UK-EU relations: Proposals for customs union and connections with the EU single market

Approximate read time: 45 minutes

The House of Lords is scheduled to debate the following motion on 29 January 2026:

Lord Newby (Liberal Democrat) to move that this House takes note of the case for a UK-EU customs union and the impact of connections with the EU single market on the United Kingdom economy.

1. Landscape of trading arrangements

The UK left the EU customs union and single market at the end of the Brexit transition period on 31 December 2020. There has been debate since then on what impact this has had on the UK economically. This section of the briefing sets out the main features of the trading arrangements relevant to proposals for a UK-EU customs union and closer links with the EU single market. It explains in broad terms how the EU customs unions and single market operate and the varying degrees of participation by non-EU member states. This provides some context for understanding the UK’s current position outside both frameworks and the implications for its trade policy and economic relationship with the EU.

1.1 Customs union

A customs union is a type of trading arrangement where the members agree to:

• eliminate duties on goods that originate in each other’s territory
• apply a common set of duties to goods that originate outside the territory of the customs union (a common external tariff)

To comply with the General Agreement on Tariffs and Trade (GATT), which is a multilateral treaty on international trade, a customs union should cover “substantially all the trade in products” originating in the territory of the members of a customs union.^[1]

The existence of a customs union does not mean that trade between members is completely frictionless. There may still be checks and formalities to be completed at the border, such as customs documentation and regulatory checks.^[2] Furthermore, customs unions do not generally improve trade in services; they are focused on removing tariffs on goods, but the frictions on trade in services are generally non-tariff barriers.^[3]

All the EU’s member states are part of the EU customs union. The EU explains this means that:^[4]

• They apply the same rates or import tariffs to goods entering their territory from the rest of the world. Customs duties are based on the type of product and the country of origin.
• They do not impose customs duties internally on goods traded between them. Once goods have passed customs, they can circulate freely within the EU, without additional tariff or border checks.

EU member states use a uniform system for handling the import, export and transit of goods and they apply a common legal framework of customs rules, known as the ‘Union customs code’ (UCC).^[5] Since all EU member states apply a common external tariff to non-EU goods entering the EU, individual EU member states cannot set their own tariffs or negotiate their own trade agreements with non-EU countries. The European Commission handles trade negotiations on behalf of all EU member states.^[6] Trade agreements are generally concluded by qualified majority voting among EU member states.^[7] However, agreements on trade in services, intellectual property, direct foreign investments, audiovisual and cultural services, and social, educational and health services must be agreed by all EU member states unanimously.

The EU also has customs unions with three non-EU member states: Andorra, San Marino and Turkey.^[8] These are different from the EU customs union. The EU’s customs unions with Turkey and Andorra exclude agricultural products.^[9] The EU’s customs unions with Turkey and San Marino exclude coal and steel products.^[10]

The EU-Turkey customs union illustrates that trade frictions can still exist between members of a customs union. This is the case even though Turkey has also harmonised much of its goods regulation with the EU to remove non-tariff barriers to trade.^[11] The House of Commons Library noted that:

The EU-Turkey border is not frictionless, in part due to the partial nature of the EU-Turkey customs union, but also because of other issues, such as transport permits. Checks still occur and there are delays at the border.

The EU-Turkey arrangements do not include a harmonised system of trade defence (anti-dumping measures etc). The EU and Turkey have imposed these measures on each other, introducing further friction on trade.^[12]

Being in a customs union with the EU also affects Turkey’s trading terms with third countries outside the EU:

There is an asymmetric relationship between Turkey and the EU in the operation of the customs union. Turkey has no seat in EU free trade negotiations with third countries. Furthermore, Turkey must open up its market to those countries with which the EU has negotiated an FTA [free trade agreement], but does not automatically gain reciprocal access to those markets. Some of the EU’s trade partners have refused to negotiate parallel agreements with Turkey or have delayed doing so.^[13]

1.2 EU single market

As well as being members of the EU customs union, all EU member states are part of the EU single market. The intention of the single market is to enable the free movement of goods, services, people and capital (known as ‘the four freedoms’) across all EU member states by removing technical, legal and bureaucratic barriers.^[14] The European Commission has described the single market as “one territory without any internal borders or other regulatory obstacles to the free movement of goods and services”.^[15] All EU member states must follow the rules of the single market.

The legal framework governing the single market developed over time:

While initial efforts were aimed at removing tariff and customs barriers, this gave way to more focus on the free movement of goods (‘imports and exports’).The Maastricht Treaty of 1993 largely abolished controls on capital and payments transfers between member states; it also created the concept of European citizenship (this ultimately led to the extension of treaty rights for EU citizens to move freely as long as they are ‘self-sufficient’ rather than only moving freely for the purposes of work). Since the late 1990s, there has been much more focus on services.^[16]

Single market rules continue to evolve. The EU has said that “faced with new geopolitical realities and increasingly complex challenges”, it is “working to further complete and deepen its single market”.^[17] For example, in May 2025 the European Commission published a new single market strategy focused on addressing barriers such as complicated rules for establishing businesses across the single market, limited recognition of professional qualifications between member states and fragmented rules on packaging.^[18]

Some non-EU member states also participate in the single market. The European Economic Area (EEA) Agreement extends the rules of the single market to Norway, Iceland and Liechtenstein, three of the four members of the European Free Trade Association (EFTA). Single market rules on the free movement of goods, services, people and capital, together with laws in areas such as competition policy, state aid, consumer protection and environmental policy apply to Norway, Iceland and Liechtenstein.^[19] However, they are outside the EU customs union, so they can pursue their own trade policy with third countries. EFTA EEA states do not have a decision-making role in the development of single market rules, but they are consulted and can participate in European Commission committees preparing the relevant legislation. The relevant EU legislation is incorporated into the EEA Agreement. Norway, Iceland and Liechtenstein contribute to the budgets of the EU programmes and agencies in which they participate, and they also provide funding to “reduce social and economic disparities in Europe” through the EEA and Norway grants mechanism.^[20]

Switzerland, the fourth EFTA country, is not covered by the EEA. It participates in aspects of the single market through a series of bilateral agreements with the EU.^[21]

In 2024, Switzerland and the EU negotiated a package of new and revised agreements on cooperation and access to the single market.^[22] The package would see Switzerland ‘dynamically align’ with most EU food safety rules (that is, automatically adopt any changes the EU made to its rules), integrate into the EU’s internal electricity market, participate in the EU’s Horizon and Erasmus+ programmes, dynamically align with changes in the EU’s product safety rules and implement new state aid provisions on air transport, land transport and electricity trade.^[23]

The package includes a ‘safeguard’ clause allowing the suspension of free movement of people in cases of “serious economic or social problems”, subject to arbitration.^[24] According to Anton Spisak, non-resident associate fellow at the Centre for European Reform, this would provide legal recourse for both sides and remove “the opportunities for punitive actions by the EU if Switzerland were to invoke the clause in the future”.^[25] The package also makes institutional reforms such as a mechanism for Switzerland to dynamically align with EU rules; a dispute resolution mechanism involving an independent arbitration panel; a commitment by Switzerland to interpret agreements consistently with the case law of the European Court of Justice (ECJ); a consultative role in the EU’s pre-legislative processes, similar to that of Norway, Iceland and Liechtenstein; and a permanent mechanism for determining Switzerland’s contribution to the EU’s cohesion funds, which are intended to reduce economic and social disparities between different regions of the EU.^[26] The new deal requires approval by the Swiss Parliament. It is due to be presented to the parliament in March 2026.^[27]

1.3 UK-EU trade arrangements

Post-Brexit, the UK is no longer a member of the EU single market or customs union. Under the UK-EU Trade and Cooperation Agreement (TCA) there are no tariffs and no quotas on trade in goods, provided that businesses can comply with rules of origin about the ‘economic nationality’ of their goods.^[28] However, under the TCA, there are customs and regulatory borders between the UK and the EU that did not exist when the UK was inside the single market and customs union. The EU introduced full customs controls on goods from Great Britain on 1 January 2021.^[29] The UK government has been phasing in border controls for goods imported from the EU since 2021, but the introduction of full customs checks has been delayed several times.^[30] Customs declarations must be made for all goods. Some goods are also subject to special licensing or certification requirements (for instance, agrifoods and chemicals) or requirements on safety and security declarations.

Different rules apply in Northern Ireland, to avoid a hard border on the island of Ireland. Under the terms of the Windsor Framework, Northern Ireland has a unique status. It is part of the UK’s customs territory but is subject to the EU’s customs code and EU single market rules for goods, including sanitary and phytosanitary (SPS) rules to protect plant, animal and public health.^[31] The application to Northern Ireland of the EU’s customs rules and single market rules for goods means that there are no checks on goods moving from Northern Ireland to the Republic of Ireland or the rest of the EU. Goods moving from Great Britain to Northern Ireland are subject to full checks and controls if they are moving on to the Republic of Ireland or the rest of the EU.^[32] However, goods that qualify as being ‘not at risk’ of moving out of Northern Ireland into the EU single market are subject to simplified checks and procedures.^[33]

Once the UK left the EU single market, UK service suppliers lost the automatic right to offer services across the EU.^[34] There are non-discrimination provisions in the TCA which mean that service suppliers from the UK are treated no less favourably in the EU than EU suppliers, and vice versa. This gives them more favourable treatment than that granted to service suppliers from third countries without similar non-discrimination provisions. However, because UK suppliers are no longer covered by single market rules, they must comply with the domestic rules of each EU member state where they seek to operate. The Institute for Government observed that while the general provisions in the TCA “sound like they offer extensive market access”, in practice “they are subject to enormous numbers of exceptions in the annexes that vary by sector and by member state”.^[35] Different EU member states impose different rules on UK suppliers in relation to matters such as the requirement to establish a subsidiary or be resident in the country where services are provided, work permits and the recognition of professional qualifications.

2. Impact on businesses and the economy

It is not straightforward to measure the impact of the post-Brexit UK-EU trading arrangements on the UK’s economy given that other factors such as the Covid-19 pandemic and the war in Ukraine have also affected the economy and international trade over the same period.

House of Commons Library analysis of UK-EU trade statistics since the end of the Brexit transition period found:

Little growth in goods exports

The UK’s recent trade performance in services has been much better than that for goods. UK goods exports to the EU fell sharply in January 2021 after the end of the Brexit transition period, before recovering strongly in February 2021. Goods exports to the EU remain below their pre-pandemic/Brexit level, however: in 2024, goods exports to the EU were 18% below their 2019 level in real terms. It is important to point out, however, that goods exports to the EU were growing slowly before Brexit and the pandemic. In addition, exports to non-EU countries in 2024 were also 14% below their 2019 level in real terms.

Services have performed better

UK exports of services to both EU and non-EU countries fell in 2020 but have grown strongly since then. In 2024, UK exports of services to the EU were 19% above their 2019 level in real terms. Exports to non-EU countries were 23% above their 2019 level.

EU share of UK trade

In 2024, the EU accounted for 41% of the UK’s exports (48% of goods exports and 36% of services exports). This share has been broadly stable over the last few years, although down from 47% in 2010 and 2011.

The EU accounted for 51% of UK imports in 2024 (54% of goods imports and 45% of services imports). The EU accounted for between 50% and 53% of UK imports between 2010 and 2020. This fell to 47% in 2021 and 2022. It increased to 51% in 2024, largely due to a fall in goods imports from non-EU countries, especially fuel.^[36]

Various economists have attempted to quantify Brexit’s effects on UK-EU trade and the UK economy. For example, the OBR’s forecasts for the UK economy assume that the volume of UK imports and exports are both 15% lower than if the UK had remained in the EU.^[37] It assumes that the resulting reduction in the trade intensity of GDP (exports plus imports as a share of GDP) will lead to a 4% long-run reduction in the productivity of the UK compared to if it had remained in the EU.^[38] The OBR view is that “a decline in trade intensity plausibly lowers productivity because trade, among other channels, fosters competition and allows countries to specialise in activity where they are relatively more efficient”.^[39] It believes that the increase in non-tariff barriers on UK-EU trade post-Brexit acts as “an impediment to the exploitation of comparative advantage”.^[40] The OBR estimates that around two-fifths of the 4% reduction in UK productivity had already happened by the time the TCA came into force on 1 January 2021 “as a result of uncertainty weighing on investment and capital deepening”.^[41]

Since leaving the EU and no longer being bound by the EU’s common commercial policy and common external tariff, the UK has concluded trade deals with a number of non-EU countries.^[42] The OBR’s economic forecasts assume that these will “not have a material impact” and that “any effect will be gradual”.^[43] In some cases, this was because the trade deal replicated the trading terms the UK previously had with the country in question while the UK was an EU member. In other cases, the OBR considered the impact of the new trade deal was not sufficient to impact its forecast—for instance, the UK’s trade deal with Australia. The Conservative government estimated when it concluded this deal that it would raise UK GDP by 0.08% in the long run (around 10–15 years from implementation of the agreement).^[44]

Professor Stephen Millard, deputy director of the National Institute of Economic and Social Research, and his co-authors suggest there is a consensus within the economic literature that “Brexit has resulted in a long-run hit to UK productivity as a result of trade becoming more costly”.^[45] They noted that the “exact estimates vary depending on estimation techniques and assumptions” but “the average effect has been estimated around 4%”. Anand Menon and Jonathan Portes of the UK in a Changing Europe think tank suggested in June 2025 that “plausible estimates of the damage so far range from perhaps 1% to 5% of GDP”.^[46] A November 2025 working paper published by the National Bureau of Economic Research, a US-based network of academic economists, estimated that Brexit had reduced UK GDP by 6% to 8%, reduced investment by between 12% and 18%, and reduced both employment and productivity by 3% to 4%.^[47]

Research has suggested that the economic impacts of post-Brexit trading arrangements have been felt differently across different parts of the economy. For instance, economists at the Centre for Economic Performance at the London School of Economics and Political Science found that smaller firms were more affected than larger ones.^[48] They concluded that trading under the TCA led to the smallest 20% of firms (with the size of firm measured by the number of employees) exporting 30% less to the EU compared to their exports to the rest of the world. However, the TCA did not have a statistically significant effect on goods exports for the largest 20% of UK firms. They also estimated that the TCA caused 16,400 firms to stop exporting goods to the EU, equivalent to 14% of the firms that had previously exported to the EU. Again, smaller firms were more affected. The economists interpreted this as “evidence that the TCA increased fixed trade costs”.

A separate Centre for Economic Performance analysis looked at trade in services.^[49] The authors concluded that, post-Brexit, “services exporters are now facing higher trade costs, more red tape and fewer opportunities”.^[50] They found that the UK’s departure from regulatory alignment with the EU had “introduced new bilateral trading frictions that have not been offset by increased competitiveness in markets beyond the EU”.^[51] They estimated that UK exports to the EU in services affected by new regulatory barriers had declined by 16% relative to other bilateral trade flows, and that overall UK services exports were an estimated 4% to 5% lower.

A recent survey by the British Chambers of Commerce (BCC), published in December 2025, found that more than half (54%) of exporters thought the TCA was not helping them grow sales.^[52] The BCC said this represented a 13 percentage point increase in dissatisfaction compared to the previous year. It believed that trade frictions were “worsening”, with new regulatory barriers appearing as the UK and EU each introduced their own new rules in different areas.^[53] The BCC called on the government to improve UK-EU trade, including by negotiating an SPS agreement to remove export health certificates, linking the UK and EU emissions trading schemes to exempt goods from carbon border adjustment mechanisms, establishing a youth mobility scheme, and enhancing VAT cooperation and customs simplification to reduce trade costs.

Economists have also sought to model the potential economic impact of removing trade and regulatory barriers between the UK and the EU. For example, a study by academics at the Centre for Business Prosperity at Aston Business School estimated that a UK-EU veterinary agreement could lead to an increase in UK agrifood exports of 22.5% and imports of 5.6%, and add 0.22% to the agricultural sector’s value added.^[54] John Springford, non-resident associate fellow at the Centre for European Reform, made a rough estimation that if the UK achieved all the ambitions for an EU reset set out in Labour’s 2024 manifesto (a veterinary agreement, mutual recognition of professional qualifications, easier access to the EU for UK performing artists) and if the EU achieved its ambitions on youth mobility, it could raise the UK’s GDP by 0.3% to 0.7%.^[55] Closer alignment than this could have a bigger impact: economics consultancy Frontier Economics estimated that deep regulatory alignment between the UK and EU could result in an increase of 1.7% to 2.2% of UK GDP in the long run.^[56]

Of course, the economic impact would depend on exactly what barriers to trade the UK and EU agreed to remove. Furthermore, it would also be subject to other global factors affecting trade. For example, the same Frontier Economics study concluded that deep regulatory alignment with the EU would increase UK GDP by only 1.1% to 1.5% if at the same time the US imposed tariffs of 60% on imports from China and 20% from all other trading partners.^[57]

3. Government policy

3.1 ‘Red lines’ on the single market and customs union

The government is seeking a closer relationship with the EU but has ruled out rejoining the single market or the customs union. In its manifesto for the 2024 general election, Labour said it would “reset the relationship” with the EU, and “seek to deepen ties” with European partners.^[58] However, it said there would be “no return to the single market, the customs union or freedom of movement”. Instead, Labour said it would “work to improve the UK’s trade and investment relationship with the EU, by tearing down unnecessary barriers to trade”. It planned to negotiate a veterinary agreement “to prevent unnecessary border checks and help tackle the cost of food” and an agreement on the mutual recognition of professional qualifications “to help open up markets for UK service exporters”.^[59]

Sir Keir Starmer has described his stance on not returning to the single market or the customs union as “clear red lines” for the government.^[60] He has not only ruled out rejoining the EU customs union but has also said that negotiating a bespoke UK-EU customs union is not the way forward for the UK.^[61] As it is a defining feature of a customs union that members set a common external tariff when trading with non-members of the customs union, a bespoke customs union between the EU and the UK would also constrain the UK’s ability to have an independent trade policy. Sir Keir has maintained that he is “not prepared to rip up the benefits” the UK has negotiated in trade deals with other countries, such as India and the US, and he would therefore keep to his “red lines”.^[62] The UK signed a free trade agreement with India in July 2025, although it is not yet in force.^[63] The UK and the US agreed the general terms of an ‘economic prosperity deal’ in May 2025. It includes commitments on reducing tariffs and regulatory barriers in certain sectors but is not a full free trade agreement.^[64]

Chancellor Rachel Reeves reiterated at the World Economic Forum in Davos in January 2026 that the UK “would lose the benefit of some of those trade deals if you were to re-enter a customs union”.^[65] She said the UK “can’t go back in time”. However, during an interview at Davos, business and trade secretary Peter Kyle said the UK “would be crazy not to engage with the prospect of a customs union”.^[66] At the same time, he emphasised that his focus was on measures that would promote economic growth in the short term. He noted that it had taken Turkey 20 years to join a customs union with the EU and had taken the UK four years to leave the customs union. In an interview a few days previously, Mr Kyle said the “utopianism” of a customs union was “seductive” but he suggested it would be “foolish” to reach for it as a solution given negotiations would likely take years.^[67]

Following the apparent contradiction between the two interviews, sources close to Mr Kyle told journalists he was “very sceptical” about rejoining the existing EU customs union.^[68] They said Mr Kyle’s position was that “while a discussion on the customs union was inevitable, it was not likely to happen any time soon and would be complex to achieve”.^[69]

Although the government has ruled out rejoining the single market and accepting single market rules on free movement of people, it is negotiating to align the UK to some elements of the single market as part of its ‘reset’ in UK-EU relations. Sir Keir Starmer said in December 2025 that “the Brexit vote was a fair, democratic expression”, which he would always respect.^[70] However, he argued that “how it was sold and delivered was wrong”. He also argued that the UK “must confront the reality that the Brexit deal we have significantly hurt our economy”.^[71] He therefore believed that for economic renewal, the UK would “have to keep reducing frictions” and “have to keep moving towards a closer relationship with the EU”. To achieve this, the country would have to be “grown-up” and “accept that this would require trade-offs”.

3.2 UK-EU ‘reset’ negotiations

3.2.1 UK-EU summit, May 2025

Engagement on this ‘reset’ has been progressing since the UK and the EU held a joint summit in May 2025, the first since the UK left the EU. Together they issued a joint statement setting out their shared “global priorities for a new strategic partnership” and a ‘common understanding’ setting out a “renewed agenda” for UK-EU cooperation.^[72] They also announced a new UK-EU security and defence partnership and set out a new framework for cooperation on defence and security.^[73]

The ‘common understanding’ document set out the conclusion of exploratory talks at the summit on areas “with the potential to strengthen bilateral cooperation” between the EU and the UK.^[74] This included an agreement for further work on formally linking the UK and EU economies in the following ways:

• exploring in detail the possibility of the UK participating in the EU’s internal energy market
• establishing a common SPS area under an agreement covering sanitary, phytosanitary, food safety and general consumer protection rules on agrifood products and the regulation of live animals, pesticides and organic products^[75]
• working towards linking the UK and EU carbon emissions trading systems

The common understanding said that in any deal reached on these areas, there should be “dynamic alignment” by the UK with relevant EU rules. However, in the SPS agreement, there could be a short list of exceptions to dynamic alignment (sometimes referred to as ‘carve-outs’) as long as it did not lead to lower standards in Great Britain than in the EU, did not negatively affect EU products being sold in Great Britain and respected the principle that only goods compliant with EU rules could be brought into the EU. In each policy area, the UK would be able to make an ‘appropriate’ contribution to decision-shaping. For the SPS agreement and emissions trading, this is explicitly defined as contributing “appropriately for a country that is not a member of the European Union”. The agreements would be subject to arbitration-based dispute resolution, but there would be a role for the European Court of Justice as the authority for questions of EU law. Under any agreement on SPS or emissions trading, the UK would make an “appropriate financial contribution” to “support the relevant costs associated with the European Union’s work in this area”.

The common understanding also set out several commitments related to mobility, including:

• to work towards a “balanced youth experience scheme” allowing young people from the EU to work, study, au-pair, volunteer or travel in the UK and vice versa, for a limited period of time and for “an overall number of participants […] acceptable to both sides”
• to work towards the UK associating to Erasmus+, an EU programme that supports education, youth, training and sport through mobility and international cooperation
• there would be no legal barriers to British nationals using eGates when travelling to/from EU member states after the introduction of the EU entry/exit system (EES)
• to set up dedicated dialogues on implementing the TCA provisions on business-related travel and the mutual recognition of professional qualifications^[76]

None of these commitments would amount to a return to full free movement of people.

3.2.2 Progress to date

There have been varying degrees of progress so far on other commitments in the ‘common understanding’. In December 2025, the government announced the UK would join the Erasmus+ scheme from 2027.^[77] The UK will pay approximately £570mn to participate in the 2027/28 academic year, which the government has said represents a 30% discount compared to the default terms under the TCA. The government estimates over 100,000 people could benefit from the scheme in the first year. Participation beyond the first year would run into the EU’s next five-year ‘multiannual financial framework’ (budget cycle) and so would need to be negotiated in future. The government said any agreement for the UK to continue participation in future would need to be “based on a fair and balanced contribution”. Nick Thomas-Symonds, whose ministerial portfolio includes EU relations, said the scheme was “about more than just travel” and would give participants access to skills and opportunities.^[78]

The UK and the EU published the outcome of their exploratory discussions on UK participation in the EU’s electricity market in December 2025. They agreed that close cooperation on electricity was in both sides’ interest, and they should work towards a formal electricity agreement.^[79] Under this electricity agreement, the UK would align dynamically to EU rules on the electricity market; the promotion of renewables, including a target for the share of renewable energy in the UK’s total energy consumption comparable to the EU’s target; relevant EU environmental protection law; and state aid (subsidy) rules targeting or materially affecting the electricity sector.

The following day, the European Commission published a draft EU negotiating position, which needs to be authorised by EU member states before formal negotiations can begin.^[80] The European Commission’s text proposes that negotiations on UK participation in the EU’s internal energy market should also lead to negotiations on a legally binding mechanism for the UK to make a financial contribution towards reducing economic and social disparities between regions of the EU (known as ‘cohesion funding’). It recommends the UK’s contribution should be of “an appropriate level” that reflects the level of the UK’s participation in the EU’s internal market.

This was not mentioned in the common understanding or the joint document setting out the outcome of the exploratory discussions. When the government was asked in January 2026 about how much it estimated it would cost the UK to be a member of the EU’s electricity market, it did not refer to making a contribution to EU cohesion funding.^[81] It said that to “unlock [the] benefits” of reduced costs of trading electricity with the EU, it was “prepared to make an appropriate and proportionate financial contribution to support relevant costs, such as accessing specific agencies or databases required for market participation”. It said “nothing has been agreed yet”, and it would negotiate to “ensure any contribution represents value for money for the UK taxpayer”.

Formal negotiations on an SPS agreement are under way.^[82] Mr Thomas-Symonds said he hoped they would be concluded by the time of the next UK-EU summit in 2026. The date of this has not yet been announced, although at the May 2025 summit the two sides committed to meeting annually.^[83] He also hopes the agreement will be able to come into effect early in 2027.^[84] In September 2025, he suggested that agreeing on the carve-outs (that is, areas where there would not be dynamic alignment to EU rules) would be the main focus of negotiations.^[85] The government has suggested that one area where it may be seeking a carve-out is precision breeding. A new regulatory framework in England means that certain crops that have been precision-bred using genetic technology are not treated as genetically modified organisms, as they would be under EU rules.^[86] The government said it had been clear in SPS discussions with the EU “on the importance of supporting the use of new and innovative technologies such as precision breeding” and it remained committed to the new regime for England under the Genetic Technology (Precision Breeding) Act 2023.^[87]

According to press reporting in January 2026, the EU is seeking a clause that would require the UK to pay “significant” financial compensation for terminating an SPS deal, as insurance against a future government reversing an agreement concluded by the current Labour government.^[88]

Formal negotiations on linking the UK and EU emissions trading schemes and on establishing a youth experience scheme are also under way, with both sides hoping to conclude them by the time of the next UK-EU summit.^[89] According to press reporting, the EU wants there to be no cap on the number of young people who could participate in the scheme, for EU citizens to pay the same universities fees in the UK as domestic students, rather than the higher international student fees, and for EU students to be exempt from the immigration health surcharge that usually applies to visitors to the UK granted a visa for more than six months.^[90] The UK is reportedly insisting on a cap and is opposed to EU students paying ‘home’ fees at British universities.^[91]

The government is expected to introduce a bill to legislate for dynamic alignment to EU rules on SPS, carbon emissions trading and the electricity market that would be required by the new deals.^[92] According to press reporting, the government plans for the bill to start its parliamentary passage before negotiations with the EU have concluded.^[93]

3.3 Economic impact of the ‘reset’ deal

Announcing the outcome of the summit in May 2025, the government said that the SPS agreement and linking the EU and UK emissions trading schemes would “add nearly £9bn to the UK economy by 2040”.^[94] It said the package would “support British businesses, back British jobs, and put more money in people’s pockets […] help make food cheaper, slash red tape [and] open up access to the EU market”.

Outlining the potential impacts in more detail, the government said removing the current requirements for paperwork would save businesses up to £200 per consignment of agrifood goods for an export health certificate, around £25 per plant health certificate and over £120 per consignment for a certificate of inspection for organic products.^[95] It said making electricity trading more efficient by participating in EU platforms would reduce the cost of electricity across the UK and the EU, and would be “good for bills, jobs and net zero”. On emissions trading, the government said the system the UK established after it left the EU system was “smaller and less liquid” which could “make prices less stable and feed through to investment”. Under the separate schemes, it said around £7bn of UK trade would be liable to be hit by the EU’s carbon border adjustment mechanism (CBAM), which could have led to UK exporters paying up to £800mn into the EU budget cumulatively between 2026 and 2030.^[96] However, linking the systems would mean they were no longer liable. The government also argued linking the systems would remove disincentives for EU carbon emitters to store CO₂ in the UK. This would make the UK’s CO₂ storage market, a growth industry in the UK, more competitive.^[97]

The OBR’s view is that it is too early to quantify any economic impacts from the deal. In its most recent forecast, the OBR said the commitments set out in the common understanding, including a common SPS area and linking emissions trading schemes, “have the potential to increase UK trade and GDP”.^[98] However, it also said that there was “not sufficient detail to assess [the] potential fiscal and economic impacts” of agreements that were still being negotiated.^[99] It said it would consider whether any such impacts should be included in its economic forecast once agreements had been finalised, published and agreed by the UK and the EU.

Anand Menon and Jonathan Portes of UK in a Changing Europe note that the government’s estimate of the economic benefit of the SPS agreement equates to a boost of around 0.3% of GDP by 2040.^[100] They suggest that this is “clearly much smaller than the consensus estimates of the negative economic impact of Brexit, originally assessed at 4% by the Office [for] Budget Responsibility”. They comment that “this is hardly surprising given that the reset, even if successfully implemented, reverses only a small fraction of the additional trade barriers that have emerged as a result of Brexit”. Nevertheless, they find that it compares favourably with the impact of other post-Brexit trade deals negotiated by the UK. They also conclude that the “limited scope of the summit’s economic implications reflects enduring political red lines on both sides”, namely “sovereignty over regulation and migration” for the UK and “the integrity of the single market” for the EU.

3.4 Further alignment?

The government has signalled its potential interest in aligning the UK with other aspects of the single market. In an interview in January 2026, Sir Keir Starmer said that following the agreement already reached with the EU to align on food and agriculture, the energy market and emissions, “if it’s in our national interest […] to have even closer alignment with the single market, then we should consider that”.^[101] He argued that doing so would be a “sovereign decision” to be taken by the government on an “issue-by-issue, sector-by-sector basis”. He believed the UK was “better looking to the single market rather than the customs union for our further alignment”. However, he emphasised that he was not willing to consider unlimited freedom of movement in return for greater alignment with or access to the EU single market.

Sir Keir did not elaborate in the interview on which sectors he thought it would be in the UK national interest to align more closely with the EU. Prior to the 2024 general election, Rachel Reeves, now chancellor of the exchequer, mentioned the possibility of a “bespoke” arrangement for the chemicals industry, arguing that she did not think “anyone voted ‘leave’ because they were not happy that chemicals regulations were the same across Europe”^[102] More recently, it was reported in January 2026 that the government will exclude financial services from any push to align with the EU single market, although it would like to see greater UK-EU cooperation in this sector.^[103]

Some commentators have argued that the EU may not be willing to engage in extending single-market benefits to the UK on a sector-by-sector basis. For example, Joël Reland of the UK in a Changing Europe think tank has suggested that:

[…] the rather significant problem with all this is that such agreements are unlikely to be on offer from Brussels. While Starmer might see such deals as in the UK “national interest”, the EU will be unwilling to let the UK continuously ‘cherry-pick’ its access to the single market without the countervailing responsibilities of an EU member state—namely paying into the EU budget and accepting the free movement of people […]

The [European] Commission was willing to countenance a limited degree of cherry picking over SPS and electricity because there were obvious self-interested reasons for doing so; the SPS deal should significantly aid the functioning of the Windsor Framework in Northern Ireland, while UK electricity supplies are a key component of the EU’s energy security.

But there are clear limits to its flexibility. The Commission will not allow the UK to endlessly pick and choose the best economic benefits of the single market, without having the economic and legal obligations of full membership, as it risks leading to member states asking for similar treatment.^[104]

However, others have suggested that the deal agreed in 2024 between the EU and Switzerland shows the EU could offer some flexibility in what it will agree to on single market participation, although the UK would likely have to make significant concessions too. For instance, Anton Spisak, writing for the Centre for European Reform, described the deal as allowing Switzerland “selective participation” in the single market, in return for “institutional safeguards” for the EU.^[105] He suggested that:

For a UK government seeking to revive sluggish economic growth, the economic case for substantially easier market access with its largest trading partner is compelling; for the European Commission, keeping London closer to Brussels than to Washington makes a strategic sense. Most importantly, for collective European security in a world where the US no longer provides a security guarantee, incorporating the UK, as a significant defence actor, under a common European defence framework seems both logical and necessary.

What is clear is that privileged market access wouldn’t be cost-free. The UK will have to accept some institutional obligations, and some financial contributions would likely be required, though these could be directed towards mutual priorities such as funding Ukraine’s security or reconstruction. More contentious is the issue of free movement. This remains sensitive for most British politicians, including Labour strategists wary of voter defections to Reform UK before the next election. Switzerland accepts free movement with an emergency break—an approach not dissimilar to the deal David Cameron negotiated before the Brexit referendum.^[106]

4. Political response

4.1 Conservatives

The Conservatives are opposed to closer ties to the EU single market where that means a reduction in the UK’s ability to make its own regulations and trade policy. Conservative leader Kemi Badenoch said the package agreed at the UK-EU summit in May 2025 broke all five ‘tests’ the Conservatives had set for a ‘reset’ with the EU to be acceptable.^[107] These included that there should be no new money paid to the EU and no rule-taking or dynamic alignment.^[108] She objected to the UK “becoming a rule-taker from Brussels once again”.^[109] The Conservatives accused Labour of “working against the people’s vote by silently selling us out to Brussels”.^[110]

Andrew Griffith, shadow secretary of state for business and trade, has warned that “deeper entanglement” with the EU could have “unintended consequences”.^[111] He suggested that closer alignment, including on emissions trading and SPS regulations, could prevent the UK from exploiting trade opportunities with other countries, such as signing a free trade agreement with the Mercosur trading bloc or securing concessions from India that would benefit the financial and professional services sectors. He has explained that “the Conservatives are certainly not opposed to co-operation with Europe as one among other markets […] but we must not in any circumstances surrender our Brexit freedoms”.^[112]

Ms Badenoch described recent calls for the UK to join a customs union with the EU as “bizarre”.^[113] She suggested that those arguing for a customs union did not understand what a customs union was. She argued that:

Going back into the customs union would make us all poorer and damage British business and British farming. Four major benefits of Brexit would be lost: we would no longer be able to set our own tariffs, negotiate our own trade deals, maintain the deals we’ve signed as an independent nation, or reject deals struck by others, even when they harmed our interests.

Worse, the bloc would demand even more concessions from us to rejoin […]

4.2 Liberal Democrats

The Liberal Democrats are campaigning for the UK and EU to enter into a customs union. They argue that “a bespoke customs union with the EU is the single biggest lever the government has to fix [the] economy and tackle [the] cost of living crisis”.^[114] Party leader Sir Ed Davey claimed a customs union would accelerate growth and restore confidence in the bond markets.^[115] He argued that the benefits would outweigh potential downsides, including negotiating with the EU about the future status of the trade deals the UK has concluded with other countries since Brexit.

In May 2025, the Liberal Democrats said they would be willing to work with Labour MPs on securing a new trade deal with Europe, including a new UK-EU customs union, to boost public finances.^[116] The party cited economic modelling suggesting that a closer trading relationship with the EU could increase the UK’s GDP by 2.2%. This figure came from work by economics consultancy Frontier Economics, commissioned by campaign group Best for Britain.^[117] Frontier Economics estimated that “deep regulatory alignment in goods and services” between the UK and the EU could result in an increase of 1.7% to 2.2% in UK GDP in the long run.^[118] This was modelled on a scenario where the UK and EU mutually recognised each other’s regulations, took active steps to minimise regulatory divergence and committed to recognising the equivalence of each other’s regulations, for both goods and services.^[119] This scenario is different to both a customs union and to the UK-EU reset deal.

In December 2025, the Liberal Democrats introduced a ten-minute rule bill (a type of private member’s bill) in the House of Commons that would place a duty on the government to enter into negotiations with the EU to agree a UK-EU customs union.^[120] Al Pinkerton, the party’s Europe spokesperson, explained they were proposing a customs union “covering most goods, with a formal mechanism for UK consultation on new EU trade deals that affect us”.^[121] Dr Pinkerton argued it would “lift the man-made constraints that are strangling our small and medium-sized enterprises, many of which have stopped trading with Europe altogether” and “cut red tape, unlock investment and restore certainty to British business”.^[122]

A vote on whether the bill should be introduced resulted in a tie, so in accordance with precedent, the House of Commons deputy speaker voted in favour of it proceeding, in order to allow further debate.^[123] Only a small number of Labour MPs participated in the vote. Thirteen of them voted with the Liberal Democrats and three voted against the bill proceeding.^[124] As a private member’s bill without government support, the bill is very unlikely to become law.

However, the Liberal Democrats have already pledged that when the government introduces its bill to implement the reset deal, they will seek to amend it to require the government to begin negotiating a customs union with the EU.^[125] The amendment would set a deadline of 2030 for implementing a customs union, covering most goods, except agricultural products. The terms of the customs union would require the EU to ensure that if it entered into FTA negotiations with a third party, the third party would be required to enter parallel FTA negotiations with the UK.

4.3 Reform UK

Reform UK not only opposes closer alignment with the EU but has said it would seek to reverse parts of the Brexit agreements that are already in force. Reform’s leader, Nigel Farage, said the reset plans agreed in May 2025 would push the UK “back into the orbit of Brussels, giving away vast amounts of our sovereignty for very little in return”.^[126] He described it as an “abject surrender”, which he feared would put the UK “on the slippery slope to rejoin” the EU.^[127] He pledged that if it got into government, Reform would undo not only the new deals negotiated by Labour but also parts of the Brexit withdrawal agreement and the TCA negotiated by the Conservatives. He said Reform was particularly opposed to “anything to do with alignment”. He argued that dynamic alignment to EU rules “makes voting at general elections irrelevant” and would make it impossible to negotiate free trade deals with other countries, such as the US.

Speaking at a Reform rally in January 2026, Mr Farage argued closer alignment with the EU would “solve none of our economic problems” but would hand sovereignty to “unelected EU bureaucrats”.^[128] He said he would “fight this giveaway, this surrender of our sovereignty […] tooth and nail”.

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