BRIEFING — A Road to Nowhere: Why the UK-EU Reset is Not the Answer

The British Government is embarking on a programme of realignment with the European Union. Contrary to the government’s estimates that this will benefit the British economy, realignment with the EU will increase costs for British businesses and taxpayers, raise trade barriers between Britain and non-EU allies, give the EU lawmaking power over Britain, and limit Britain’s ability to control immigration.

This briefing examines the implications of the UK-EU “Reset” and analyses the costs associated with rejoining the Erasmus+ scheme as well as rejoining the EU Customs Union. Joining the Customs Union would be a mistake. Taking into account trade, labour and investment effects, a full accession to the Customs Union will have an immediate effect of -0.5 percent on GDP, worsening to -1.4 percent after 3 years.

What has happened?

On 19th May 2025, the British Government agreed to a “Reset” in relations with the EU which will erode British sovereignty and give the EU the power to make laws and regulations in Britain. Britain has committed to dynamic alignment across critical sectors, accepting EU rules on food safety (SPS) and carbon pricing (ETS) while submitting to ECJ jurisdiction and agreeing a Youth Mobility Agreement which would increase migration to Britain. The Government has also indicated its interest in joining key EU structures such as Erasmus+ and potentially the Customs Union. These measures undermine British regulatory and trade independence and potentially increase trade barriers between the UK and its non-EU partners. This delivers a Labour Party promise to secure a closer relationship with the EU, but the premise and policies are fatally flawed.

Why is it bad for Britain?

The Reset undermines British sovereignty. It binds the UK to the EU’s regulatory orbit and curtails Parliament’s powers to make decisions on behalf of the British people. It further imposes new costs on British businesses, limits trade flexibility with Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) partners and other non-EU trade relationships and hinders Parliament from restoring regulatory sovereignty.

Britain will receive rules and regulations from the EU on areas such as product standards, food and farm standards, genetic technology in crops, and fisheries management. British manufacturers will also see their energy costs increase following the decision to align the UK’s carbon prices with the EU’s and follow the EU’s Renewable Energy Directive. These rules are overseen by the European Court of Justice, instead of the independent arbitration panel which governs the UK-EU free trade deal.

It imposes new trade barriers between the UK and the rest of the world and will increase costs to British manufacturing firms and farmers at a time of high inflation and rising energy costs.

What does this briefing tell me?

This briefing draws on findings from the Prosperity Institute’s 2025 report A Road to Nowhere: Why the UK-EU Reset is Not the Answer to show why the Reset will lead to losses in regulatory autonomy, trade sovereignty, and Britain’s long-term economic prosperity. It provides a summary of the report’s main points, as well as new analysis on the costs associated with rejoining the Erasmus+ Scheme and the Customs Union.

Main points

1. The UK’s post-Brexit trade policy has restored national sovereignty, enabling independent negotiation of over 70 trade agreements worth approximately £164 billion. This sovereignty is threatened by the EU Reset, which raises trade barriers with the world and erodes Britain’s ability to choose its own trade partners.
2. Although the EU accounted for 41 percent of British trade in 2024, the volume of trade with the bloc is less today than a year after Brexit (see Fig.1). Conversely, trade with the rest of the world has increased significantly in comparison to 2017. Realigning with the EU runs contrary to Britain’s long-term economic and trade trajectory.
3. ‘Dynamic alignment’ with the EU binds Britain to compliance with EU law without any say in their creation in sectors such as food and agriculture (SPS rules), carbon pricing (EU ETS), and product regulations. This limits parliamentary sovereignty by subjecting Britain to ECJ purview on dispute resolution and leads to further compliance costs for British businesses. This means EU inspectors will be able to monitor British farms, and the EU will control carbon prices for British manufacturers.
4. Schemes such as the Youth Mobility Scheme and Erasmus+ feature weaker caps and entry barriers with little parliamentary scrutiny on how they would operate. The EU is demanding the UK issue visas to tens of thousands of EU residents. This reduces control of immigration and means spending British taxpayer money on EU universities with little benefit to British taxpayers, students, or researchers.
5. The EU requires strict adherence to its regulatory regime as a condition for reductions to border friction, expanding to EU rules on AI, digital services, and sustainability. The EU has also declined Britain’s request for mutual recognition of professional qualifications unless Britain agrees to ongoing monitoring and alignment with EU regulatory regimes. All this ties Britain to EU policy decisions, ECJ oversight, and regular compliance checks for minimal benefit.
6. Leaving the EU has improved trade ties with the US. In 2025, tech giants such as Microsoft, Nvidia, and Google announced investments in the British AI and digital economy worth over £30 billion. Dynamic alignment with the EU would reintroduce regulatory uncertainty and expose investors to higher costs such as a 57.5 percent increase in carbon charges under EU-ETS carbon pricing for data centre operations. These costs are a direct barrier to UK-EU trade.
7. Linking UK ETS with EU ETS will increase carbon costs, increasing electricity bills for British households by £46 and for manufacturers by 58.9 percent. Between January 2025 and January this year, UK ETS prices increased by 112.5 percent (£32/tonne to £68/tonne) imposing approximately £5bn to the British economy every year. Furthermore, adopting the EU’s CBAM would increase import costs from key trading partners such as the United States, Canada, and CPTPP members, while providing minimal benefit to the UK, which maintains a trade deficit with the EU on all CBAM-covered goods. Increased carbon pricing will apply to all British businesses which purchase carbon credits, whether they export to the EU or not. This will make British manufacturing less competitive. The Reset means the UK will re-join the EU’s Customs Union for manufactured goods and adopt EU ETS standards.
8. In December 2025 the Government announced that it would re-join the EU’s student exchange programme, Erasmus+. The Government has agreed to spend £570 million for the 2027-28 academic year on joining this scheme, with future, higher, rates to be negotiated in the future. This equates to roughly 16 percent of the total Erasmus+ budget per year. In the last academic year when the UK was a full participant in the Erasmus+ scheme, around 16,000 British students took part, a mere 2.6 percent of the total scheme. The fee to rejoin Erasmus is a large and disproportionate burden on British taxpayers which is expected to increase in future years.

Summary of recommendations

1. Diverge from EU law. Repeal legislation which enables British minsters to align British regulations with the EU in a dynamic fashion; we must also repeal legacy EU law. Deregulation across the economy should be considered paramount to increase competition, innovation, and economic growth.
2. Prioritise trade negotiations with the USA and Indo-Pacific economies, particularly those participating in CPTPP, to reduce relative economic dependence on the EU.
3. Establish mutual recognition of strategic sectors with allied countries, including those in Europe (e.g. professional services, manufactured goods and food standards) to encourage easier trade while preserving regulatory autonomy.

The Reset has become a vehicle for the managed reintegration of the UK into the EU’s economy, driven more by EU interests than British strategic calculation.

The previous government’s intention to agree mutual recognition in key sectors with the EU has been replaced by the current Labour government with an agreement to enter broad, open-ended dynamic alignment. As Figure 1 shows, since the Labour Government won the last election, it has veered more towards alignment (50 percent alignment with EU regulations and 70 percent delayed divergence from EU regulations) than towards active divergence (30 percent). The Reset formalises this trend and locks the UK back into the EU’s orbit for much of the physical economy. The EU continues to signal the Commission’s clear preference for regulatory hegemony over mutual recognition with the UK as an equal trading partner. The Commission intends to treat the UK as a captive market, and HM Government is obliging by following EU standards.

Transformation of UK-EU trade relations

The EU’s share of British exports has been on the decline since 2000. The EU is a declining market globally and less relevant to British prosperity.

Britain’s economic centre of gravity has steadily moved away from the EU. As of 2024, following the full reopening of the global economy post-pandemic, UK-EU trade accounted for 41 percent of British exports, the lowest for over 25 years (Fig. 2). Despite Britain’s sustained trade surplus in services exports to the EU, the EU is increasingly a declining partner; with British businesses looking beyond the bloc to other countries and trade blocs (e.g. CPTPP and the USA) with better potential for economic growth. This is especially true regarding the United States, the UK’s largest bilateral trading partner, which offers greater opportunities for trade, innovation, and investment. The EU does not contain the same customer demand that it once did.

Erasmus+

Although it is unclear where the Government stands on Britain’s membership of the EU’s Customs Union, it is clearer on its position regarding the Erasmus+ programme. On 17 December 2025, the Government announced its formal agreement with the EU to re-join its Erasmus+ programme in the 2027/28 academic year, contributing £570 million to the programme. The implications of this are vast.

Firstly, the Erasmus+ programme could be detrimental to immigration control, especially when combined with the broader “Youth Experience Scheme”, which establishes special provisions for EU nationals coming to the UK. It could also lead to a phasing out of the Turing Scheme, which has been a cheaper alternative and has provided more British students with the opportunity to study in more places than the Erasmus+ permits. Finally, it subordinates Britain to Brussels-imposed programmes, placing Britain in a rule-taker position on its education and immigration policies. British taxpayers are being expected to fund a disproportionate part of the Erasmus+ budget, money which will ultimately be spent to the benefit of EU students.

Below is a list of negotiating demands made by the EU—taken from the Common Understanding and supplementary negotiating terms—that set conditions for a UK-EU Reset. The overarching theme is the request for EU regulatory oversight and dynamic alignment, which would amount to Britain’s wholesale adoption of EU regulations now and into the future.

Domestic deregulation

• Pursue domestic deregulation to increase competition, innovation, and economic growth. Diverge from EU regulations which inhibit economic growth, including the Habitats Regulations and GDPR. Create innovation incubators in emerging technologies including artificial intelligence, financial technology, and synthetic biology.
• Liberalise requirements of the UK Conformity Assed (UKCA) and UK REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) to implement streamlined approval processes for innovative products which can be delivered quicker and more efficiently than the EU’s assessment procedures.
• Repeal powers given to ministers to align British manufacturing standards with EU standards without parliamentary scrutiny. The Product Regulation and Metrology Bill should be used to recognise the most innovative and competitive product standards globally, rather than aligning with the EU.
• Repeal the UK ETS regulations and introduce a competitive energy policy. The UK has some of the most expensive industrial energy prices in the world. De-linking from the EU’s ETS prices and repealing ETS would send a strong signal to businesses and investors that the UK is going to increase its economic competitiveness.

Diversified trade strategy

• Prioritise concluding an FTA with the USA. The USA continues to indicate its willingness to expand its trading relationship with the UK. Although the Economic Prosperity Deal narrowly focused on industrial tariffs, the 2025 Tech Prosperity Deal launched a £31 billion investment package by global tech giants in Britain’s digital economy. These deals remain non-legally binding, thus prone to the probability for alteration or complete withdrawal, and as things stand negotiations over the Tech Prosperity Deal continue. The Government should expedite talks on concluding the deal, expanding across all sectors which would enable competition between British and American firms in areas such as AI, finance, and legal services.
• Enhance Britain’s global competitiveness by utilising the benefits of its membership of the CPTPP. The UK Trade Strategy 2025 does not capitalise on the benefits that Britain stand to gain as a member of the CPTPP. To change this, Britain should exploit diagonal cumulation provisions (i.e. retaining rules of origin benefits as British goods are traded through other CPTPP members to non-CPTPP members) and use its membership of the CPTPP as a catalyst to implement supply-side reforms that boost Britain’s global competitiveness.

Selective and mutual cooperation with allies

• Establish a framework for selective regulatory cooperation that preserves autonomy in strategic sectors. This includes negotiating high-trust, mutual recognition agreements (MRAs) with partners in sectors where collaboration provides clear mutual benefits, such as automotive manufacturing, chemical, and food standards.
• Maintain regulatory divergence in high-growth sectors including digital services, biotechnology, and financial services where it enjoys existing competitive advantages.

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