The new US tariff settlement is being read in London as a non-story: no new UK tariff, no fresh damage, business as usual. That framing is too narrow, and it is also wrong on its own terms. The relevant comparison was never the UK’s position in isolation and crucially, what is the UK’s relative position to Europe. From that perspective, the UK’s market access to the US has been substantially degraded.
The relevant comparison is Europe
For UK goods, Washington’s 10% levy sits on top of whatever the ordinary most-favoured-nation (MFN) tariff already was. For EU goods, the same 10% is a ceiling: where the MFN rate is already 10% or higher, the additional charge is zero. The UK government’s claim that “nothing has got worse” is true only if the counterfactual is frozen at the UK’s own previous position. It is false the moment the comparator is the access the EU has negotiated with its far greater bargaining weight. This highlights the importance of market size. Brexit’s cost has always included the loss of frictionless EU access and it now also includes the loss of the EU’s ability to pass on its own external deals, which may invoke preferential terms owing to the EU’s single market size.
This has been obvious for many years now, but it is the first time that this has become very salient in the context of the UK and the EU’s relative trade position with the US following the renewed US aggressive trade policy starting last April.
Goods take the hit where Britain is most exposed
The divergence in relative market access falls almost entirely on the physical goods economy, and that is precisely where the UK and the EU are asymmetrically exposed. Brexit has been a bet on the growth in service sector trade. This is significantly under risk from artificial intelligence which highlights the fragility of much of the service sector part of the economy. Growing geopolitical risks and ongoing military conflict in the region further highlights the importance of manufacturing capacity. Much of the UK’s manufacturing activity is not concentrated in London, but in other parts of the UK — its smaller towns and the West Midlands. These regions have done, in relative terms, less bad compared to London as new regional cost-of-Brexit estimates show (Alabrese, Edenhofer, Fetzer and Wang 2026). As a result, the relative worsening of UK market access to the US relative to the EU implies that this hit, if it were to come to last, will put further downward pressure on precisely the parts of the UK economy that levelling-up policy is trying to revive.
Britain’s growth model since 2016 has leaned harder into services exports than almost any comparable economy — finance, law, consultancy, the whole apparatus of London as an accounting and advisory hub. That model is also the one now most exposed to AI: the occupations large language models reach first and hardest are disproportionately the high-wage, licensed, judgment-intensive service occupations Britain has specialised in exporting (Eloundou et al. 2024). The EU, by contrast, remains comparatively goods-heavy, and its industrial base is under a different kind of pressure: Chinese overcapacity in autos, chemicals and machinery, which Brussels is managing through minimum-price regimes and trade defence rather than a clean tariff wall. The new US settlement therefore does something quite specific. It hits the UK’s goods sector hardest at the exact moment the UK’s compensating services sector is under its own structural threat, while handing goods-side relief to an EU that is simultaneously fighting a separate battle against Chinese import pressure. Britain is squeezed from a direction the EU is not, at a moment the EU is squeezed from a direction Britain largely escapes.
Investment will follow the tariff wedge
The commercially rational response to a tariff differential of this size is not to reroute finished goods through Rotterdam — simple transshipment does not confer EU origin, and rules-of-origin regimes are specifically designed so that trade deflection of this kind is rarely profitable (Felbermayr, Teti and Yalcin 2019). The rational response is to relocate the substantial-transformation stage itself: final assembly, certification, testing, supplier onboarding, the next tranche of productive investment. None of that requires a political declaration, but it happens firm by firm, as manufacturers quietly decide that the next factory line, the next compliance function, the next capital expenditure belongs inside the EU rather than the UK. Britain has already run this experiment once: the 2016 referendum itself produced a measurable 17% increase in UK firms’ outward investment transactions into the EU27, precisely the “vote with their money” pattern of firms rebuilding market access from inside the bloc they had lost preferential access to (Breinlich, Leromain, Novy and Sampson 2020). That mechanism is now primed to run again, part of the broader reorganisation of where nodes sit in a production network rather than a simple change in trade volumes, a framing developed in One Network, to Rule Them All and Production Networks and “Value” Chains. The effect is to shift the tradable production margin, not just the trade flow, and the beneficiary is Europe’s production network almost by default.
Of course, the new US tariff regime may not last for long owing to legal scrutiny, just as the previous one has not. But most certainly will this induce a rethink of investment decisions causing hold up at a time when the UK economy is already under increasing strain.
Tariffs become politics when capital starts to move
That is what turns a tariff schedule into a political fact. Every increment of that relocation raises the return to UK-EU regulatory alignment — SPS rules, conformity assessment, origin cumulation, the accumulating list of technical convergences that add up to something close to a single market for goods. UK-EU talks stalled for long stretches amid the churn of yet another prime minister, even as the case for closer alignment is strengthened, a tension already visible in the Interview on the Occasion of 10 Years since Brexit.
But a settlement that visibly rewards EU-based production over UK-based production is the kind of external shock that may reliably concentrates minds. It gives manufacturers, not just diplomats, a reason to push the negotiation forward, it improves the EU’s relative bargaining position because the cost of drift is now being priced daily into investment decisions rather than argued about in abstract sovereignty terms.
Goods pull Britain toward Europe while data pulls the other way
The other flip side to the goods pressure runs into a digital-trade commitment that pulls the other way, and this is where the wedge becomes genuinely awkward rather than merely inconvenient. The Economic Prosperity Deal’s digital chapter has never been finalised in enough detail to settle whether it bans data localisation in the narrow US sense — no restriction that touches US firms’ ability to process data wherever they choose — or in the narrower UK sense, which has historically preserved space to regulate for privacy, security and financial stability, a divergence I flagged when the EPD was first signed in Why the EU Must Assess the US-UK Template Carefully. Washington’s template treats almost any domestic-processing requirement as presumptively illegitimate, part of a wider effort to keep taxable digital activity and inference on US-controlled infrastructure, set out in Digitalization, Tax Loopholes, and the New Global Power Dynamics. I firmly believe that Brussels’ template, and the UK’s own instincts on data protection, sit closer to the opposite pole. On privacy and platform governance, Britain is politically nearer to Europe than to the US, in particular owing to large scale tax leakage from aggressive tax structuring. This remains whatever the EPD’s drafters intended. The divergence is not really about principle, it is about who gets to define “unjustified” localisation and who carries the burden of proof.
That divergence is an important real stake behind the tariff story, not a footnote to it. Certificates, customs records and rules-of-origin data are, in this sense, only the trade-policy analogue of the argument made about digital VAT in The Battle Over Traceability: control over the data trace is what determines who can validate origin, compliance and ultimately market access. Goods pressure is pushing Britain toward Brussels, the unfinished data chapter is quietly trying to lock in a US-compatible regulatory ceiling before that reintegration goes very far. We will now see which direction the UK choses in light of this asymmetric shock.
The settlement is forcing a regulatory choice
The UK cannot simply cherry-pick — EU goods access without EU rules, US digital latitude without US strings — because both blocs are now using selective access as leverage precisely to foreclose that kind of à la carte alignment, exactly the bilateralisation strategy described in What Is the Biggest Way Donald Trump Has Changed Europe?, and the whisky and pharmaceutical carve-outs that soften the goods hit for selected UK exporters or regions play the same coalition-building role for concentrated domestic constituencies described in Data Sellers, Service Sector Trade and the Rentier Economy. The choice this settlement is forcing on London is not, ultimately, about whisky exemptions or knitwear tariffs. It is about which regulatory architecture governs data, AI and services trade for the next decade, and the tariff schedule is the instrument quietly making that decision now, sector by sector, before the politics has caught up with it.
References
Alabrese, E., Edenhofer, J., Fetzer, T. and Wang, S. (2026). Levelling Up by Levelling Down: The Regional Economic Costs of Brexit as of 2026. CAGE Working Paper, University of Warwick. Interactive regional data at brexitcost.org.
Breinlich, H., Leromain, E., Novy, D. and Sampson, T. (2020). ‘Voting with their money: Brexit and outward investment by UK firms.’ European Economic Review, 124, 103400. https://doi.org/10.1016/j.euroecorev.2020.103400
Eloundou, T., Manning, S., Mishkin, P. and Rock, D. (2024). ‘GPTs are GPTs: Labor market impact potential of large language models.’ Science, 384(6702), 1306–1308. https://doi.org/10.1126/science.adj0998
Felbermayr, G., Teti, F. and Yalcin, E. (2019). ‘Rules of origin and the profitability of trade deflection.’ Journal of International Economics, 121, 103248. https://doi.org/10.1016/j.jinteco.2019.07.003