What will No-Deal tariffs mean, and are they enough to break the EU's will?

It may be time for the UK to consider the possibility the German car industry might not be riding to the rescue.

Since the UK Brexit Referendum, a lot of ink has been spent on trying to measure the resolve of the European Union over issues like the Irish Backstop.

Consistently, those optimistic about the chance of an EU retreat have argued the UK’s significant trade deficit in goods with the EU means they’ll have to back down. The EU, they argue, simply sells far more things to the UK than the other way around and won’t risk tariffs fouling that up.

The current front runner for the UK Prime Ministership, Mr Boris Johnson, has indicated he believes that even if the EU doesn’t remove the backstop, he can get them to agree to a so-called “Article XXIV FTA” which would eliminate all tariffs both ways and provide tariff-free time for a more comprehensive agreement to be negotiated. This would be legal under WTO rules, but the EU have to-date denied being open to it.

Still, Mr Johnson believes the threat of tariffs on their exporters will make them move. But what are tariffs, who will be hit by them in a No-Deal and to what extent could their potential imposition scare the EU into compliance? Your humble (everyone who has ever met me just did a spit-take) author explains, using… data!


So what are tariffs, nerd?

First, you’re on a website called “ExplainTrade.com” so you’re one of us geeks now. Embrace it.

Second, tariffs are taxes governments charge their businesses for importing certain products from abroad. They collect a bit of revenue for government, but are mostly there to give local businesses an advantage over foreign imports.

How?

By making it easier for them to compete.

If an importer has to pay 10% more to bring a car in from the US than from Kent, that importer will have to charge consumers more for the US car. That creates incentives to buy locally, theoretically creating more local jobs.

Tariffs sound great! We should all have some. Mine will be called ‘Riffy.’

Eh. Economists are pretty down on tariffs actually. They are a tax on consumers (which is bad), make it more expensive for businesses to get the inputs they need, discourage competition, and encourage firms to spend more time lobbying governments for extra tariffs on their competitors than they do trying to make or market a better product.

That’s why generally, most developed countries have very low average tariffs (0-5%) and reserve high tariffs for very carefully selected (often politically influential or strategically important) sectors.

Right, so what’s the Brexit link here?

While a Member of the European Union, the United Kingdom was also part of something called the ‘Customs Union’ which is a fancy way of saying the UK and EU agreed not to have any tariffs on one another’s exports.

After Brexit, the rules of the World Trade Organization say that unless the UK and EU have a Free Trade Agreement or continue their current arrangements for a while (through a transition period like the one in the Withdrawal Agreement), they have to apply the same tariffs on one another as they do on everyone else.

So, why don’t they just do a Free Trade Agreement then?

They almost certainly will eventually. It’s pretty silly not to at least work toward one of those with your closest neighbors. However, a Free Trade Agreement can take years to negotiate and Brexit might be happening as early as November.

But I heard Mr Johnson say we could do a short term “GATT XXIV” deal in the meantime?

That’s right, he has said that.

His argument is that if the EU and UK aren’t able to agree a Withdrawal Agreement that can pass through Parliament, the EU might be willing to accept something much more limited: a Free Trade Agreement which does nothing but eliminate all the tariffs.

This would buy tariff-free time for the negotiation that was supposed to have taken place during the transition period in the Withdrawal Agreement.

That sounds good, are the EU going to go for that?

They have said repeatedly and at the highest level they are not.

Could they be bluffing? They sell us a lot more than we sell them, they must be afraid of tariffs!

I’m glad you asked, because things are actually a lot more complicated that that. Bring forth… the data!


How scared should the EU be of UK tariffs?

Total EU goods exports to the UK are around $350 billion, and if tariffs were to lock all of that out of the UK it would be a terrible blow for the economies of the EU27.

However, fortunately for the EU not all of their exports occur in sectors where the UK currently has tariffs.

Even more fortunately for them, the UK has indicated it will liberalize (lower) thousands of its tariffs to 0% on everyone in the event of a No-Deal.

So what is the EU’s actual level of exposure?

Uses average 2016-18 exports from EU27 to UK as against announced No-Deal interim tariffs.

Uses average 2016-18 exports from EU27 to UK as against announced No-Deal interim tariffs.

What am I looking at here?

The full pie represents the average total value of all the things the EU has annually exported to the UK.

The green part represents how much of that value would, if it were exported after No-Deal, still face no tariffs at all.

The yellow part represents how much of that value would face a tariff of 10% or less.

the red part represents how much of that value would face a big tariff, over 10%.

So, what does that mean?

It means that (only) when it comes to tariffs, 82% of the EU’s goods exporters have nothing to worry about from Brexit, 13% have some room for concern and 5% should be pretty nervous.

Will that be enough to make them change their minds on a quick and dirty FTA?

I don’t know. This blog isn’t about my prediction of the future, it’s about informing yours.

What about the UK, how are its exports looking in a No-Deal?

Unlike the UK, the EU hasn’t indicated it plans to significantly eliminate tariffs as a result of Brexit. So unless something changes or a deal is done, the UK will face the same tariffs 3rd countries like the US or China currently experience when exporting to the EU.

-chants- Chart! Chart! Chart!

Average 2016-2018 exports from UK to EU27.

Average 2016-2018 exports from UK to EU27.

Walk me through this one?

Again, the full pie represents the average annual value of all the goods the UK has recently exported to the EU27.

The green part indicates that following No-Deal Brexit, 49% of those exports would still be tariff free.

The yellow part indicates 45% of those exports would face a tariff of 10% or less.

The red part indicates 6% of those exports would face a tariff in excess of 10%.

That’s a lot of yellow. What could that mean?

The actual impact of these tariffs will vary considerably from sector to sector and even firm to firm. If your firm relies on exporting to the EU and has a competitiveness margin of 5%, then a 6% tariff could really hurt it. If it’s got a comfortable margin of 10% or people love it so much they’ll buy it for whatever price, than a 4% tariff is annoying but hardly fatal.

I’m in the UK and worried about my sector, are we going to face tariffs?

Sectoral Exposure.PNG

Congratulations, your most incomprehensible chart yet.

I know. Shut up.

What this chart does is break the pie chart from above into the ten categories customs agencies use to classify goods, providing the average annual export value to the EU of each.

The colors in each stacked graph represent the part of that sector’s exports which will now face no tariffs (green), mild tariffs (yellow) and heavy tariffs (red).

This shows both how much of a sector is likely to experience some tariff turbulence, and the comparative importance of that sector to the UK’s overall export relationship with the EU.

What about administrative costs, services and non-tariff barriers?

Even if your product faces a tariff of 0%, the administrative costs of Brexit might be considerable as you become an ‘exporter’ from the EU’s point of view for the first time.

The UK is increasingly a leading services exporter, and so services are incredibly important even though they are not subject to tariffs.

Non-tariff barriers, such as standards and regulations are also very important and could be disruptive in a No-Deal Brexit (or indeed, a Brexit of any kind).

However…

This blog looks exclusively at tariffs on goods because the Prime Ministerial front-runners proposed plan for an Article XXIV FTA eliminating tariffs wouldn’t do anything for services, nor significantly decrease the administrative costs or non-tariff barriers faced by exporters.

If the EU is thinking about whether to accept such a proposal or not, services, administration and NTB’s won’t be motivating factors for them to do so because it wouldn’t address them.

Conclusion

We can’t know if the EU may or may not ultimately choose to accept Mr Johnson’s proposed bridging FTA. They have said they won’t, but nothing in life is certain.

However, what the data shows is that less than 20% of the European Union’s exports (by value) are facing the prospect of tariffs in the event of a No-Deal, compared to 51% of UK exporters going the other way.

This is an important consideration in a debate where the economic incentives are often reduced to a single and misleading figure, the bilateral trade deficit.


I hope you enjoyed this blog, which is far wonkier than even I am used to. If you have any questions about the above, please don’t hesitate to contact me or reach to me on twitter (@DmitryOpines).

This blog is produced entirely for free and without a patreon, gofundme or even a soundcloud where you can fund my sick beats. Instead, I rely on training contracts with private sector, government and academic institutions for whom I provide fun, accessible workshops on negotiations and trade policy. I’d be obliged if you kept me in mind.


Boring Nerd Stuff:

I am very much Not An Economist (c) so while I have done my very best with the above, I welcome any and all corrections or suggestions.

The data for the charts above comes from:

  • The International Trade Centre’s Trade Map

  • The UK Government’s No-Deal Tariff Announcement

  • The CIRCABC Library

  • The WCO

To err on the side of caution, I classed all tariffs more complex than a simple ad-valorum value as being above 10%. I suspect there are cases where this led to over-classification but I don’t think it massively altered the final results.

The ITC only has EU imports from the UK at the HS6 level, so the data for that chart is less precise and nuanced than that of the UK’s imports from the EU. I don’t think this made a huge difference to the overall chart, but it’s important to know.

The data and charts were created in Microsoft Excel, and I’m happy to share them if no one laughs at my terribly awkward formula coding. Just reach out.