Will post-Brexit tariffs really cost consumers £930 a year?

Will post-Brexit tariffs really cost consumers £930 a year?

The prospect that the UK will be leaving the EU in March 2019 without a formal trade deal is focusing attention on what this might mean for tariffs. There are serious questions to be answered here. Nonetheless, some of the media coverage has gone completely over the top.

Two recent reports have attempted to put numbers on the cost to UK consumers of imposing tariffs on imports from the EU after Brexit. One was published by the Resolution Foundation and another by the National Institute of Economic and Social Research (NIESR). The NIESR report in particular was trumpeted by the Guardian newspaper under the headline ‘No deal Brexit could add £930 a year to UK shopping bills, say experts’.

As it happens, both reports were based on the same modelling work by specialist trade economists at the University of Sussex; but there are some concerns over the methodology. For example, these studies appear to underplay the scope for consumers to replace imports from the EU with goods produced at home. However, there are other areas where the researchers have erred on the side of caution, so for now I’ll take the numbers at face value.

The more important point is that everything depends on the assumption that the UK would impose the same tariffs on imports from the EU as it currently does on trade with the rest of the world. This would satisfy the WTO’s ‘Most Favoured Nation’ (MFN) rules, under which the UK could not discriminate against other trading partners by treating imports from the EU differently.

But this isn’t quite as clear cut as many suppose. There are exceptions to this rule, notably where there is a formal trade agreement in place. This is the basis on which the UK and EU are currently allowed to have tariff-free trade without offering the same benefits to all other WTO members. Some well-respected lawyers have argued that this could continue even after Brexit, by relying on the principles of continuity in international law. Alternatively, it might be possible (under Article XXIV of the GATT) to keep trade tariff-free during a transition period while a formal deal is being negotiated.

Of course, these solutions may be much less likely in a ‘hard Brexit’ scenario where relations have broken down. But even then, it is widely accepted that the UK could lower tariffs on trade with the rest of the world, rather than introducing them on trade with the EU. This would also keep the level playing field required under the MFN rules.

Indeed, the Resolution Foundation report acknowledged that the average UK household could be £130 a year better off if tariffs were reduced to zero across the board, compared to a loss of £260 if the UK reverted to MFN tariffs with the EU.

These figures will vary according to the expenditure patterns of each household, though not necessarily in the way that the headlines imply. It is probably true that poorer people would see the biggest impacts (whether positive or negative) when these effects are measured in terms of percentages of income or expenditure. This is partly because poorer people typically spend more of their income on basic foodstuffs, many of which are imported.

However, the differences here are likely to be much smaller than many seem to think (or the Guardian would have us believe). Better-off households often spend a larger proportion of their income on goods, such as more expensive foods and clothing, where the MFN tariffs are relatively high. As a result, the Resolution Foundation study suggested that the increase in goods prices as a result of reverting to MFN tariffs might be 2.7% for the bottom 10% of the income distribution, but only slightly lower (at 2.5%), for the richest 10%.

The Guardian’s eye-catching figure of £930 is therefore the hypothetical increase in the annual bill for those at the top end of the income scale. The corresponding figure for a poorer household would be much lower – perhaps less than £200. But this wasn’t the impression given by the article, which led on the argument that ‘poorer families and unemployed will be especially badly hit’.

Of course, £200 would still be a major blow, especially for those least able to afford it. However, this still begs the question of why the UK government would choose to raise tariffs with the EU, rather than cut those with the rest of the world. Two arguments are usually made here.

The first is that dropping tariff barriers would expose UK producers to more competition. But there are centuries of economic theory – and ample hard evidence – that tariff barriers are a very inefficient way to protect domestic industries and jobs. Free trade is positive for the economy as a whole, and there are many better ways to help those who might lose out than resorting to naked protectionism.

The second argument is that the UK could be giving up an important bargaining chip in negotiating trade deals with other countries. This is debatable, in part because there would still be other issues to discuss (including non-tariff barriers). But unilateral moves by the UK may well prompt other countries to follow. If UK consumers can be shown to benefit from the reduction in import tariffs, political pressure on other governments to offer the same benefits to their own people is surely likely to increase.

However, let’s suppose that the government does go down the route of imposing tariffs on imports from the EU. It does make sense to prepare legislation for just that contingency. But there would still be one very important mitigating factor: the new tariffs would raise a large amount of revenue that the government could use to compensate the losers.

The latest data show that the UK imported goods worth around £260 billion from the rest of the EU in the twelve months up until August. An average tariff of 5% on these imports would therefore raise around £13 billion a year. This sum could be used to cut taxes and uprate benefits to offset the higher prices faced by lower income households. And even if there are other claims on this money, the UK would be saving roughly the same again on its contributions to the EU Budget.

As a result, it should not be beyond the ability of policy-makers to come up with a fiscally-neutral package that protects the most vulnerable, or even leaves them better off. Now, that would be a great headline for the Guardian