UK tariff policy post Brexit
In recent days a key focus in the economic debate about Brexit has turned to tariffs.
As a member of the EU, among many other things, the UK adheres to EU trade policy and is a member of the customs union, adopting its common external tariff. This applies tariffs for all EU countries on imports coming into the EU from countries outside the EU and with whom the EU does not have an existing trading agreement.
Also, tariffs do not apply on trade within the EU. While the debate in the UK differentiates frequently between the customs union and single market, from an EU perspective these are closely intertwined, with common rules and regulations applying for goods and services within the single market.
Companies selling into any country or trading bloc will need to abide by the rules and regulations of that block.
In my view, the EU’s approach to tariffs is neither right for the UK now, nor in the future.
Many EU tariffs are unnecessary, many are regressive in that they hit the poor hardest and many are imposed for political reasons or to protect industries that lobby hard.
According to the 2018 World Tariff Profiles* the EU’s average tariff was 5.0%; 11.8% on agricultural goods and 3.9% on non-agricultural.
In terms of agricultural products, the average EU tariff on dairy products is 38.1%, with no diary products avoiding an import tariff. On fruit, vegetables and plants the tariff is 11.5%, with 78.3% of such imports being subject to a tariff. On sugars and confectionary, the average import tariff is 23.0%, on drink and tobacco 19.1%, on cereals 16.0%, on animal products 16.1% and on oilseeds, fats and oils 5.4%. On cotton the tariff is zero.
For non-agricultural products the tariffs also vary, with the average tariff on autos 9.6%, chemicals 4.5%, petroleum 3.1%, clothing 11.5%, while for leather and footwear the average is 4.2% and the maximum 17%.
The future UK approach
The right approach can only be achieved by recognising the distorting influence tariffs currently have. The tariffs we pay are high on food, clothing, footwear and autos. While our highest-income households spend 7.5 per cent of total expenditure on food and non-alcoholic drinks, the figure for the bottom decline is 17.3 per cent. These are a tax on imports that hit the poor hardest and are a legacy of the EU’s customs union desire to protect, among others, French farmers and German car makers.
When we joined the European Economic Community in 1973 the British public was told to expect an increase in food prices. Thus when we leave, it is only fair to ask whether we should expect them to fall? As pointed out in Clean Brexit**, the July 1971 White Paper stated that, “Membership will affect food prices gradually over a period of about six years, with an increase of about 2.5% each year in retail prices.”
The UK’s future policy on tariffs on imports will be heavily influenced by our future trading relationship with the EU.
If the future policy is a free trading relationship then the UK would likely adopt the same or similar tariff policy to the EU. Also if there is a transition period after we leave the EU then this would see a continuation of the present set-up, with no immediate change. Of course, there is still uncertainty about the future UK-EU relationship, in part due to the poor way the UK has handed the process, the aggressive way in which the EU has tried to treat the UK and also by the very nature of these negotiations where the final agreement is left to the last minute. Thus there is now increased focus on no deal and in this case, on what it might mean for UK tariff policy.
A pragmatic approach
In we leave the EU with no deal, we should not be protectionist, like the EU, but neither should we be puritanical and eradicate tariffs immediately. The correct approach is to be pragmatic. This will allow the UK tremendous leeway and scope.
If we were to leave the EU without a deal, then we would have full leeway in setting our own tariff rates. Trading under WTO rules, our new tariffs would have to apply to all countries - under what is called Most Favoured Nation status - unless we had a trade deal with a country that allowed us to allow a lower tariff rate.
Initially, under WTO rules, we should adopt the existing EU schedules as our template.
Depending upon the policy approach and whether sufficient work has been conducted already within Whitehall we may be able to progress quickly, and in particular, eliminate completely tariffs where we have no domestic production but currently charge tariffs such as on oranges, rice or bananas.
In other areas, where we have domestic production, whether in agriculture or across the wider economy, we should link our approach to tariffs to our policy for that particular sector. This is often the area that causes most angst, with suggestions that removal of tariffs would see the decimation of particular sectors.
That is not the aim. I have seen ceramics, for instance, mentioned as one sector that requires tariff protection. This is all part of the pragmatic approach needed. Some sectors are protected by tariffs, and even though consumers will pay a higher price for imports as a result of those tariffs, we should have a clear overall strategy and approach before proceeding.
It highlights the importance of gradualism in some areas, and also possibly the need to use funds to help sectors, or regions, to adjust to the new environment.
For instance we could differentiate between food and autos.
On food there is a case to eliminate tariffs completely but we may wish to do this gradually for many tariffs and immediately, as mentioned above in those areas where we have no domestic production. There would be immediate gains in lower food prices, and given the competitive food retailing environment one would expect these to feed though to final prices, not profit margins of retailers. Lower food prices would benefit all.
The wider approach to agricultural tariffs should be linked to a policy for the farming sector. The farming sector is about 0.5% of the economy and accounts for around 1% of employment. There would be plenty of scope to help the sector, including farmers, in the near-term.
If the EU imposes WTO tariffs, make clear the UK will reciprocate. This may be particularly relevant for autos.
An imported car from outside the EU is made less attractive because of the additional 9.6% tariff the consumer must pay. Imagine if we left the EU without a deal, and decided to keep tariffs at 9.6% on autos. Outside the EU we would be trading under the WTO’s ‘most favoured nation’ rules, so 9.6% would apply to all imports – unless we have agreed a trade deal with a particular non-EU country. This would immediately add to the retail price for cars imported from the EU – although the exact increase would depend on the extent to which a particular auto producer decided to alter its margins. So EU cars would be on the same tariff as those imported from the rest of the world. To UK buyers, German vehicles, for instance, would therefore be less attractive than before, while the price of American cars would be the same.
But, if there was no deal and the UK decided to cut car import tariffs to zero, regardless of the fact that the EU was charging us a 9.6% tariff, what would happen? At first, this might seem like a strange strategy, until you consider that zero tariffs benefit UK consumers. Under WTO rules, zero tariffs must apply to all future car imports into the UK, regardless of where they came from. Suddenly cars we are importing from the rest of the world would be 9.6% more competitive than they are now whereas imports from Germany and the rest of the EU would be the same. The gainers would be UK consumers and automobile manufacturers selling to Britain from outside the EU.
It is this fear of their prices becoming relatively less attractive and losing a share of the big UK market that most worries EU car exporters and should augur well for a post-Brexit auto sector UK–EU trade deal. At the same time, of course, the UK needs to ensure we remain an attractive location from where to build and export cars. If we trade with the EU under WTO rules, maintaining tariff on UK imports will give us bargaining power to negotiate EU tariffs lower in the future.
The EU sells more to us than we to them, with many jobs dependent upon exports to the UK. Thus, outside the EU, trading under WTO rules, the UK will be well-placed to negotiate a future tariff-reducing or zero tariff free trade agreement with the EU.
Having WTO tariffs in place that we can offer to remove strengthens our hand.
Outside the EU, we should promote fair trade and encourage the eradication of non-tariff barriers, vital for our service sector.
Moreover, we send currently directly to Brussels, the vast bulk of the tariff money we collect. If the EU were to impose tariffs on us, as it does other third countries, and we responded in full then it is estimated*** that the UK would raise about £13 billion in tariffs, while on current exports, our tariffs to be paid would be £5 billion.
Importantly, our future approach to tariffs will be decided in Westminster, based on our best interests.
*A co-publication of the WTO, ITO and UNCTAD, this is a 236 page summary report on world tariff profiles
**Clean Brexit is the book I co-authored with Liam Halligan, published by Biteback.
*** These figures I remember being in a report from the Civitas think tank.