Rachel Reeves Hints a deal with EU potentially more important than a deal with USA

2nd May 2025

Rachel Reeves has made clear that, in her view, the UK's trade relationship with Europe is "arguably even more important" than the trade deal being negotiated with the United States.

Speaking to the BBC while in Washington, she emphasized that the EU remains the UK's largest and closest trading partner—not only in terms of geography and historical links but also through the deep economic interdependencies forged over decades.

Her comments underline a strategic decision to reset and strengthen trading relationships with European neighbours, which she sees as crucial for boosting British jobs and consumer benefits 2.

While Reeves is in Washington engaging with U.S. Treasury Secretary Scott Bessent on a bilateral deal intended to mitigate the impact of tariffs (such as those on car exports), her remarks have sparked some controversy.

Critics, including figures like Sir Keir Starmer, argue that downplaying the importance of a U.S. deal could jeopardize the progress of negotiations, given that the U.S. is also a major trade partner in key sectors. However, Downing Street has defended her stance, stressing that it is simply a recognition of the facts—that the EU is the UK's largest trading partner—and that both relationships are vital to the nation's economic strategy.

This prioritization is reflective of a broader UK government strategy to rebuild post-Brexit ties with Europe, even as it continues to pursue opportunities with other global partners like the US. The focus on the EU is not intended to neglect the American relationship but to ensure that the UK leverages the benefits of having a well-established and geographically proximate market, which offers a more immediate pathway to economic recovery and stability.

Implications for Specific Industries
Automotive: The UK's automotive sector relies on complex, cross-border supply chains connecting British manufacturers with European suppliers. A robust EU deal can help reduce the risk of tariffs and customs delays, ensuring the industry remains competitive. In contrast, a delayed or less comprehensive EU deal might force companies to adjust their supply chains—potentially increasing costs and reducing export competitiveness.

Agriculture & Fisheries: These sectors have long been accustomed to operating under EU standards and trade practices. Closer alignment with the EU through a dedicated deal would help maintain access to the European market, safeguarding the livelihoods of many farmers and fishermen who rely on predictable, tariff-free trading and common sanitary standards.

Financial Services: Despite having lost some of its passporting rights post-Brexit, the UK's financial sector still benefits from clear regulatory alignment with the EU. An EU deal might ease market uncertainty and reduce disruptions in services that depend on cross-border financial flows. This stability is crucial for maintaining the attractiveness of London as a global financial hub.

Technology & Manufacturing: For sectors that rely on just-in-time delivery of sophisticated components—such as electronics or pharmaceuticals—the predictability of border operations and regulatory alignment that an EU deal promises can be invaluable. This reduces downtime and costs associated with customs friction, ultimately fostering innovation and growth.

Broader Economic Implications
Supply Chain Stability and Investment: With the EU being the UK's closest trading partner, a well-negotiated deal would reduce uncertainty for businesses, encouraging both domestic and foreign investment. Stability across supply chains not only benefits large manufacturers but also small and medium-sized enterprises that could see improved cash flows and lower operating costs.

Regional Economic Balance: Many parts of the UK—especially regions with strong historical ties to European markets—rely heavily on exports to the EU. A solid trade relationship can help maintain jobs and promote regional economic resilience. In contrast, while a US deal might open up opportunities in high-tech and other emerging sectors, it typically benefits different parts of the economy.

Political and Strategic Messaging: Prioritizing the EU speaks to an acknowledgment of the UK's post-Brexit realities. It signals to both domestic stakeholders and international partners that while new opportunities with the US and other regions are vital, the economic and regulatory ties with Europe remain a cornerstone of the UK's trading system. This can build confidence in markets, stabilizing currency and fostering a more predictable investment climate.

Long-Term Economic Security: Reinforcing the economic relationship with the EU could serve as a buffer against global economic volatility. Given that the EU is not only a geographic neighbor but also a major destination for UK exports, ensuring frictionless trade can protect the UK economy from external shocks—something that might be less easily achieved through bilateral agreements with more distant partners like the US.

Overall, while both relationships are critical to the UK's economic strategy, this prioritization suggests a careful balancing act. The UK is looking to mitigate near-term risks associated with supply chain disruptions and regulatory divergence with its largest trading partner while still keeping an eye on long-term strategic partnerships with the US.

The forecasted economic conditions point to some sectors feeling the pinch more than others. Here’s a breakdown of the key sectors and how they’re impacted:

Consumer and Retail Sectors With inflation pressures and lingering uncertainty, consumers are increasingly cautious about discretionary spending. This shift directly impacts retail, hospitality, and leisure—sectors that depend on robust consumer demand. As households allocate more of their budgets to essentials, spending in these industries tends to slow down, potentially leading to lower revenues and thinner margins for businesses operating in this space .

Housing and Construction The outlook for the housing market is similarly tempered. With higher interest rates and reduced government spending, both new home construction and renovation projects are expected to slow down. Builders, material suppliers, and real estate services thus face challenges as the sector works through supply chain constraints and softened consumer demand. Even though there’s a touch of resilience in renovation activities driven by energy-efficiency projects, overall, the sector must brace for a sluggish recovery until economic confidence picks up 2.

Business Investment and Manufacturing Uncertainty over trade policies—especially with tariff-related tensions—has led firms to postpone or curb capital expenditure. Industries heavily dependent on robust investment, such as manufacturing, auto production, and heavy machinery, are particularly vulnerable. Companies in these sectors might delay upgrading plants or expanding production capacity, thereby dampening growth prospects. Additionally, export-dependent industries can suffer as rising tariffs reduce competitiveness in international markets, influencing sectors like agricultural products and industrial goods 4.

Technology and Innovation Although the technology sector has historically demonstrated resilience, it is not immune to the headwinds affecting the broader economy. Supply chain disruptions, increased input costs, and a more cautious investment climate can all slow down technological developments and expansion plans. Companies might opt to delay new product rollouts or scale back research and development investments as they navigate these turbulent conditions.

Taken together, these forecasts suggest that sectors closely tied to consumer spending, construction, and business investment are facing significant challenges. Companies operating in these areas will likely need to adopt adaptive strategies—such as diversifying supply chains, rethinking investment priorities, or even pivoting to less capital-intensive models—to weather the short-term headwinds and position themselves for long-term growth.