How Can the UK Survive Global Trade Shocks? A Proposed Solution.

As of March 2025, there were 4,650 import restrictions among G20 economies, representing a 75 percent increase since 2016 (Douglas and Fairless, 2025). Protectionism is accelerating, and the global trading system is fragmenting. In early 2025, following a change in political leadership, the United States undertook an unprecedented shift to protectionism, implementing a 10 percent universal tariff (White House, 2025). Conflicts in the Middle East are adding to this move away from free trade toward prioritising autonomy. State-led trade policy is replacing multilateralism.

For the UK, being one of the most trade-dependent G7 economies, this shift increases exposure to external shocks. The challenge is clear: reduce vulnerability to sudden trade disruptions in the short term, while building the capacity to respond to long‑term volatility. Can an economy so deeply tied to global supply chains afford to retreat - or must it adapt instead? Two complementary tools could help. The first is a Trade Resilience Index (TRI) to identify and rank the UK sectors most exposed to global trade shocks. The second is a Trade Shock Reserve (TSR), a stabilisation mechanism to support export‑reliant sectors experiencing severe volatility. Together, they aim to keep the UK open to trade while adapting to rising protectionism.

The UK’s high level of trade openness creates economic vulnerability, and this can be seen with UK manufacturing being less than 10 percent of GDP (House of Commons Library, 2025). Take steel - its economic output has fallen by over 70 percent since 1990, even as overall manufacturing has increased (Allen, 2025). These trends reflect the effects of what some economists view as unbalanced globalisation, where distorted competition has arisen from state-led industrial strategies in other economies (Rodrik, 2011). This is contributing to the growing pressure, in the UK and elsewhere, to reduce vulnerability through more interventionist trade policy. However, withdrawing from trade could risk inefficiency, reduced consumer choice, and weaker investment. If a 10 percentage point tariff is fully applied worldwide, estimates suggest global GDP could fall by around 0.3 percent within two years, reflecting the allocative inefficiencies of moving away from comparative advantage (OECD, 2025). For the UK’s services‑led economy, the priority is not retreating from trade but identifying and supporting exposed sectors while staying engaged in global markets.

A Trade Resilience Index (TRI) would assign sectors a vulnerability score based on four weighted criteria: import dependency, geopolitical risk exposure, strategic value, and alignment with decarbonisation. Import dependency highlights supply chain weaknesses; geopolitical exposure measures links to unstable regions; strategic value identifies nationally important sectors; and decarbonisation ensures alignment with net‑zero policy. Sectors scoring above a certain point would become eligible for temporary, rules-based support, which could be operationalised through a possible Trade Shock Reserve. For example, UK steel might score high on strategic value and risk exposure but lower on decarbonisation, meaning any support would be conditional on measurable emission reductions. The TRI’s logic mirrors the Bank of England’s financial stress-testing framework, where banks are assessed in difficult conditions and must meet capital requirements. In the same way, TRI-based analysis would be used to identify sectors most at risk, informing whether any policy response should be considered (Bank of England, 2023). Over 60 percent of UK-consumed goods are imported, showing how exposed the country is to supply chain risks, which the TRI could assess (Fry and Hale, 2024). While existing metrics such as the Global Trade Resilience Index (GTRI) assess resilience at the national level, this proposal adapts the concept to individual UK sectors by linking vulnerability scores directly to targeted policy support (Whiteshield, 2023). The GTRI tracks sectoral trends but remains observational, whereas the TRI would directly guide policy decisions and resource allocation. The TRI’s value, however, rests on reliable sectoral data and the government’s ability to update support flexibly as conditions shift.

A UK Trade Shock Reserve (TSR) would act as a conditional fiscal mechanism to stabilise sectors during rising global protectionism. External trade shocks in certain sectors (as identified by the TRI) may require limited, time-bound support to sustain investment and avoid production disruption, a strategy that has also been recommended in response to similar risks within the EU context (Saussay, 2024, p. 14). The TSR would function in the manner of an automatic stabiliser, delivering short-term support in response to volatile international trade without requiring repeated government intervention (Blanchard, 2021). The scheme would be triggered by clear indicators. For example, sudden changes in the TRI for a certain sector, or a 15 percent fall in sectoral exports over one quarter. Support could include temporary tax deferrals, co-financed investment grants, or short-term insurance against export losses. In contrast to current industrial subsidies, TSR support would not be automatically granted to firms. The fund activates in response to shocks, but access would require sector-wide recovery plans and predefined criteria. To reduce ‘moral hazard’, support would be phased out based on progress linked to TRI vulnerability scores, preventing state dependency. It is proposed that by shielding key sectors from external trade shocks, it preserves capital, skills, and investment. This would support a rightward shift in the long-run aggregate supply (LRAS) curve and increase potential output from Y1 to Y2 (see diagram). Although complex to manage, the TSR helps the UK remain open to trade while giving vulnerable sectors time to adjust and remain competitive in an increasingly unstable global economy.

Figure 1: Rightward shift in LRAS illustrating TSR’s impact on potential output

To conclude, the UK needs to remain open and competitive in a global economy increasingly shaped by fragmentation and risk. A return to 1990s-style trade liberalism is no longer viable, but nor is a descent into protectionism. The world has changed: supply chains are fragile, and protectionism is back. Does that mean Britain must choose between open markets and retreat? The Trade Resilience Index and Trade Shock Reserve provide an alternative route, a route where vulnerabilities are identified, stabilised, and eased as conditions improve. By adapting rather than withdrawing, the UK can remain competitive in a world of fragmented trade.