Last week, the BBC reported that Andrew Bailey, the Governor of the Bank of England, had said, ‘the UK must do everything to rebuild trade with the EU.’ The Governor's actual statement was more nuanced than the headline:
"It is important we do everything we can to ensure that whatever decisions are taken on the Brexit front do not damage the long-term trade position. So, I hope that we can use this to start to rebuild that relationship," Mr Bailey said.
The BBC also claims that Bailey believed there had been a ‘post-Brexit hit to UK-EU trade’ which could be reversedand implied that Bailey said the UK should ‘pursue a veterinary agreement with the EU, including alignment on standards, in order to lower post-Brexit red tape on food, farm and fish exports’.
I suspect that these are actually the wishes of a Europhile BBC editor, not the words of the Governor of the Bank of England. Surely Bailey has analysts working at the Bank who can explain that most of the falls in UK trade are due to poor UK government energy policies, more accurate trade statistics and failing EU economies.
But in case he doesn’t, here are some of the things Andrew Bailey needs to know about UK-EU trade:
1. Companies trade, not governments
Trade between the EU and UK will not be increased by ‘relationship building’. Trade occurs between companies, consumers, and producers, rather than governments. People will purchase what they need or want if it is available at an affordable price, regardless of a government-to-government ‘relationship’ or a trade agreement. For instance, in 2024, the UK’s largest export market was the US, and its largest import supplier was China; yet, the UK does not have a trade agreement with either. Even adversaries engage in trade: Germany continues to purchase gas from Russia, China still buys iron ore and coal from Australia, and the US is still acquiring electrical goods from China, yes, even now.
2. UK environment policy is killing UK goods trade
The UK government's environmental policy has had a more detrimental effect on UK exports to the EU than Brexit. Lower UK oil production, due to restrictions on new wells and field development, along with excessive taxation of 78%, has consequently reduced trade. Fuel exports used to be among the UK’s largest exports. Crude oil exports to the EU, measured in tonnes to remove price fluctuations, declined by 27% between 2019 and 2024, while refined oil exports fell by 23%. Trying to blame this decline on Brexit is shameful. The governor of the Bank of England should recognise that both current and previous government policies are responsible for this.
UK and EU environmental policy has also outpaced UK and EU manufacturing and manufactured goods exports. Lower UK oil production and refining have further decreased UK exports of chemicals and plastics: Organic chemical exports to the EU fell by 29% between 2019 and 2024, while plastics saw an 8% decline.
However, the most significant decline is in the UK's internal combustion engine (ICE) and diesel car exports. Car manufacturing is a major UK export industry. However, both the UK and EU governments have introduced Electric Vehicle (EV) mandates requiring their car manufacturers to transition to all-EV production. The UK and EU originally aimed to stop sales of new Internal Combustion Engine cars by 2035; however, the UK accelerated this to 2030, while the EU maintained the 2035 target. Recently, the UK has slightly relented and will permit hybrid cars to be sold until 2035. Nevertheless, this has severely affected UK car exports to the EU. Total UK vehicle exports (HS87) to the EU were 19% lower in 2024 than in 2019, before Brexit, due to reduced exports of ICE and diesel cars. UK exports to the EU of ICE cars decreased by 57% between 2019 and 2024, and exports of diesel cars plummeted by 93%, resulting in a combined loss of £6.4 billion. Although exports of hybrid, plug-in hybrids, and EVs have increased by around 134%, a gain of £4 billion, this still leaves UK car exports to the EU £2.4 billion lower than they were in 2019.
This is not a relationship issue; this is a regulation issue. EU citizens aren’t investing in new ICE or diesel cars, so this is reducing total UK car exports. The government should not try to blame its ill-advised EV mandate on Brexit. This has nothing to do with Brexit other than Brexit giving the UK government the ability to make a bad EU regulation even worse. Relationship building wouldn’t change this.
However, salvation is at hand. UK ICE cars are extremely popular in the US, and the US has agreed to lower its National Security tariffs from 25% to 10% for 100,000 UK cars. As long as the government doesn’t agree to align with EU regulations on Monday, UK car exports should be fine.
3. Structural change in trade statistics and data collection
There has been a significant structural change in what can be classified as UK or EU exports under the rules of origin in the UK-EU Trade and Cooperation Agreement (TCA). UK and EU goods exports are tariff-free and quota-free under the TCA, provided that the goods meet the required regional value content (RVC) to qualify as UK or EU products. The TCA’s regional value requirements exclude many products that were previously classified as UK or EU goods by the EU’s statistical agency, Intrastat, even though these goods were simply imported goods distributed from UK or Dutch ports.
The TCA RVC requires unprocessed products to be wholly sourced from either the UK or the EU to be traded tariff-free and quota-free. This has led to the removal of many goods from the UK’s trade statistics. The most obvious example is tropical fruit and nuts, which once accounted for a significant portion of UK fruit exports, see the chart below. The UK cannot grow coconuts, bananas, or mangoes. These were never UK products; they were primarily grown in Commonwealth countries and distributed to other EU countries from the UK. Aligning with EU SPS regulations or signing a veterinary agreement will not change this.
However, regional value requirements have not only excluded unprocessed agricultural goods from UK export statistics. UK exports of unsorted diamonds (HS 710210) to the EU were valued at about a billion pounds before Brexit, but exports are now nearly zero. These diamonds were re-exported from Australia, Canada, and Zimbabwe, and no amount of relationship building with the EU will turn them into UK goods. But this valuable trade will be continuing; the diamonds will just be stored in bonded warehouses until EU diamond dealers purchase them.
In the TCA, the RVC varies by product. Some products, such as raw agricultural products, raw materials, and precious metals and stones, must be wholly sourced in the region. However, a certain level of processing in the region can convert goods into UK or EU exports. For example, teas from India or Sri Lanka that are processed and packaged in the UK are still counted as UK exports, just as coffee from Brazil that is roasted and ground in Germany is counted as a UK import from the EU.
The RVC for manufactured goods prevents many UK-branded goods from being counted as UK exports if they are manufactured in Asia for a UK company. For example, for clothing to be considered a UK product, the fabric must be woven or knitted, cut, and sewn in the UK. Hats, shoes, textiles, umbrellas, and walking sticks have similarly restrictive regional content requirements. Furniture, lighting, electrical equipment, optical equipment, toys, games, and sports equipment are limited to 50% non-originating material (ex works) value. However, some miscellaneous manufactured articles cannot have more than 15% of non-originating value. UK goods that do not meet the TCA’s regional value requirements were responsible for a £7 billion reduction in UK exports to the EU between 2019 and 2024. No amount of ‘relationship building’ will turn golf balls and golf clubs, musical instruments, textiles, cutlery, glassware, clothing, or footwear made in China into UK exports.
Some goods were granted a transition period to comply with the new content requirements. Notably, electric vehicles were mandated to have locally produced batteries by January 2024; this requirement was extended to the end of 2026 when it became clear that neither the UK nor the EU could meet this deadline. However, other products had compliance deadlines in 2023 and 2024 that were not extended, such as the active ingredients in pharmaceuticals, certain petrochemical-based products, and specific biopharmaceuticals, which had to be sourced within the UK or EU to avoid tariffs.
No amount of ‘relationship building’ with the EU is ever going to allow the UK and EU to pretend that goods made in China, Vietnam, Bangladesh, etc., for UK or EU companies are actually UK or EU exports. Just because the EU is still kidding itself that goods landed in Rotterdam are actually Dutch exports, the UK can no longer play that game. The Governor of the Bank of England should understand the structural differences in UK trade statistics since Brexit and know that ‘relationship building’ won’t change this.
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4. Stockpiling of exports in 2018 and 2019 skewed UK and EU trade statistics
Stockpiling goods before Brexit to avoid potential tariffs, in case the UK left without a trade deal as threatened, also exaggerated the decline in UK trade reports between 2019 and 2024. Economists who favour remaining in the EU often compare UK exports in 2018 or 2019 to 2024 to demonstrate a decline in UK trade, while conveniently overlooking the fact that UK-EU trade rules remained unchanged until January 1, 2021. No one wishes to use 2020 as a base year for UK exports as it was also the first year of Covid, although UK and EU ports remained open. These economists also shy away from comparing exports in 2024 to those in 2017, 2016, or any years preceding the Brexit referendum; they focus solely on 2018 and 2019 because they recognise there was considerable stockpiling of many goods with long or indefinite shelf lives. My favourite example is HS 89: Ships, boats, and floating structures: the UK typically exports ships worth around £500 million to the EU, except in 2019 when this figure doubled to £1.1 billion, largely due to the export of a luxury yacht to Malta. After that, UK exports to the EU returned to approximately £500 million, but this spike in 2019 contributes to the misconception that Brexit is responsible for declining UK exports. We also observed stockpiling in UK exports of arms and ammunition, clocks and watches, ceramic products, carpets and floor coverings, pyrotechnic products, jewellery, and various food preparations such as mustard, condiments, and cheese.
However, even though the Governor of the Bank of England is not a trade specialist, he should understand the following points extremely well. This is, after all, his mandate. Relative currency values matter in trade. The UK is not the cheapest producer of most homogeneous goods, especially manufactured goods that require large amounts of energy. The UK has the highest industrial energy costs in the developed world. Alignment with the EU won't change this.
The UK also has a high relative currency compared to the EU, making UK goods even more expensive and less competitive in the EU. The Governor of the Bank of England has the power to change this, but improved relationships won't. The European Central Bank has been cutting its interest rates furiously since September 2023. The ECB’s deposit rate has fallen from 4% in September 2023 to 2.25% in April 2025, while the Bank of England has only reduced its September 2023 rate of 5.25% to 4.25% in May 2025. This interest rate differential will help keep the pound relatively higher than the Euro.
6. EU agricultural subsidies are a trade barrier
The BBC interview with the governor of the Bank of England suggested that the UK could ‘pursue a veterinary agreement with the EU, including alignment on standards in order to lower post-Brexit red tape on food, farm and fish exports.’ However, the difference in competitiveness between UK and EU food is primarily due to EU agricultural subsidies and the currency differential rather than red tape. The EU still subsidises its farmers with Common Agricultural Policy (CAP) payments ranging from €100 to €250 per hectare, along with additional payments for smaller farms, those with natural constraints such as poor or steep land, and for environmental or rural development programs. These payments, combined with a lower relative currency, make EU food cheaper in the UK compared to UK products, as the UK has phased out its Basic Payment Scheme for Farmers, with delinked payments set to end in 2027.
The UK is not self-sufficient in food and imports 38% of the food it consumes. How would it benefit the UK to tie itself to EU standards? The UK already has a significant agri-food deficit with the EU. No amount of relationship building will make UK agrifoods more competitive in the EU, and the current proposal to dynamically align with the EU’s Sanitary and Phytosanitary regulations will only bind the UK to sourcing its imported food from EU producers instead of more efficient non-EU suppliers, thereby increasing the UK’s agrifood trade deficit with the EU.
7. The economic health of your trading partners also matters.
The ECB is not cutting its interest rates on a whim; the EU economy is in dire straits. First quarter GDP growth for Belgium was 0.4%, Italy was only 0.3%, Germany was only 0.2%, France was only 0.1%, and the Netherlands was also 0.1%. These countries are the UK’s largest EU trading partners. Together they accounted for 63% of UK exports to the EU, which is almost two-thirds of our EU exports. The Governor of the Bank of England should not be surprised if these countries aren’t lavishly spending on expensive UK export goods. No amount of ‘relationship building’ will change this, nor will aligning with EU regulations, nor giving France even more of the UK’s fishing ground.
By the way, France has by far the largest fishing waters in the EU, not just on its Atlantic and Mediterranean coasts, but also the exclusive economic zones of all of its colonies, including around New Caledonia, French Polynesia, French Guyana, and France’s Indian Ocean territories. They seriously do not need any more fish! The UK government has to learn to ‘Just say NON!’ when it comes to France.
Frances' extensive EEZ is shown on the map below.
8. The UK can’t export goods that it doesn’t make anymore
The Governor of the Bank of England should recognise that several industries in the UK are in terminal decline, which has adversely affected UK exports. Examples include UK steel exports, wool exports, raw hides and skins, as well as zinc and zinc products. If the UK can no longer produce goods due to high production costs, stringent Emissions Trading Scheme regulations, or excessive corporate taxes, UK companies will relocate their production to more favourable locations. These locations are seldom within the EU, where energy costs, ETS regulations, packaging taxes, and other corporate taxes tend to be higher than in the UK, with the exception of Irish corporate taxes. No amount of ‘relationship building’ will rejuvenate these industries.
Aluminium production is energy-intensive; the largest smelters in the UK closed due to the UK’s high energy costs, carbon taxes, environmental regulations, lack of investment, and global competition from countries with cheap power and fewer environmental regulations, such as China and the Middle East. The UK now has only one aluminium smelter at Lochaber, which operates on hydroelectric power. Although the UK still exports many goods made with aluminium, it does not export plates, sheets, or strips of aluminium. Exports of aluminium plates, sheets, and strips (HS760611) fell by 89% between 2019 and 2024 but have been decreasing steadily since the closure of the UK’s large aluminium smelters in 2009 and 2012.
This is also true of the many UK chemical exports to the EU, which have been falling steadily for many years which has nothing to do with Brexit, but everything to do with the UK’s high energy costs, environmental regulations, emissions trading schemes, a lack of investment in new production facilities, and a shortage of raw materials from oil refineries. Better relations with the EU won’t change this either. In fact, most of the UK’s chemical, steel, and aluminium industry woes are tied to regulations that began when we were part of the EU.
Some exports have suffered from both the RVC rules and the UK’s environmental regulations. For example, the UK’s exports of semi-finished products of iron or non-alloy steel containing less than 0.25% carbon have dropped by 91%. This decline is partially due to the rules of origin in the TCA, which halved exports of these products, and then collapsed completely with the closure of the UK’s Port Talbot steel mill in September 2024.
Conclusion
Trade is much more complicated than the UK’s media and Rejoiner politicians understand or are willing to admit. Trade is determined by the relative efficiency of production, relative currency values, and the economic health of both your trading partners and your domestic industries. UK-EU trade has the added complication of changing both the definition of what can be counted as a UK or EU export and the data gathering body, moving from the EU’s Intrastat surveys to HMRC’s data collection for tariff imposition. The latter has a much greater incentive to be accurate.
No amount of ‘relationship building’, ‘regulatory alignment’, veterinary agreements, or capitulation to aggressive EU demands for discounted student fees and greater access to UK fishing grounds will change this. The only way to increase UK exports is to create a better economic environment for UK goods production.
The Governor of the Bank of England could help UK exporters by lowering interest rates and eliminating the requirements for banks, insurance companies, and other investors to comply with Climate Change Adaptation regulations and Sustainability Reporting requirements. The government should review its carbon taxes, emission regulations, renewable energy subsidies, EV mandates, punitive taxes on oil and gas companies, and legal restrictions on new oil and gas field development. Wasting time haggling with the economically moribund EU will not change UK exports.
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