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After this week’s votes, a Cabinet sub-committee is expected to confirm the Government’s policy on tariffs in the event of No Deal. Open Europe’s Dominic Walsh explains the options the Government could pursue and the trade-offs it faces.
A clear policy position on tariffs has been a long-running absence from the Government’s No Deal planning; the question has been repeatedly kicked down the road. The EU exit sub-committee of Cabinet ministers was due to meet and finalise a policy position on Monday, but this has now been delayed until after this week’s crunch votes in Parliament.
When the tariff policy does finally emerge, it will likely be a compromise which reflects a series of international and domestic trade-offs.
WTO rules on tariffs explained
The Government’s policy on tariffs in a No Deal Brexit will be constrained by WTO rules, in particular the Most Favoured Nation (MFN) principle.
However, within the constraints of the MFN principle, the UK will retain flexibility on its overall tariff regime – thanks to the distinction between ‘bound’ and ‘applied’ tariff rates.
The Government’s options span from full protectionism to unilateral liberalisation
The status quo – mutual tariff-free trade with the EU and some tariffs on non-EU trade – is not an option under No Deal. There is a spectrum of options the Government could theoretically pursue on tariffs:
The Government looks set to pursue targeted tariff liberalisation, which will vary sector-by-sector
The broad contours of government policy were agreed two weeks ago. There is broad agreement to avoid imposing tariffs on most imports in the short-term, in order to minimise disruption to trade flows, but support for “limited exceptions” to this in order to protect vulnerable sectors such as agriculture. A recent exclusive in the Financial Times appears to confirm this sectoral approach. However, there has reportedly been disagreement within the Cabinet over the level of tariffs in these import-sensitive sectors, and whether to prioritise protections for producers or avoiding higher prices for consumers.
The sector most likely to be protected by tariffs and quotas is agriculture, where EU tariffs are very high – up to 40% for some meat products. Michael Gove told the National Farmers Union (NFU) last week, “I can reassure you it will not be the case that we will have zero rate tariffs on [farming] products.” This came after lobbying from the NFU, with its president Minette Batters telling the BBC, “If you obliterate the tariff wall… we would be massively undermined by food produced to standards that would be illegal to produce to in this country. It would decimate British agriculture.”
However, agriculture is not the only sector which has lobbied for tariff protection. For example, the British Ceramic Confederation (BCC) sent a letter to the Prime Minister this week saying, “the shock of zero tariffs would be devastating, affecting business, jobs and communities across the country.” The aforementioned Financial Times report suggests that ceramics, as well as steel and cars, are set to be protected by tariffs in a No Deal scenario.
Separately, the Government has already announced that it will keep 43 EU anti-dumping measures in a No Deal Brexit, while a further 66 will not apply as these have been judged not to matter to UK businesses. Many anti-dumping measures, such as countervailing duties, are effectively additional tariffs imposed on imports judged to be traded unfairly. The Department of International Trade is in the process of establishing a UK Trade Remedies Authority for this purpose.
The announcement may also set out the Government’s plan for tariff rate quotas in No Deal, an issue on which there has been little clarity thus far and which has previously faced stumbling blocks at the WTO.
The Irish border question hangs over the government’s policy on tariffs
The decision to impose tariffs, at any level, on EU agricultural produce raises a familiar problem: the Irish border. Given the Government’s commitment to avoid border checks in Northern Ireland even in the event of No Deal, tariff collection could be problematic. There are three broad possibilities, none of which are particularly palatable:
Whichever option the UK takes, the problem of the border cuts two ways in No Deal, and the Irish government will face its own set of difficult choices on tariff collection.
Any tariff option the Government pursues will face political opposition
The decision to delay the announcement on tariffs until after this week’s votes reflects the fact that any announcement on tariffs will be politically controversial. In the words of one Cabinet source, the Government “worry that Brexiteers will see it as another bit of Project Fear while anti-Brexit MPs will see as proof that No Deal has to be taken off the table.” Increased tariffs will be criticised for the impact on consumers; lower tariffs for the impact on producers. Either option will be compared unfavourably to the status quo by Remainers. Ultimately, however, facing up to these difficult trade-offs is part and parcel of an independent trade policy.