Countries impose customs duties on imported goods. How would UK exports be affected if we left the EU’s Common Customs Tariff regime? Michael Johnson explains how the tariff schedule works, and that some products (such as food, vehicles and electronics) are subject to much higher duty than others. Abolishing all tariffs, as some pro-Brexit economists have proposed, is unrealistic because industries like agriculture demand protection from cheap imports.He looks at the challenge of renegotiating the vast amount of legislation in the area, particularly for services.
Tariffs on trade in goods
Protective tariffs (or “customs duties”) and other equivalent charges which are applied by national governments to imported goods are generally based on the so-called Harmonised System of Customs Nomenclature (HS), which is coordinated by the World Customs Organisation. The HS classifies every known category of goods ranging from the most basic agricultural products to the most sophisticated electronics. It is divided into 21 sections covering 99 chapters. These comprise around 5,000 product headings and subheadings, or perhaps more according to how far national governments choose to subdivide individual subheadings into more detailed product descriptions. The HS is regularly reviewed to keep it up to date with advances in technology.
Some 180 countries worldwide, including all significant trading countries and the 28 member states of the European Union acting jointly, base their tariff schedules on the HS. The EU’s schedule is known generally as the Common Customs Tariff (CCT). The tariff rates set in the CCT are applied to imports by the customs authorities of all the member states in cooperation with the European Commission.
After decades of worldwide negotiations to reduce tariffs and other trade barriers, the average level of tariffs on industrial goods applied by developed countries is low at around 3% of value. But many countries including the EU apply much higher “peak” tariff rates or other barriers to imports of so-called sensitive goods like agricultural and food products, textiles, vehicles and electronic equipment.
UK tariffs after Brexit
Unless and until the UK might be able to negotiate new trade arrangements with the EU, British goods of all types exported to the 27 remaining EU member states, currently totalling more than 45% of total UK exports, would be subject to the CCT. This might not make much practical difference to trade in products on which tariff rates were low, but it would hit very hard UK exports to EU countries of items which were subject to “peak” tariffs.
Of course other countries, including the EU member states, would want to go on selling their exports to the UK. How far they would be able to do so would be a decision entirely for the UK government, depending upon what new structure of tariffs the UK adopted:
- Some economists argue that the right course for the UK would be to abolish all tariffs and other obstacles to imports and have a totally open market in which competition would force down prices to consumers and achieve maximum efficiency. This is unrealistic, because some producers particularly in agriculture and sensitive industrial sectors will demand protection. Also, doing away with all protection would leave the UK with no bargaining power when negotiating for access to other people’s markets.
- So if it left the EU, the UK would need to put in place a new national tariff structure. How should this be done? Determining new UK tariff rates item by item over the 5,000+ headings and subheadings listed in the HS would be a vastly complex and contentious undertaking and need exhaustive consultation across the whole of UK industry, taking years. The only viable option would be for the UK to continue to apply the tariff rates which it currently implements under the CCT.
- The UK, like all the EU member states, is a member of the World Trade Organisation (WTO) in its own right and would retain that membership. However the tariff rates which the UK has undertaken in the WTO to “bind” (i.e. not increase) are those in the CCT, negotiated by the EU as a whole during the UK’s membership.
- If the UK post-Brexit decided to continue applying the existing CCT rates it could reduce any of them “autonomously”. If however the UK wanted to increase tariff rates on specific goods, WTO rules give other WTO members whose exports to the UK would be affected by such higher tariffs the right to demand “compensation”, that is reductions in UK tariff protection in other sectors which would be of equivalent value to them. This could mean long and complex negotiations under WTO auspices.
Preferential tariff and market access agreements
- The EU has in force more than 50 preferential trade agreements (providing for reduced tariffs and ease of market access) with other countries. Over 80 more are awaiting ratification or in negotiation, including the important Transatlantic Trade and Investment Partnership (TTIP) with the USA.
- International Treaty Law, specifically the Vienna Convention on Succession of States in respect of Treaties of 1978, provides that when a territory secedes from a state it continues to be bound by treaty obligations entered into by the former state. However, the EU is not a state. It is an arrangement based on a complex of interlocking treaties among sovereign states. On Brexit the UK would simply withdraw from a set of treaties, not from a state.
- This means that after Brexit the UK would have no right to continue to benefit from the EU’s market access treaties with other countries. With each of the relevant partner countries or regional associations the UK would need to negotiate on its own account for a new agreement. Whether or not this was possible would depend on whether the partners concerned were willing to devote the considerable resources and effort needed to negotiating to provide the UK with benefits which it already enjoys under the relevant international agreements of the EU.
- Renegotiating potentially 50 or more agreements with partner countries and regional associations worldwide would require massive negotiating resources on the part of the UK and take many years to accomplish.
Trade in services
It is a mistake to consider this question purely in terms of trade in goods, vitally important though that is. 80% of the UK economy now consists of supply of services, across the more than 150 categories of service activities defined by the United Nations. Services account for 33% of total UK trade. In 2014 the UK had a surplus on trade in services of £85 billion. Post-Brexit, UK service suppliers of all categories would continue to have to comply with EU regulatory standards in order to operate in EU countries, but without any say in the formulation of those regulations.
In negotiating on its own for access to the services markets of other countries the UK would lack the clout which it enjoys from negotiating as part of a major trading entity. Furthermore, many of the EU’s existing preferential trade agreements do not include services, or do so only partially. In these cases the UK as an individual country would be faced with seeking greater or entirely new market access agreements for services.
This post represents the views of the author and not those of the BrexitVote blog, nor the LSE.
Michael Johnson is a former trade negotiator for the UK government and advises on international trade policy.