British business has little to fear from EU tariffs

British business has little to fear from EU tariffs

The debate over Britain’s withdrawal from the EU has focused upon the risks of a “hard” Brexit and the need to soften it by avoiding costs such as tariffs levied upon exports.

That is a Remain outlook, as I demonstrate in a new paper for Civitas, Mitigating the impact of tariffs on UK-EU trade. I set out to solve a puzzle: if the UK did not have tariff-free access to the Single Market, what could Government do to compensate exporters?

As a member of the World Trade Organisation (WTO), the UK is prevented from paying subsidies as direct compensation for tariff costs. But the same WTO rules permit countries to implement horizontal, economy-wide business support measures. Provided programmes are not tied (in principle or in practice) to any specific industry, no other member state can retaliate against British goods. The rules are slightly more relaxed for “agricultural products”, which includes most foods and beverages. In this way, the impact of EU tariffs could be “mitigated”, rather than “compensated”.

There would be “leakage”, with benefits going to non-exporters unaffected by the tariffs. That suggests “mitigation” programmes should be pro-business measures justifiable in their own right, satisfying other political/economic objectives.

A previous Civitas study estimated that if current UK/EU trade had been carried out subject to EU tariffs, our exports would have suffered £5.2 billion in costs, but HM Treasury would have collected £12.9 billion from tariffs on imports from the EU. Government would have a more than sufficient war chest to fund mitigation, and could afford a very high level of “leakage”.

In my paper I advance the following fully-costed package:

  • Increased R&D tax credits, with further enhanced rates for “agricultural products” and “experimental development” (£2.9 billion). All businesses would be eligible, but 73% of the benefits would go to affected industries.
  • An expanded regional aid programme for areas where income per capita does not exceed 85% of the national average and/or unemployment is more than 110% of the national average (£3.8 billion). By studying the distribution of UK businesses, 69% of the funds would reach affected industries. (Current EU rules limit UK regional aid to areas covering only 27% of the population. Local authorities passing one of the two tests above comprise 65% of the population.)
  • Abolishing the Carbon Price Support, a self-inflicted wound which raises the price of electricity for everyone (£1.2 billion). From official statistics, 31% of the benefit would go to affected industries. (All businesses use electricity, so this assists firms which do not spend on R&D or are not located in a disadvantaged area. Cheaper electricity delivers a “Brexit bonus” for domestic consumers.)
  • A Transitional Assistance Programme for discretionary grants to any business affected by Brexit, capped at 1% of export sales, and time-limited (£0.9 billion). I have assumed that only 80% would go to businesses hit by tariffs.

This package (£8.8 billion) delivers assistance worth £6.3 billion to industries affected by EU tariffs, more than mitigating their impact (£5.2 billion) and leaving a considerable surplus in the Government’s Brexit war chest. In the paper I analyse 96 sectors (R&D spending; geographical concentration; electricity usage) to demonstrate how they benefit.

Since WTO rules only permit horizontal economy-wide measures, it makes more sense to consider the “problem” of EU tariffs as part of a wider, post-Brexit industrial strategy to make British business fit to compete in a global market. We should drop our fixation with the EU and get on with the job of devising policies which are best for Britain.

This analysis gives British negotiators confidence to walk away if the right EU trade deal is not forthcoming. Ideally, our exporters would not have to bear such costs. But if, for whatever reason, the EU imposes them, my study demonstrates they are easily manageable, through measures that we would probably want to adopt anyway.

The real question is not “how soft a Brexit can we achieve?” but ”how hard a negotiation do we wish to drive with the EU?” If the EU27 wish to injure themselves by levying tariffs on British exports, Britain has little to fear.