UK government ministers have recently made extravagant claims about the benefits of closer integration with the EU single market, referring to EU alignment as a ‘prize’ and ‘where the magic happens’. But the reality is far removed from these assertions. UK exports to the EU grew very slowly in the last two decades of the UK’s EU membership, while exports to non-EU destinations thrived. Efforts to re-align the UK with parts of the EU single market will bring very scant gains while also imposing considerable financial costs and can be considered a dead end as far as boosting UK growth is concerned.
Ministers in the UK’s Labour government have recently been talking up the benefits of closer alignment with the EU’s single market. Chancellor Reeves referred to such alignment as a the ‘biggest prize’ while Business Secretary Kyle claimed EU alignment is ‘where the magic happens’. The government has also asserted that their planned ‘reset’ involving alignment in the food and energy sectors would increase UK GDP by £9 billion by 2040, a rise of 0.3%.
The reality is far removed from these extravagant claims. Even strong supporters of EU integration like John Springford of the CER agree that the government’s claims about the upside of the reset are exaggerated. Springford has suggested the upside to GDP will be only 0.1% over a decade – a rounding error – with a minimal positive impact on food prices.
Source: Briefings for Britain
We think the likely net outcome would be even worse. The UK’s total food and live animal exports to the EU in the five years to 2019 averaged only £13 billion per year and were £11 billion in 2025. So even a magic return to pre-Brexit levels would only add £2 billion. But as we have previously noted, even this modest gain in exports is unlikely; part of the UK’s lost food ‘exports’ are previously re-exported tropical products, the reset won’t remove all border processes, and regulatory changes required under the reset will damage the UK’s agricultural productivity. We reckon the likely gains to exports from the reset would be at best £1 billion, a trivial sum.
On top of this, the UK has given away over £500 million per year in fishing rights for 12 years and there will be a financial cost for the proposed agri-food deal. Meanwhile, aligning with the EU’s carbon border adjustment mechanism and emissions trading system will drive up import prices and energy costs. This will hit household real incomes and worsen the already very considerable damage done to UK industry in recent years by high UK energy prices – which have soared to 120% of the EU median.
Considering all these factors, we think the reset is likely to have a net negative impact on UK GDP, conservatively to the tune of £500 million to £1 billion pounds per year (see Chart 1).
What about the broader question of whether it makes sense to align more closely with the EU single market? Again, the government’s claims of great economic benefits from this are way off the mark. We can see this both by looking at the past, the present and the future.
The past: contrary to government claims, the EU single market did not prove a bonanza for UK exporters. Indeed, in the final years of the UK’s EU membership from 2000-2019, UK exports of goods to the EU grew by just 15%, i.e. by 0.8% per year. In the same period, UK exports to the rest of the world grew by 88%, or 3.4% per year, i.e. 4.5 times faster (see Chart 2). This puts claims about the inescapable effects on UK trade of economic ‘gravity’ into useful perspective: the size and proximity of the EU market didn’t stop UK exports to non-EU destinations growing dramatically faster than those to the EU in this period.
The weak impact of the single market on UK goods exports has been identified by a number of studies, including Briefings for Brexit work in 2018 which noted that trade barriers between the UK and EU barely changed after the year 2000 despite the single market programme. Leaving the single market after Brexit, therefore, was unlikely to have had a large impact on UK trade and rejoining it, even partially, will also not have a big effect.
Source: ONS
Moreover, this disappointing export performance came at a growing cost in terms of a rising net UK contribution to the EU budget. In the final years of the UK’s EU membership this reached around £9.5 billion per year. This was equivalent to around 6% of the value of UK goods exports to the EU in 2013-2019 (see Chart 3), which could be seen a pretty hefty ‘tariff’ on UK exports to the EU – especially compared to the EU’s actual weighted average tariff on imports at the time which was only around 2%. EU membership became an increasingly expensive way for the UK to ‘buy’ free trade with its European neighbours.
Sources: ONS, UK Treasury, EU
What about the broader strategic issue of whether to align more with the EU single market? We think this makes little sense, as can be seen by reference to the past, present and future:
The present: an obsessional focus on goods exports to the EU makes little sense given the current structure of the UK’s foreign exchange earnings. Over the last two decades, the slow growth of goods exports to the EU, stronger growth of goods exports to the rest of the world, and the rapid growth of services exports has rendered goods exports to the EU a dwindling minority of the UK’s overseas earnings.
In 2000, goods exports to the EU made up 10% of UK GDP and accounted for some 40% of the UK’s total overseas earnings, but by 2025 they amounted to only 6% of GDP and less than a fifth of the UK’s export earnings (see Chart 4). Exports of goods and services to non-EU markets are 60% of the UK’s total exports. The UK government may continue to opine about how the EU is the UK’s ‘biggest market’, but this is increasingly at odds with reality.
Source: ONS
The future: a key reason for the declining importance of the EU as a market for UK goods exports is the slow growth of the EU relative to other regions. When the UK joined the EU, the then six economies of the ‘Common Market’ amounted to some 20% of world GDP and the EU on today’s boundaries about 30%. These shares have halved since, and the decline is only going to get worse. The OECD estimates that the EU will only account for about 10% of world output by 2060 (Chart 5). The share of the original EU-6, which account for most of the UK’s trade with the EU, will be smaller still at less than 6% of world output.
Sources: World Bank, OECD
Notwithstanding the EU’s proximity to the UK, its slow growth and relentless relative economic decline mean that its importance as a trade partner for the UK is certain to fall further. Indeed, it’s likely that by 2060 the EU will account for only 25-30% of UK export earnings. Against this background, it makes little sense for UK trade policy to focus on alignment with the EU single market – not only is the EU going to represent a small share of world demand, its regulatory influence on the rest of the world is sure to fall away as well.
It should be clear from the analysis above that the EU single market is not a place where ‘magic happens’. It has been a stagnant market for UK goods for two decades, long before Brexit, and its weight in world demand is set to dwindle further in the next twenty years. The notion that tighter alignment with it will give UK growth a significant boost is a fantasy and derives from a mixture of political desperation and the continued baleful influence of deeply flawed studies (see here and here) that claim the UK has lost several percent of its GDP due to Brexit.
The UK has a good free trade deal with the EU that costs very little in terms of financial transfers and also has improving trade links with other, faster growing regions of the world. Closer EU alignment promises at best very modest gains in trade at an unacceptably high cost in terms of bad regulation, hefty fiscal transfers, and the loss of trade policy autonomy.
