Following the official departure of the UK from the EU on the 31 January, the government is preparing the UK’s first independent tariff policy in almost 50 years. This will apply to all goods imported into the UK, with a few exceptions, such as goods originating from countries with which the UK has negotiated a free trade agreement (FTA).
Within reason, the UK is able to set whichever tariffs it deems to be most suitable. The tariffs must, however, be applied equally and in line with the most favoured nation (MFN) principle/ World Trade Organisation (WTO) terms, where the same tariffs on imported goods must be applied to all WTO trading partners. This is, of course, unless an exception, such as a preferential arrangement, (e.g. under a free trade agreement, or tariff suspension applies) and are below the bound rate (the maximum tariffs the UK can apply in line with the WTO).
To determine what the tariffs will be, the government is calling for feedback on the current applied tariff rates by 5 March 2020, and any views on the potential series of amendments, specifically:
International Trade Secretary, Liz Truss, said:
“High tariffs impinge on businesses and raise costs for consumers. This is our opportunity to set our own tariff strategy that is right for UK consumers and businesses across our country. I am calling on people, businesses and civil society groups to seize this opportunity to take part in our consultation and tell us what would work best for them.”
In essence, the government wants to simplify a system which it believes has potentially been overcomplicated by the EU.
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There has been criticism from the Institute of Directors for reviewing tariffs while the government and business groups were involved in trade negotiations with the EU and the US. Clearly, the concern here is that, by setting low import tariffs, we are giving away a bargaining chip as there is less incentive for other countries to reduce their tariffs for goods being imported into the UK if they are already able to export their goods to the UK at a low tariff rate.
Allie Renison, the Institute of Directors’ Head of Trade Policy, said:
“The consultation comes at a fraught time as we seem headed for simultaneous negotiations with both the US and EU. This will leave business scrambling to work out how one set of negotiations will affect terms of trade with the other, and underscores the need for maximum clarity across all negotiating objectives to allow firms any hope of preparing in advance.”
Lower import tariffs could potentially flood the UK with cheap imports, while manufacturers continue to pay tariffs on exports to overseas markets. However, the government’s proposals to remove tariffs on key inputs to production and where the UK has zero or limited domestic production should address these concerns if properly dealt with. This is why it is key for businesses to engage with the consultation process, so that the government is fully informed about what the ‘key inputs to UK production’ really are and also which products have limited or no UK production. If businesses do not engage, there is a danger that the government gets this wrong, having a significant impact on certain UK sectors in the form of additional costs from tariffs and increased cheap imports from overseas competitors.
Applying higher tariffs on goods from the EU would have a significant impact on the UK economy and consumers, particularly if it results in a rapid and significant increase in prices and a reduced selection of goods (if they become uncompetitive) and hence overseas companies decide not to export to the UK. This can also mean that consumers end up with inferior products, and certain foods and commodities only being available at certain times of year. Although, in the short-term, this may help UK businesses by removing competition. In the longer-term, domestic producers will benefit from the introduction of tariffs in the same way as low UK import tariffs because it makes their domestic production relatively more competitive compared to imports. The lack of competition could result in reduced investment and innovation, and also a fall in quality, as UK businesses would have less competition and, therefore, potentially feel a reduced need to continue to improve their products.
The unions, such as the TUC, have initially responded by stating that that lower tariffs will put thousands of manufacturing jobs at risk as it will allow imports from other countries to enter our market at very low prices against which it will be difficult for UK manufacturers to compete. They also raised concerns over countries such as China dumping its products in our markets if tariffs fall. The government’s proposals to remove tariffs on key inputs to production and where the UK has zero or limited domestic production should address these concerns, but again only if both business and the government engage properly through the consultation.
In a separate announcement, Liz Truss has said the UK would seek to secure a
“comprehensive, far-reaching and mutually beneficial tariff reductions” taking into account sensitive UK products – in a free trade agreement with the US. She went on: “This market access will be further supported through the FTA by efficient, predictable, and transparent customs procedures, with a reduction in technical barriers to trade. The FTA will aim to remove measures that currently restrict UK trade and to prevent their imposition in future, while upholding the safety and quality of products on the UK market.”
This suggests the government is aware of the concerns raised by businesses and the trade unions.