From 1960s-style “economic planning” to “levelling-up” initiatives, there have been many, unsuccessful, attempts to re-establish Britain’s manufacturing base. The UK’s services-led economy is something of a global outlier; the services sector accounts for 76 per cent of our GDP and 46 per cent of our exports, compared with America, where it represents only 30 per cent of exports, or the EU, at 23 per cent.
Critics of Britain’s over-reliance on spreadsheets and PowerPoint argue that its failure to manufacture many products that the rest of the world wants to buy makes its economy brittle, undiversified, and exposed to shocks. There’s some truth to this assertion — and certainly to the suggestion that the UK’s economy is “old world”, with very few tech champions to speak of — though I suspect that political lionising of goods over services has a lot to do with the fact that it is popular with voters.
“Liberation day” is the extreme manifestation of the goods-focused lens. President Trump’s vision for equitable global trade revolves around buying and selling tangible products — things the American people can see, eat, build, and mine – and broadly overlooks services that are less visible to, and emotive for, the electorate.
It’s been claimed that the impact of “liberation day” will wipe out any of the UK’s meagre remaining fiscal headroom. It also makes the imminent “reset talks” with the EU more challenging, if the UK’s response to the US is regarded as puny compared with the Continent. While I’m not suggesting that Rachel Reeves and Sir Keir Starmer will be toasting the president’s actions, there’s a strong argument that the UK government has been given a unique opportunity to reboot growth, if it is bold in its talks with the EU.
To achieve a more beneficial trade relationship with the EU and then strike a favourable trade deal with America would be “art of the deal” stuff. But the UK’s disproportionate reliance on services, combined with the economic and defence pressures it confronts alongside the EU, makes it a possibility.
Alongside defence, Starmer should make services the key focus of reset talks. Put simply, securing a more favourable deal for services — particularly financial services, which alone accounts for about 10 per cent of GDP — is economically far more important than any deal it strikes across its goods sectors. The world has changed since January, let alone since the Brexit vote. The heightened mutual dependency of the UK and Europe for military and economic security gives the prime minister air cover to erase some of the hitherto untouchable ideological red lines.
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For example, if the UK’s negotiating team pushed for a deal on financial services with the EU like the one signed with Switzerland in 2023, it could be a game-changer for the sector and UK growth. This deal facilitates greater unrestricted market access via both countries agreeing to defer to the other’s regulatory standards rather than establishing a common set of rules. The relative size of the UK’s financial sector compared with other EU countries means that it would reap the bigger benefits and would need to proffer something in return, for example, compromising on sticking points such as fishing access and migration-related issues, such as youth mobility.
The US administration’s relentless focus on goods means that reaching a deal with the EU that secures better access for services is unlikely to make enemies in the White House and inadvertently kibosh chances of landing a better US trade deal.
Unlike recent predecessors, Starmer enters EU talks from a position of greater mutual reliance and, arguably, relative economic strength, given the stronger trade headwinds that the bloc faces. He can present a resistance to tariff retaliation as simply the pragmatic decision of a services-focused economy rather than the cowardly actions of a teacher’s pet, breaking ranks with European classmates. The climate for compromise and pragmatism seems more favourable, too, with the EU and member states abandoning some of their rules-obsessed intransigence, notably on defence spending and Germany’s decision to scrap its “debt brake”.
The government’s policies have been neither bold nor effective in promoting growth. They’ve been a toxic mixture of the economically irrelevant, such as ending VAT relief for private schools, or hopelessly counter-productive, such as raising employers’ national insurance contributions. A confluence of geopolitical factors means that the EU reset talks are serendipitously timed, offering a golden opportunity to move the growth needle. It’s critical that the government focuses on the right areas and is ambitious enough to take that chance.
Seema Shah is chief global strategist at Principal Asset Management
