17 October 2017

Lower-income households would be disproportionately affected should the UK revert to WTO tariffs

Exiting the EU without a trade deal and reverting to WTO ‘most-favoured nation’ (MFN) tariffs with the EU would lead to significant price rises across a range of goods, with low-income households facing the biggest cost pressures. This is according to a new joint-report published by the Resolution Foundation and the UK Trade Policy Observatory at the University of Sussex.

While there is much debate, even within Cabinet, about the wider challenges and opportunities of a ‘no deal’ scenario, the one certainty is that it will lead to a major change in the UK’s trade tariffs.

Changing Lanes examines what impact this concrete change would have on the prices of household goods, and what different ‘no deal’ post-Brexit trade policies could mean for consumers.

The report comes ahead of a crucial EU Commission meeting later this week, at which the Prime Minister is keen to kick-start discussions of the UK’s future trading relationship with Europe.

The government says it wants to negotiate a comprehensive free trade agreement with the EU that will keep tariffs at zero. However, it has also stated that it is preparing for a ‘no-deal’ scenario, in which the UK exits the EU without a trade deal and imposes the same tariffs on the EU as it does for other WTO countries. The report models this and an alternative ‘no deal’ scenario, advocated by some economists, in which the UK unilaterally reduces all tariffs to zero after Brexit.

Looking at the impact of imposing most-favoured nation (MFN) tariffs on the EU – the government’s stated ‘no deal’ scenario – the report finds that tariffs on imports of dairy products from the EU will rise by 45 per cent, on meat products by 37 per cent, and on clothing, footwear, beverages and tobacco by 10 per cent.

These tariffs would feed through into significant price increases, with the average price of dairy goods rising by 8.1 per cent, meat products by 5.8 per cent and transport vehicles by 5.5 per cent.

These price rises will have a significant effect on living standards. The report finds that the cost of the average annual household’s current consumption would rise by £260, and that over three million families would see price rises of over £500 a year.

The report also finds that poorer households would be most affected by a ‘no-deal’ scenario in which tariffs and prices rose.

Looking at the impact of MFN tariffs on different households, the analysis finds that the proportionate effect on the poorest fifth of households will be one third greater than on the richest fifth of households. This is because lower-income households tend to spend a greater share of their income on food and essential items of clothing, products which would be most affected by new trade tariffs.

The impact of new tariff-induced prices rises would also be a third larger in Northern Ireland than in London, one of the least affected parts of the UK.

The report finds that unilaterally reducing tariffs to zero would reduce expenditure by an average of £130 a year. The impact is smaller because eliminating tariffs means that they remain unchanged (at zero per cent) between the UK and the EU and a large share of UK imports comes from the EU.

However, it adds that unilateral tariff reduction is unlikely to have happen as it would have major consequences beyond price changes, such as reducing the UK’s ability to strike future trade deals and exposing some industries and parts of the UK to relatively sharp competitive pressures, without other countries being obliged to open up their own markets to competition from the UK.

The report concludes that from a living standards perspective a ‘no deal’ scenario in which the UK imposed WTO tariffs on the EU is undesirable, particularly as poorer households would bear the brunt of price rises.

Stephen Clarke, Economic Analyst at the Resolution Foundation, said:

“Britain’s hasn’t had to negotiate its own trade agreements since it joined the EEC over 40 years. Ministers are keen to sign lots of new free trade agreements after 19 March 2019, but a comprehensive agreement with the EU matters most.

“However those trade talks have yet to begin, and the government has said that while it wants a comprehensive trade agreement it is also preparing for a ‘no deal’ scenario when we leave the EU. Such an outcome – which could see the UK imposing tariffs on EU imports – would increase the annual shopping bills of millions of households by £500, with poorer families taking the biggest hit.

“While trade may not have been the biggest issue in the referendum it is one that will affect the day-to-day living standards of every family in Britain. The government must rightly continue to prioritise a comprehensive new trade agreement with the EU in order to avoid households having to fork out for a ‘no deal’ outcome through higher prices and squeezed households budgets.”

Ilona Serwicka, Research Fellow at the UK Trade Policy Observatory at the University of Sussex, said:

“The UK Government’s objective is to ensure that the new trade relationship with the EU delivers trade that is as frictionless as possible. But a ‘no deal’ scenario that would see the UK and the EU trade on WTO terms also remains a possibility. Our research shows that this scenario will increase the cost of essential goods, such as food and clothes, which will impact most adversely on those households who already struggle to get food on the table and make ends meet.

“To avoid the real economic danger of a ‘cliff-edge’ scenario – that will see the cost of living for households up and down the country go up – the UK Government must realise that walking away from the negotiating table is the worst possible outcome.”

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