Labour may face a tug of war between European trade and US security

The Labour party doesn’t like discussing aligning the UK economy with the EU in case it scares the voters. If it gets elected next week, it won’t have much choice. Managing divergence often means reacting to initiatives from Brussels more than making free choices as a sovereign nation. And to complicate matters, the UK could face rising pressure from the US pulling it away from the EU.

Since the UK left the single market and the customs union in 2021, hardline Brexiters have been disappointed by the absence of a regulatory Year Zero. That reflects their own shaky grasp on reality more than lack of sovereigntist spine among ministers. The economic gravity of the EU, whose GDP is more than six times bigger than the UK’s, has weighed particularly on British manufacturing and agriculture. Economic expedience has overridden the ideological urge to diverge.

Even devout Brexiters frequently choose alignment with the EU when presented with inconvenient facts. Kemi Badenoch, the business and trade secretary, infuriated her fellow Brexit supporters last year when she declined to abolish great swaths of retained EU law. To do otherwise, as anguished pleas from businesses pointed out, would have created serious dislocation in large parts of the economy.

In issue after issue, the heated rhetoric of independence rapidly congeals on contact with cold economic logic. The UK made a big deal out of creating its own supposedly light-touch system of trade defence instruments — emergency tariffs used against surging or unfairly priced imports. Somewhat pettily, the government distanced itself from the EU by calling the new agency the Trade Remedies Authority, using the US term for TDI.

In the event, the UK’s attempt to take a radically different path from the EU fell at the first hurdle in 2021 when the TRA recommended lifting some of the “safeguard” tariffs on steel it had inherited from the EU. Ministers quickly legislated to over-rule the TRA, and this week the government extended the tariffs again for two years the day after the EU did similarly. The British car industry has also been lobbying for the UK to match the EU’s antisubsidy tariffs against Chinese electric vehicles. 

Another example is the EU’s carbon border adjustment mechanism (CBAM), which aims to ensure imports reflect the same carbon price that Brussels sets for its own companies. Badenoch has insisted the UK will have its own CBAM designed to reflect UK needs. But failing to align with or join the EU’s mechanism would put carbon tariffs on Britain’s electricity exports into the EU and threaten its already beleaguered steel industry. Few informed observers inside or outside government have taken Badenoch’s declarations of independence seriously, and the FT has now reported Labour is wisely planning to join or align with the EU’s CBAM.

More such choices are on their way. If the UK doesn’t align its regulation on imports from newly deforested land with the Brussels version, it may find its companies restricted from exporting into the EU, a threat US businesses are already facing.

Now, this is not to deny the existence of some genuine choices over regulation, particularly outside the manufacturing sector. The UK’s artificial intelligence rules have a lighter touch than the EU version and can in theory run in parallel, for example.

Another dilemma may come from across the Atlantic. As a close ally of the US, Britain has come under pressure to constrain China’s lead in sensitive technology with national security implications. The UK succumbed to Washington’s lobbying to restrict the Chinese telecoms company Huawei’s presence in its 5G network. 

If this pressure increases, it could deter the UK from alignment with the EU. President Joe Biden, for example, regards Chinese EVs as a potential national security threat because of the data that they collect, calling them “smartphones on wheels”. The EU disagrees, and has rolled out a welcome mat for Chinese EV investment in the bloc.

If the UK’s car industry is going to survive the green transition, it needs access to the EU market and to build value networks with EU producers. The UK auto industry lobbied strongly and successfully to extend the generous post-Brexit rules of origin that helped maintain their supply chains. Pressure from one of Britain’s leading intelligence and foreign policy allies to eschew the EU model of EV transition would be the last thing it needed.

An incoming Labour government will be faced with a range of discrete choices over alignment and a wider challenge of setting the direction of travel. The former — shadowing EU trade defence, adopting EU carbon pricing and CBAM, copy-pasting deforestation regulations — are the easy ones. The harder challenge is integrating while keeping its AI sector free enough to innovate and its national security allies happy. Labour may not want to talk about EU alignment during the campaign, but it can’t avoid the subject once it is in power.

alan.beattie@ft.com