The trade tariffs conundrum

31 Jul 2018

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Mark Waterman of Vendigital explains that as part of the EU, the UK currently enjoys trade agreements with 36 non-EU countries, with a total goods trade value in the territory of £106bn in 2017. However, this could all be about to change, and UK businesses remain in the dark about what this will mean.

There is still a great deal of uncertainty about the nature of Britain’s future trading relationship with the EU and third-party countries and whether frictionless trading will be possible, once the UK leaves the EU.

Published at the start of July, the Government’s long-awaited Brexit White Paper has shed some light on post-Brexit trade. It proposes a ‘common rulebook’ of zero tariffs on goods, whilst allowing the UK to apply its own tariffs and independent trade policy for goods intended for consumption in the UK. The complexity of these proposals and the fact that the UK would still be bound by EU rules and regulations in some areas has raised concerns that the proposals may not be workable. 

With more than 5,000 separate category codes against which tariffs will need to be set, covering everything from livestock to aircraft, this will be a complex process. The most straightforward position would be for the UK to adopt the same WTO tariffs as those currently set by the EU. This would help to minimise any disruption to trading activity with countries outside of current EU trade arrangements, for example, China and the US.

Alternatively, the UK could unilaterally adopt a WTO zero tariff policy. While HMRC collected around £3.5 billion in customs duties in 2017, in reality this only represents around 0.6 per cent of total UK tax revenue, therefore it would not represent a significant loss.

Many economists believe that lowering tariff barriers to trade is good for economic growth, however, some industry sectors could suffer as a consequence. In particular, industries that are currently protected with high tariffs and have a significant UK manufacturing capability, would be most affected. For example, businesses trading meat and fish products, or clothing and footwear, currently benefit from double digit WTO EU tariffs. Whilst the UK currently exports goods with a value of £40bn in these categories each year, it remains a net importer of these goods and therefore any move to remove tariffs on UK imports in these areas would impact UK producers. Reducing trade tariffs to zero in these categories could also widen the trade gap with countries outside of the EU; placing further pressure on UK businesses. A further challenge to introducing such a strategy would be political. For example, in the case of farmers, who will see exiting the much-maligned Common Agricultural Policy as broadly positive (providing the subsidies are replaced), being hit by increased international competition will not be welcome.

To avoid these problems, it is perhaps more likely that the UK Government will introduce a hybrid solution that maintains or even increases tariffs for those sectors that it wishes to protect, whilst reducing or eliminating tariffs altogether in other areas. While this solution would seem the most attractive, it would however leave the Government facing the conundrum of how to set a tariff level that works for everyone. The simple answer is that this is not possible, and compromises will be required.

A good example is the declining UK aluminium sector, which currently exports goods with a value of £2.2bn each year whilst the UK imports £4bn of aluminium, with an average WTO tariff of 6.4 per cent.

If tariffs were reduced, it is likely that imports of aluminium from outside of the EU would go up, and overall prices would reduce. While this would have negative consequences for UK aluminium sector, it would be more positive for manufacturers that use aluminium in their products, such as component manufacturers in the aerospace and automotive industries.

For the Government, getting this right is not going to be easy. There are complex economic, social and political implications to consider and careful assumptions will need to be made in areas such as price / volume elasticity to ensure the UK can remain competitive across a range of markets.

With the Brexit negotiations ongoing, UK manufacturers should continue to lobby hard for their sectors; making it clear where they would like to see external trade tariffs set. They should also have contingency plans in place based on a worst-case scenario.

Mark Waterman is a manufacturing sector specialist at management consultancy, Vendigital.