British business need have little to fear from EU tariff barriers
- A new Civitas study demonstrates how UK exporters could be compensated if Britain leaves the EU without having agreed a free trade deal with its remaining members
- An £8.8 billion package of support, built around R&D credits, support for disadvantaged regions and reducing electricity costs would be WTO-compliant and offset tariff costs
- Such a scheme would form the bedrock of a post-Brexit industrial strategy and be funded entirely from tariffs levied on EU exports into Britain, estimated to be almost £13 billion
British industries could be fully protected from the impact of potential tariff costs if the UK leaves the Single Market without striking a free trade agreement with the EU, a new Civitas study shows.
A package of measures could be provided – within World Trade Organization rules – that would provide support at least equal in value to the tariffs that would be levied on exporters by the EU.
This could be achieved at no net cost to the taxpayer given that, at the same time, the UK would begin collecting even larger sums in tariffs from EU exporters.
The analysis should give British negotiators confidence that they can walk away if the right EU trade deal is not forthcoming from the 27 remaining members.
‘Mitigating the impact of tariffs on UK-EU trade’, published today (Monday, January 9th) considers the options available to the government in the event that Britain left the EU without having secured some kind of free trade agreement.
A previous Civitas study estimated that, were present trade volumes to be conducted under EU tariff schedules, Britain would collect £12.9 billion in tariffs on EU imports but at the same time British firms would incur costs of £5.2 billion on their exports to the EU.
Any attempt to alleviate that £5.2 billion cost would have to be compliant with WTO rules, which would not permit subsidies designed as outright compensation for the loss of tariff-free access to the EU.
But, as the study shows, it is feasible to design horizontal, economy wide policies of support, supplemented by measures that comply with the terms of certain WTO agreements, that would principally benefit those industries that stand to incur the costs of EU tariffs.
Such a programme, forming the bedrock of a new post-Brexit industrial strategy, could include:
- A £2.9 billion R&D support package in the form of an expenditure credit for all businesses, but with an enhanced allowance for producers of ‘agricultural products’ which would be permitted under special WTO rules for agriculture. Of the total cost, 73 per cent would go to industries affected by tariffs.
- A £3.8 billion regional policy for places where income per capita is under 85 per cent of the national average and/or unemployment is more than 110 per cent of the national average. Of that, 68.5 per cent of the funds would reach industries impacted by tariffs.
- Abolishing the Carbon Price Support, which raises the price of electricity for all businesses and consumers, at a cost of £1.2 billion. Only 30.6 per cent of this would go to affected industries but, importantly, in addition to assisting businesses not in disadvantaged areas or who do not invest in R&D, it would provide a direct ‘Brexit bonus’ for domestic consumers.
- An £869 million Transitional Assistance Programme for making small, discretionary grants to any UK business affected by Brexit. Payments would not exceed a threshold of 1 per cent of the value of exports and the scheme would be time-limited. The programme would not need to be restricted to exporters; the study assumes that only 80 per cent of the cost would go to businesses hit by tariffs.
Taken together, these measures would benefit industries affected by tariffs to the value of £6.3 billion a year, more than compensating for the newly-imposed costs to those industries of £5.2 billion.
The total cost of the package to the Treasury, including ‘leakage’ to non-affected industries and households, would be £8.8 billion – which would be easily covered by the £12.9 billion collected in tariffs on EU imports into the UK.
The report’s author, William Norton, writes: ‘Hitherto, the political debate about the UK’s departure from the EU has focussed upon the risks of a “hard” Brexit and the need to soften this by avoiding costs for business such as tariffs being levied upon exports to the EU-27.
‘But these tariff costs can be managed. In an ideal world, British exporters would not have to suffer them, but it is possible to mitigate their impact through other measures which are justifiable in their own right.
‘It makes sense to remove a self-inflicted wound like the carbon price floor, which is damaging British competitiveness and low-income households. It makes sense to provide greater tax incentives for research and development. A case can be made for regional aid given the imbalances in economic performance and employment across the UK as a whole.
‘Hence, the real question is not “how soft a Brexit can we achieve?” but rather “how hard a negotiation do we wish to drive with the EU?”
‘The balance of negotiating strengths is far more favourable to the UK. If the EU-27 wish to impose a self-inflicted wound by levying tariffs on British exports, Britain has little to fear.’
Notes
‘Mitigating the impact of tariffs on UK-EU trade’ is published by the cross-party think tank Civitas on Monday, January 9th. It can be read in full here.
William Norton is a tax lawyer with 20 years of experience in the City of London and as a policy adviser in Westminster. He was a core member of the James Review on Taxpayer Value and the Conservative Party Policy Unit (2004-5). He worked for the victorious designated lead campaigns in the North East referendum (2004), the AV referendum (2011) and the EU referendum (2016). Among numerous articles, papers and books, William is the author of Monument and Bank: Capitalism and the Anglo-Saxon Mind (SAU, 2011).
Mitigating the impact of tariffs on UK-EU trade