The UK has a difficult balancing act ahead of it in 2025 as it seeks to reset its relationship with the EU while maintaining good relations with the US under President-Elect Donald Trump.
Brexit supporters have always argued that leaving the European Union would allow the UK’s financial centre in London to deregulate, making it more competitive, and give the nation free reign in signing up to new trade deals. Detractors have pointed out that as the EU is the UK’s main trading partner, the best deal it can have is with Europe and Brexit has introduced unnecessary friction in moving goods and services between Britain and the EU.
Getting the best from Brexit has proven difficult both politically and economically, but that will be further complicated this year by the US presidency of Donald Trump, who has threatened a range of tariffs on global trade in an effort to “put America first”. Throughout the campaign, Trump promised to levy a 20% tax on all imports and a 60% tariff on Chinese imports, although it’s still unclear whether he will hold to this promise. Reports have suggested that his aides are keen to circumscribe the breadth of the promise, but Trump has denied that tariffs will be watered down.[1]
For the UK, trade and regulatory moves will have to tread a fine line, carefully responding to activities in both the US and the EU in a way that protects domestic growth while remaining diplomatically sensitive.
Looking at the numbers
What is certain is that the UK cannot afford to sit still. Both US tariffs and continued trade friction with the EU threaten future growth.
According to research from the London School of Economics, breaking trade links with the EU cost the UK £27bn in the first two years.[2] The analysis used data from more than 100,000 firms to estimate the gap between the actual value of exports under the Trade and Cooperation Agreement and what would have been expected had the UK remained in the EU. Although the overall impact was more limited than forecasters first estimated, the research found that the firms that were suffering most were smaller exporters.
The Office for Budget Responsibility had previously forecast that the UK would see a 15% slump in trade, leading to a 4% reduction in national income over the longer term.[3] This new analysis indicates that forecast was somewhat pessimistic, however, it only took into consideration goods trade, omitting trade in services.
Trump’s tariffs would also hit the UK hard. Economists at the University of Sussex's Centre for Inclusive Trade Policy (CITP) have predicted that if they were to go ahead as stated, US tariffs would see UK exports fall by £22 billion, or 0.8% of GDP, and UK imports drop by £1.4 billion.[4] The UK’s balancing act
Although the Labour government has indicated that it will attempt to “reset” its relationship with the EU and made much of the US-UK special relationship, it has not given much specific detail on its plans.
UK Chancellor Rachel Reeves told the Commons Treasury Committee after Trump’s election that she was “optimistic” about the UK’s ability to steer global economic policy and underlined that the government considered its trading relationship with the US to be “crucial”.[5]
She said: “We’re not just a passive actor in this… It’s a trade relationship with the United States and we will make strong representations about the importance of free and open trade, not just between ourselves and the United States, but globally.
“The US also benefits from that access to free and open trade with us and other countries around the world, and it’s what makes us richer as societies, to benefit from that open trade.
“I absolutely do not want to sound in any way sanguine. On the other hand, I am optimistic about our ability to shape the global economic agenda, as we have under successive governments.”[6]
Foreign Secretary David Lammy also told the BBC's Newscast podcast: “We will seek to ensure and to get across to the United States – and I believe that they would understand this – that hurting your closest allies cannot be in your medium or long-term interests, whatever the pursuit of public policy in relation to some of the problems posed by China."[7]
Both Reeves and the Bank of England both used speeches at Mansion House in November last year to talk about the need to improve trade links with the EU. Although Reeves once again ruled out rejoining the EU's single market or customs union, she talked about creating “a mature, business-like relationship”.[8] At the same event, Bank of England governor Andrew Bailey said that Britain should stand up for free trade and rebuild ties with the European Union.[9]
Although UK Prime Minister Keir Starmer has been invited to a meeting of EU leaders early in 2025, the first invitation of this type since Brexit, there has been scepticism in the EU about what a “reset” really means and how much room Starmer has to make concessions.[10]
President-elect Trump’s feelings towards the UK are less clear, particularly because the level of influence wielded by Elon Musk, who has been vocal about his perceived problems in Britain, are uncertain.
Bibliography
[1] https://www.theguardian.com/us-news/2025/jan/06/donald-trump-tariffs
[3] https://obr.uk/forecasts-in-depth/the-economy-forecast/brexit-analysis/#assumptions
[4] https://citp.ac.uk/publications/trumps-tariffs-could-reduce-uk-exports-by-22-billion
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