21 May 2020

Michael Gasiorek is Professor of Economics at the University of Sussex and Julia Magntorn Garrett is a Research Officer in Economics at the University of Sussex. Both are Fellows of the UK Trade Policy Observatory.

Let’s start at the very beginning…

Suppose a country was (more or less) starting from scratch with its trade policy, and anticipated wanting to sign future trade agreements with other countries. What might you want from that country’s tariff structure? At the end of the day it is important to remember that tariffs are discriminatory taxes (i.e. they discriminate against foreign suppliers) which reduce competition, distort markets and lower national welfare. So, aiming to get to low (zero) tariffs is a good objective. But there may also be some other considerations. Here are some guidelines:

• You probably don’t want to eliminate all the tariffs as that gives you fewer bargaining chips to use in those future FTA negotiations. That might be particularly important when you have embarked on negotiations with three large trading partners.
• If you don’t produce the good domestically, then you may as well import it as cheaply as possible (though that might be subject a bit to having bargaining chips as in the point above).
• For firms / industries that export goods and services, you want to help them be as competitive as possible, hence you want to minimise the tariffs on their imported intermediates. But if there is significant domestic production of the intermediates you might be concerned about the impact on those domestic producers. So there may be some trade-offs here.
• With current concerns about climate change, you might also want to encourage trade in environmentally friendly goods.
• Hopefully, you might also be concerned about any impacts on developing countries, so you don’t want to lower their preference margins.
• Finally you might be concerned about any impacts on key / sensitive sectors – hypothetically such as cars or agriculture.

If you look at the list above, the announced UK Global Tariff more or less ticks all the boxes and so, on the face of it, it potentially does a ‘good job’ of navigating the tricky trade-offs. Getting the instruments of trade policy right is not easy.

However, a key element in the first sentence of this blog is ‘starting from scratch’. And clearly the UK is not starting from scratch. The UK’s position is complicated by two big issues. First it currently has free trade with its biggest trading partner (the EU) and is in the middle of negotiations over a Free Trade Agreement (FTA) aimed at minimising the damage from future increased trade costs with the EU, of which tariffs are part of the story. Second, for customs/tariff purposes de facto, the UK is not a single entity – there is the non-trivial issue of Northern Ireland applying the EU’s external tariffs.

In relation to point 1, Trade with the EU:

• Having tariffs different from the EU’s Common External Tariff (CET) immediately means that rules of origin will become more of an issue in the negotiations. It is well known that negotiations over rules of origin (ROO) can be difficult, complex and lengthy. Of course, having the same tariffs does not remove the ROO issue because they may arise in other contexts (such as trade remedies). The closer the alignment between the UK’s Global Tariff and the EU’s CET the easier it would be to minimise these complications and to seek genuinely liberal approaches to rules of origin and their cumulation. The UK Government entirely ignored the question of ROOs in its summary of and response to the consultation on the Global Tariff – even though the issue was raised in submissions to the consultation.
• By lowering tariffs, especially on intermediates, the UK Global Tariff is sending a signal to the EU about the desire to increase competitiveness of UK exports. While a perfectly legitimate action by the UK, the issue of UK policy shifting to increase competitiveness in EU markets is clearly an EU concern (hence the insistence on level playing field provisions). It is therefore possible that the proposed UK Global Tariff will complicate the EU FTA negotiations, and may harden the EU’s position on other elements of the negotiations.

Re point 2, Northern Ireland:

• The issue of how the UK Global Tariff may impact on the Northern Ireland protocol and on Northern Ireland is also absent from the Government’s summary of and response to the consultation – even though (again) the issue was raised in submissions to the consultation.
• Having widespread lower tariffs means that there is a greater likelihood that many more goods will be deemed ‘at risk’ of passing through Northern Ireland into the Republic – the European Single Market – and so increases the need for border / customs controls, and will have a bigger impact on Northern Ireland.
• Depending on the sorts of arrangements in place in Northern Ireland and between Northern Ireland and Great Britain, there may also be complicated effects on third country exporters wanting to ship to NI, who may now have an incentive to ship first to Great Britain. The result will be greater pressure to have checks between Great Britain and Northern Ireland, even though in the Command Paper on ‘The UK’s Approach to the Northern Ireland Protocol’ published on the 20 May, the Government has stated this will not be necessary.

So, given the two points, the UK Global Tariff is problematic. Indeed, in the UKTPO’s submission to the government consultation, we suggested that the benefits from simplification, removal of nuisance tariffs, etc were not sufficient to warrant moving away from the CET at this point, particularly given the very tight timetable for negotiation with the EU.

However, and with that qualification in mind: Given that the decision to deviate from the CET has been taken (be this on political or economic grounds) then the UK Global Tariff is a reasonable compromise.

But, “…once you have these notes in your head you can sing a million different tunes”.

The UKGT tune that has been sung will depend on the detail, on the configuration of those notes, and needs more analysis (watch this space):

• Are the remaining tariffs in sectors which might help in FTA negotiations?
• How many of the tariffs which have been reduced might matter for poor developing countries?
• How has the list of environmental goods been compiled and is this on the basis of scientific evidence?
• What is the trade-off in the reduction on tariffs in intermediate goods between lowering exporting firms costs and impacting on domestic production, and what is the impact on effective protection rates?
• To what extent will consumers benefit from the tariff cuts?
• To what extent might the Global Tariff mitigate against the effects of a no-deal with the EU?
• Which sectors have retained their protection and why? Is this for reasons of domestic political economy (agriculture, ceramics, bicycles?), or possibly as a lever in the negotiations with the EU or with Japan (cars?)
• How will the Global Tariff impact on the operationalisation of the Northern Ireland protocol?

Another issue: commitment. The UK Global Tariff is an applied tariff, not a one bound at the WTO. Thus, the Government could raise tariffs back to the current bound levels at the drop of a hat. Research has suggested that this possibility by itself discourages trade. Second, in most countries the purpose of using tariff bands is to constrain the discretion that governments have to set made-to-measure tariffs in order to make lobbying for protection harder work. Bands of 2% barely have this effect and there does not appear to be a commitment only ever to work with these bands.

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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