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Much was made during the U.K.’s Brexit referendum campaign from those eager for separation from the E.U. about the ease of reaching free trade deals with the rest of the world.
Misguided as these promises have proved, those involved are not alone in seeing the theoretical benefits of forging free trade agreements, while also ignoring the practicalities of trade and countries’ relative industrial strengths and weaknesses.
The U.K., for example, along with the rest of Europe and the U.S., has a very powerful agricultural lobby that demands and receives considerable protections.
There is some argument in support of this. A country is dangerously exposed if it is totally reliant on imports of that most basic of needs – foodstuffs. We can maybe live without avocados, but could we live without our cereals and vegetables?
With the looming possibility of an exit from the E.U. on Halloween (Oct. 31) – either with some kind of framework deal or, more likely, without – the U.K. is finally, after three years of near-paralysis, making plans for what a post-Brexit tariff landscape it may go for.
It is an interesting situation, as countries are rarely faced with the opportunity for a wholesale change in tariffs; usually, such changes happen gradually and as part of bipartisan negotiations over many years.
Carolyn Fairbairn, director-general of the U.K.’s CBI business lobby group, was quoted as saying this is “the biggest change in terms of trade this country has faced since the mid-19th century, with no consultation with business, no time to prepare.”
But the U.K. may have to unilaterally decide what tariffs to impose (or not), as it will probably be bereft of its free trade arrangement with the E.U. and, at the same time, with the E.U.’s trade agreements with third countries, like Canada, in a matter of weeks.
When the U.K. exits the E.U., if it has no agreement in place it will automatically leave all of the E.U.’s trade agreements forged with countries around the world — marking a revision to so-called WTO rules.
Canada is a case in point.
Prime Minister Boris Johnson and his supporters breezily asserted during their campaign that they would rapidly roll over the E.U.’s free trade deal with Canada to apply to a newly separate U.K.
Well, when push comes to shove and faced with the choice, Canada has politely declined, according to the Financial Times.
The reason is because, as it stands, the U.K. is planning to remove all tariffs — or at least on some 87% of imports — making Canada’s terms with the U.K. in such a scenario better than the terms it enjoys with the E.U.
Tariffs are being periodically reviewed; for example, a proposed 22% tariff on heavy HGV trucks was recently revised to 10%, the same rate as cars, following fierce lobbying from the road transport lobby. With that caveat in mind, the U.K. would only impose tariffs on some 13% of goods, said to include meat and dairy products, vehicles, ceramics, and fertilizers. The sectors chosen are said to support farmers and certain manufacturers.
Interestingly, automotive parts would not face tariffs in a bid to support the continuation of just-in-time automotive supply chains between the U.K. and mainland Europe that have become so highly integrated over the last 20 years. As such, some fear the wholesale collapse of the U.K. automotive sector in the event of a hard Brexit.
There remain a few weeks for interested parties to lobby for special status or protection from such a zero-tariff policy — you can bet there will be plenty that do just that.
The government is set to increase tariffs on bioethanol after the domestic industry complained that low tariffs on imports could threaten its future. Likewise, ministers are also expected to increase the tariffs charged on imports of textiles; although the U.K.’s textiles industry is relatively small, it may be part of a wider policy to limit rises in costs for consumers as a result of Brexit.
Boris Johnson’s government is desperate for Brexit to appear a success to the general populace. As such, one of its top priorities is that voters should not experience a bruising rise in living costs, such as may result from tariffs being imposed on imports (Britain is a net importer of goods by a wide margin).
How long this status would be maintained remains to be seen — maybe the other side of an election, the cynic would suggest, but the proposal seems to be the tariff structure should last at least 12 months.
For exporters selling to the U.K. who currently face E.U. tariffs, life could be about to get easier selling into a tariff-free, post-Brexit U.K. economy.
As a wider experiment on the impact of tariffs on an economy, it will be interesting to see whether a zero- and low-tariff mix environment has the galvanizing impact some free-trade economists have promoted.