Global Market Insight Webinar - European Union

EU-UK Trade Dynamics

The EU-UK relationship has seen incremental progress since the May 2025 summit, where leaders agreed on a strategic partnership covering security, energy, and fisheries. This reset addresses lingering Brexit frictions, but 2026 marks a pivotal year with the mandatory review of the Trade and Cooperation Agreement (TCA). Negotiations for a sanitary and phytosanitary (SPS) agreement, which could ease food trade by aligning standards, began after the EU adopted its mandate in November 2025. Linking the UK and EU emissions trading systems (ETS) is another key item, potentially exempting UK exports from the Carbon Border Adjustment Mechanism (CBAM).

CBAM's full implementation from January 2026 imposes a carbon price on imports of goods like iron, steel, aluminum, cement, fertilizers, hydrogen, and electricity into the EU. For UK firms, this means calculating and reporting embedded emissions, with liabilities accruing now and payments due in 2027. Estimates suggest this could cost UK exporters up to 800 million pounds annually without an exemption. Sectors like manufacturing are hit hardest, with small and medium enterprises (SMEs) facing disproportionate compliance burdens due to complex supply chain tracing.

Beyond CBAM, the EU's push for a 'Made in Europe' industrial strategy, set for legislation in 2026, could disrupt integrated UK-EU supply chains by prioritizing EU-made products in public procurement. This risks higher costs and barriers in strategic areas like renewables and vehicles. Meanwhile, the EU Deforestation Regulation (EUDR), delayed to December 2026 for large operators, adds pressure on UK exporters of commodities like timber and soy to prove deforestation-free origins, though the UK's low-risk status offers some simplified due diligence.

Tensions arise from stakeholder divergences: EU member states seek to protect the single market's integrity, while UK industries push for minimal alignment to retain trade flexibility. Surprising data from surveys show 54% of UK exporters view the current TCA as unhelpful for growth, up 13 points from last year, underscoring urgency. The AI Act's phased rollout, with high-risk rules from August 2026, indirectly affects UK firms supplying AI to the EU, requiring conformity assessments amid no direct UK equivalent yet.