There is no more eloquent testimony to the troubled nature of our attempted exit from the EU than the recent announcement of the UK’s tariff regime in the event of a no-deal Brexit.
You might think that after the Commons vote against no deal, this is of academic interest only.
But you’d be wrong.
A no-deal exit is still the legal default position. The EU may not grant the delay that Parliament wants and even if it does, we don’t know what will happen at the end of it. Moreover, if it comes to a second referendum or a general election, and/or the choice of a “softer” Brexit, the nature of our future trade regime should figure large in the debate.
The details of Britain’s intended tariff schedule were kept under wraps until last Wednesday, the day of the Chancellor’s Spring Statement. At that point it was only 16 days until the UK’s scheduled exit on March 29. Yet it was more than two and a half years since the referendum. There are few better examples of government incompetence and the burdens that this places upon business.
On tariff policy there is substantial scope for misunderstanding. This is where economics, politics, vested interests and ignorance meet. Most people do not understand where the gains from trade come from. They think exclusively about exports, or perhaps the revenue to be gained from the imposition of tariffs on imports.
By contrast, the essential point to grasp about international trade is that the main benefits derive from access to cheap imports. Exports are the price we pay to secure them.
Under World Trade Organisation (WTO) rules, a country may not discriminate between its trading partners with regard to tariffs – unless it has a free-trade agreement (FTA) or is in a customs union. While the UK is in the EU it must impose zero tariffs on imports from fellow members but is obliged to impose the EU’s common external tariff (CET) on imports from the rest of the world.
Accordingly, after Brexit the UK has a spectrum of choices. At one extreme, it could keep the existing tariffs on imports from the rest of the world and impose these same tariffs on imports from the EU. At the other extreme, it could keep the tariffs on imports from the EU at zero, and reduce the tariffs on imports from the rest of the world also to zero. There are umpteen possibilities in between, and we can make different choices for different goods.
The first of these options would increase prices in the shops and squeeze consumer real incomes, thereby demanding a response from the Chancellor to restore consumer incomes and maintain demand. The second would reduce prices in the shops and boost real incomes.
It at least says something for this government that its chosen regime veers more towards the latter than the former. At present, 67pc of the UK’s goods imports enter tariff free. The Government’s proposals would increase this to 87pc. So the direct result would be a net reduction of prices in the shops.
This unilateral reduction of tariffs would not appreciably weaken our ability to negotiate FTAs. There is much more to forging FTAs than tariffs. It is possible to adopt a regime of zero tariffs while still bargaining with trade partners about such issues as standards, mutual recognition, cross border investment and much else.
Moreover, the Government’s proposed post-Brexit tariff regime lays out tariff rates for a preliminary period of one year only. The implication is that the UK would retain the right to change these tariff rates after the year has expired.
Tariff schedules are usually the outcome of a mixture of trade bureaucrats’ misguided concept of the national interest and lobbying by individual companies in pursuit of their own interests. So it should come as no surprise that the EU’s tariff regime is a monstrosity.
It is designed to protect supposedly “key” parts of the European economy – especially French farmers and German manufacturers – but in the process harms European consumers. It is a tribute to the overweening bureaucracy of the European Union.
The expression “common external tariff” belies the essential truth. The only common thing about the tariff is that it must be imposed by all member countries equally on imports from everywhere in the world. In 2018 there were 6,702 different tariff categories. Indeed, there were 12 tariff rates applying to different sorts of coffee alone.
Such complexity is mirrored in the UK’s proposed tariff regime although, thankfully, not to the same extent. There are 469 different tariff categories. Where protection has been continued it is principally for two groups of producers that officials evidently think are particularly vulnerable – car manufacturers and farmers.
This choice is quixotic. There are two keys issues at stake: the first is about which industries genuinely need support, in the public interest. The second is about the best form that support should take. The answer to this second question is very rarely tariffs, because they penalise consumers and thereby carry a heavy cost in the distortion of market forces and the waste of resources.
If the public interest demands that an industry should receive support then the best thing is to provide the funds directly without penalising consumers.
Once we have left the EU this option would be open to us. This important issue requires debate and consultation. But there has been none.
Of course, our proposed tariffs may never come to be applied. Remarkably, lots of MPs seem to think that it is important to stay in the customs union, thereby continuing with the current tariff regime. Some confuse the customs union with a free-trade area and accordingly assume that it inevitably boosts trade. If only they could realise that the customs union is at the heart of the EU’s protectionist racket. Leaving it is one of the major gains to be had from Brexit.
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