and tackle barriers to trade". KSG assesses that tying trade relations to security will be the basis for Labour’s EU strategy, and that this is already ongoing between London and Brussels. KSG assesses that in return for increased UK involvement in European security (namely on NATO’s eastern flank and via support to Ukraine), the UK will seek to acquire reduced trade frictions on agricultural products, services and chemicals.
The EU Position:
The starting point for a healing of the rift between the EU and the UK has been German willingness to engage in bilateral security pacts. On July 24th the UK and Germany signed a Joint Declaration on Enhanced Defence Cooperation, which publicly expressed the bilateral ambition to:
Strengthen defence industry collaboration.
Support Ukraine.
Improve military interoperability.
In particular, Germany and the UK will look to expand on existing collaborations such as:
The German-British Amphibious Engineer Battalion 130 in Minden.
Existing agreements within the Organisation For Joint Armament Cooperation.
The Eurofighter/Typhoon programme.
The Boxer User Group.
The bilateral Ministerial Equipment and Capability Cooperation (MECC).
Miguel Berger, German Ambassador to the UK has described the agreement as a “Security and Cooperation Agreement between the U.K. and the European Union”, rather than simply with Germany. This would mark a steep climb down from the EU’s former punishing position in the aftermath of the referendum, pictured below, but that some accommodations are likely.
Source: Slide presented by Michel Barnier, European Commission Chief Negotiator, to the Heads of State and Government at the European Council (Article 50) on 15 December 2017.
With the Ukrainian war on Europe’s borders, the economic outlook forecast for collective growth across the EU for 2024 is at 0.9% and the 2024 forecast for Germany is at just 0.3%. The stagnant growth figures are likely to pressure the German government towards a more conciliatory stance compared to the aftermath of the Brexit referendum. A successful rapprochement with the UK would offer a considerable opportunity to foster growth through the easing of trade frictions.
Despite German positivity, EU Commission Executive Vice President Maroš Šefčovič has made clear to the UK that the EU would only be willing to implement “existing agreements” to build their relationship. The pivotal existing agreement is the Brexit deal, finalised in December 2020. Under Article 776 of the Trade and Cooperation Agreement (TCA) it must be reviewed every 5 years and its review is due by 2026. The review explicitly provides scope for negotiations on trade in services which as a services economy the UK exports £171 billion to the EU and imports just £147 billion.
In short - the leading EU power appears eager to strengthen ties with the UK, whereas the EU structures themselves appear reluctant.
EU Preparation for a Trade War with China
KSG assesses that within 1-2 years, in the wake of Chinese threats to economic security and the economic impact of Russia’s invasion of Ukraine, the EU will be forced into closer ties with the UK. On 22 August the EU’s most senior diplomat, Josep Borrell, said that he regarded the prospect of a trade war between China and the EU as almost “unavoidable”. KSG assesses that mitigations against the negative effects of a trade war will rely on trading partnerships with the UK and the US.
Provisional EU Commission tariffs on Battery Electric Vehicles came into force (primarily related to China) on July 5th and were made definitive on August 20th:
BYD: 17.0%
Geely: 19.3%
SAIC: 36.3%
Other cooperating companies: 21.3%
All other non-cooperating companies: 36.3%;
The decision to grant an individual duty rate to Tesla as an exporter from China, established at 9%.
With the prospect of two German warships leaving Japan on 25 August heading towards the Taiwan Strait for freedom of navigation operations, the EU stance is hardening on China. This would be the first time since 2002 that Germany will enter the Taiwan Strait.
The US-EU relationship and its significance to UK-EU dynamics
The risk of a Trump re-election to the EU comes with campaign promises of significant shifts towards US trade protectionism. Trump has outlined the idea of a universal tariff of 10% since at least 2023, though he recently claimed he would increase this to 20%. KSG assesses that uncertainty over the election result is likely to closen UK-EU ties to hedge against the potential of US tariffs.
On October 18th, 2019, the US began to apply 10% tariffs on aircraft and 25% tariffs on agricultural products from the EU. Unlike the maintenance of the majority ($360 billion) of tariffs placed on China by the Trump presidency, the Biden administration’s desire to ‘reset relations’ with the EU led to the US and EU agreeing to suspend tariffs for 5 years starting on June 15th 2021. With this deal due to lapse in the next presidency, the effect on EU businesses and the American consumer is likely to be extremely dependent on the winner of the election.
While many dismiss the claims and the rhetoric of the former president, the past record of leveraging huge tariff packages against allies leads KSG to assess that the EU will likely be forced to shift towards further implementation of strategies such as conciliation with the UK to mitigate the effects of a Trump victory at the upcoming election.
With a US trade deficit with Europe of $229 billion in 2023 and already at $117 billion for the six months to the end of June 2024, the implementation of any tariff could be devastating to European exports, and inflationary to American consumers. The risk of any tariff implementation as Trump indicated is that once the tax duties are in place, domestic pressures on budgets make scrapping them too unpopular.
The EU cannot take a Harris victory for granted when it comes to tariffs either. KSG assesses that Harris’ stance on foreign policy is yet to be fully outlined publicly, or completely determined behind the scenes. This has led to increased uncertainty in the capitals of Europe. KSG assessment identified indicators of Harris’ potential policy towards the EU. Prior to her vice presidency she claimed that she was “not a protectionist Democrat” and prior to his selection as Vice President, Governor Tim Walz led trade delegations to the Netherlands and Ireland, promoting the possibility to “strengthen international economic ties”.
If further tariffs are introduced or the suspension of tariffs are allowed to lapse, then the requirements of either administration to reduce the deficit and protect domestic production is likely to pressure the EU commissioners under a weakened Von der Leyen to build or mend bridges elsewhere. KSG assesses that the UK will be the most likely and simplest place to do so.
Forward Look
KSG assesses that within the next two years, the UK-EU relationship will be at its height since the Brexit referendum. This is likely to benefit both economies and slightly reduce either party feeling a sense of reliance upon the US or China. The process is likely to be gradual given the complexity of moving both bureaucracies on either side of the English Channel.
In 2022, small shifts such as a veterinary agreement were identified as long-term recommendations by the British Chambers of Commerce. Significant posture shifts in the UK’s relationship with the EU are likely to achieve those recommendations especially in regards to:
UK recognition of CE (Conformité Européenne - European Conformity) marked products, especially in the construction sector.
Regulatory policy dialogue to reduce creating EU-UK divergence, and thus further trade barriers.
VAT cooperation and regulatory alignment, especially easing E-commerce.
UK defence companies such as BAE systems will likely face continuing and improving opportunities given the improving relations, able to make up for the shortfall in German defence manufacturing output. Given the nations of Europe are continuing to pledge increased defence spending, UK companies can expect opportunity across the EU, facilitated by this fundamental bilateral rapprochement (with Germany).
KSG assesses that closer relations between the UK and EU will provide greater security on NATO’s Eastern Flank, seamless defence production collaboration, more effective and co-ordinated support to Ukraine, and deter Russian aggression in theatres such as the Baltic and High North.