Cutting tariffs on food products: why bother?

About the Author: Nick Phipps

Published On: 6 May 2022Categories: UK - Non EU, UK- EUTags: cost, food, tariffs

Image of Alan Winters 6 May 2022

L. Alan Winters is Professor of Economics at University of Sussex Business School and Founding Director of the UK Trade Policy Observatory and Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.

The concept is simple: cut tariffs levied on food imports so the products become cheaper in the UK, right? In this blog, we look at the trade data and discuss the reasons why changing tariffs would hardly affect prices.[1]

Only a small proportion of imports pay tariffs.

In 2021, the UK imported £38.6 billion of food products[2] (equivalent to 7.6% of the UK’s total imports that year and about 46% of UK food consumption). Approximately 66% come from the EU and are already exempt from tariffs under the EU-UK Trade and Cooperation Agreement (TCA).[3]

The other 34% of food imports are from non-EU countries and of these about 19% face no tariffs because the exporter has a Free Trade Agreement (FTA) with the UK. These FTAs offer tariff-free access to many UK imports, but with a few exceptions which vary by FTA and are sometimes subject to conditions that make it difficult to expand sales (e.g. health and safety regulations).

Of the remaining 15%, approximately 2.9% enter the UK tariff-free because the Most Favoured Nation (MFN) tariff rate (the rate charged on countries without FTAs or development-related preferences) is equal to zero, and another approximately 1.8% are entitled to do so as well through the UK’s Generalised Scheme of Preferences. Thus, we estimate that only about 10% of food imports faced tariffs in 2021. These rates average 17%, and range between 2% for some forms of dried fruits and vegetables and 30% for more processed foodstuffs like fruit juices.

Table 1: Source of UK Food Imports

	Value of Food Imports (2021, £m)	Share of Total Food Imports (2021, %)
Total	38,557	100
EU	25,294	65.6
Non-EU FTA	7,401	19.2
GSP tariff-free	700	1.8
MFN (i.e. Non-FTA)	5,162	13.4
(of which, facing non-zero tariff )	(3,697 )	(9.6 )

Not all of any tariff cut will be passed through to the UK – suppliers may increase their margins a bit.
Imports are the smaller part of domestic consumption.
The product itself is only a part of the consumer price. There are also processing costs, logistics, wholesale and retail margins. Hence, a 5% decrease in the cost of the product will generally translate into only a 2-3% decrease in the price to consumers.

On the other hand, partially offsetting these effects, but probably not by much,

If import prices are lowered by tariff cuts, domestic producers may feel the need to lower their prices to maintain market shares.
If non-EU goods become relatively cheaper, people will substitute them for EU and domestic goods, thus lowering the cost of consumption as a whole.

In the Appendix, we present up-to-date information about the pattern of UK imports and tariff rates (point 1 above) and more details of the numbers. However, we conducted a much more detailed study of this phenomenon in 2017, comparing EU membership with a zero-tariff Brexit which is a good approximation of the current situation on tariffs.[4] That study allowed for the points above except for the fourth and suggested that, if the tariffs on them were abolished, the average cost of meat for consumers might have fallen by 3.4%, oil and fats by 3.2% and fish by 2.7%. Other food products would have seen significantly smaller decreases. Cutting all tariffs to zero (including on manufactures) would have reduced the cost of living by 0.5%. Of this, we estimate that roughly 0.15% would have been due to food prices.

Other considerations

Abolishing tariffs also raises a number of other considerations. They do not all point in the same direction, but all serve to make the tariff question more complex and deserving of careful thought.

Tariffs increase the cost of goods to consumers and create economic inefficiency. However, they also redistribute income. In particular, if the UK abolished all tariffs on all food stuffs, this would hit UK farm incomes hard and also the incomes of poor countries which currently export to the UK tariff-free but in markets where richer countries face tariffs — for example, bananas and cane sugar.[5]

The Treasury is said to object to the loss of revenue if food tariffs were abolished. Government revenue is a legitimate concern but the amount lost from this change would be very small. The Treasury says ‘the low hundreds of millions of pounds’ and we estimate no more than £500 million. A government concerned about the effect of food prices on poor UK consumers might even collect the revenue and use it towards an increase in benefits for the very poor. Distributing £500 million could give a one-off bonus of £85 to each Universal Benefit recipient.

The Department of International Trade is said to object to reducing tariffs on imports ‘for free’ when they might use such reductions to leverage the opening of other markets in FTA negotiations. But a small tariff-take implies small leverage and if the reduction were temporary, the leverage would not be entirely lost. On the other hand, a government that shows a propensity to suspend tariffs when politically convenient will clearly be able to extract a smaller ‘price’ for permanent reductions negotiated in an FTA than would a less uncertain one.

Hikes in food (or fuel) prices indicate shortages, in which case people need to cut back to the extent that they can. Cutting prices reduces the incentives to do so. If the government feels people cannot afford to live appropriately at the new prices, they should supplement their incomes, (e.g. via benefits) not ‘subsidise’ the consumption of shortage goods. However, the government does need to be realistic – and honest. Increases in import prices reduce real incomes in the UK. On top of the general effects of Covid, the war in Ukraine and, most significantly, the disruption and increases in costs caused by Brexit, UK real income is falling and set to fall further.[6] The burden has to fall somewhere in the population, so not everyone can be maintained in the way to which they were accustomed. The choice of where is largely a political one.

Appendix: The UK’s Food Imports

The UK’s main non-EU non-FTA partners for food products are the USA (2.2% of the UK’s total food imports in 2021), Brazil (2.1%), China (2.0%) and Thailand (1.6%). The main imports of food from non-EU non-FTA countries are preparations of meat or fish (HS 16, 13.6% of the total non-EU non-FTA imports of foodstuffs), fruit and nuts (HS 08, 10.4%), and oil seeds (HS 12, 9%).

Note that many tariff rates for food products under the UK’s Global Tariff (UKGT) are specific (i.e., they levy a fixed amount per unit of quantity independent of price), so it is difficult to estimate their percentage effects on prices. In our calculations below, we consider the ‘ad-valorem equivalent’ (AVE) tariff rates expressing the fixed amounts as a percentage of an average price. As import prices rise relative to the period over which these averages were calculated, these percentages are overstated somewhat. The table below shows that of the £5.2 billion (i.e., 13% of the UK’s food imports) from non-EU countries non-FTA, 1/5^th face no tariffs, and about 3/5ths face tariffs that are higher than 5%.

Table 2: AVE Tariff Bands for UK Imports of Food Products

Tariff Band	Imports from non-EU non-FTA (2021, £ million)	Share of Total UK Food Imports (%)	Share of total non-EU non-FTA Food Imports (%)
0%	1,119	2.9	21.7
0%-2.5%	503	1.3	9.7
2.5%-5%	122	0.3	2.4
5%-10%	942	2.4	18.3
10%-20%	932	2.4	18.1
>20%	1,198	3.1	23.2
Unallocated	345	0.9	6.7

Table 3: The UK’s Imports of Food Products, 2021

		(1)	(2)		(3)	(4)	(5)
HS2		Tariff average			Imports from non-EU non-FTA (£ million)	Share of product in imports of food from non-EU non-FTA (%)	Share of non-EU non-FTA in total imports of product (%)
HS2		Simple (%)		Weighted (%)	Imports from non-EU non-FTA (£ million)	Share of product in imports of food from non-EU non-FTA (%)	Share of non-EU non-FTA in total imports of product (%)
01	Live animals	1.4	0.88		24.4	0.5	5.4
02	Meat and edible meat offal	46.69	43.41		447.6	8.7	12.0
03	Fish and crustaceans, molluscs […]	10.19	8.96		380.0	7.4	17.7
04	Dairy produce; birds’ eggs; natural honey; edible products of animal origin, n.e.s.	44.47	13.38		103.6	2.0	3.8
05	Products of animal origin, n.e.s.	0	0		99.2	1.9	47.3
07	Edible vegetables and certain root and tubers	9.32	9.72		256.5	5.0	8.2
08	Edible fruit and nuts; peel of citrus fruit or melons	4.95	3.88		535.5	10.4	11.5
09	Coffee, tea, maté and spices	1.96	0.6		166.8	3.2	13.9
10	Cereals	15.01	6.8		346.8	6.7	23.2
11	Products of the milling industry; malt; starches; inulin; […]	19.79	19.38		41.3	0.8	10.6
12	Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; […]	1.97	0.25		464.7	9.0	38.0
13	Lac; gums, resins and other vegetable saps and extracts	0	0		58.1	1.1	28.8
15	Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes	7.64	4.39		361.7	7.0	20.2
16	Preparations of meat, of fish or of crustaceans, […]	21.9	26.28		701.4	13.6	22.6
17	Sugars and sugar confectionery	25.58	33.32		207.2	4.0	19.2
18	Cocoa and cocoa preparations	9.68	5.44		75.2	1.5	3.5
19	Preparations of cereals, flour, starch or milk; […]	11.69	8.76		228.8	4.4	6.5
20	Preparations of vegetables, fruit, nuts […]	16.14	12.1		223.1	4.3	8.4
21	Miscellaneous edible preparations	6.5	7.95		439.8	8.5	16.3