19 February 2019
Originally published by Brexit Central.
More attention is needed to be given the tariff policy Britain must adopt on leaving the EU on 29th March. It now looks likely that this will have to be without a withdrawal agreement. However, this has the advantage that Britain can shape its tariff policy from day one.
This is a responsibility that British governments have been able to avoid during the period of EU membership. Now they are regaining that responsibility, they must seize it promptly.
Before the end of March, the Government should publish a White Paper explaining that:
1. It has sought to negotiate a withdrawal agreement, but unfortunately no acceptable agreement could be reached, so while the UK remains open to agreement, European leaders have ruled out further negotiation. This means the European Treaties cease to apply to the United Kingdom on 29th March 2019. Britain’s trade with the EU will then be governed by the World Trade Organisation agreements, which govern most of Britain’s trade already.
2. The WTO agreements are international law and Britain will honour them in full. It expects the EU to do likewise.
3. The EU will now be obliged to apply its Common External Tariff (CET) to British exports, treating the UK on equal terms with other third countries, on a Most Favoured Nation (MFN) basis. Tariffs must be accepted as a disadvantage, but it has now become a very minor one: on industrial exports from the UK to the EU, the CET averages about 3%.
4. As far as British imports are concerned, Britain will not be obliged to charge import duties; but where it does so, it must charge a rate which treats all WTO members equally. Absent a withdrawal agreement the EU must be treated on the same basis as other WTO members. Britain will inherit tariff bindings, as a result of which its import duties cannot exceed those of the European CET.
5. Importantly, however, Britain will be free after 29th March to reduce or eliminate import duties whenever it sees fit (see below).
6. Apart from tariffs, the rule of the WTO for all other aspects of trade is non-discrimination. Non-Tariff Barriers are prohibited by the WTO so far as they afford protection to domestic production (GATT Art. III.1). So far as they arise out of the operation of internal laws (industrial safety etc.), all such laws must be applied equally: they must accord imports treatment “no less favourable” than that accorded to products of national origin (GATT Art. III.4). They cannot discriminate against imports from other WTO members.
The White Paper will explain the application of these rules carefully, emphasising that they are tried and tested by many years of practice worldwide. It will emphasise three key facts:
(a) that most of the UK’s trade is already conducted outside Europe, most of it under the WTO rules;
(b) that Britain trades more successfully outside Europe than within it; and
(c) that most of the EU’s trading partners worldwide trade with it under the WTO rules, and do so with success.
FIRST PHASE OF TARIFF POLICY: KEEPING TRADE FLOWING
After 29th March, the immediate priority will be to keep trade flowing in an initially uncertain environment. During this phase, the Government should suspend all import duties from all sources. The WTO rules allow this, provided the suspension is on an MFN basis.
This will mean that no inbound consignments are interrupted for tariff reasons.
SECOND PHASE OF TARIFF POLICY: ELIMINATING HARMFUL IMPORT DUTIES
Then, as it becomes clear that trade is flowing smoothly, import duties would be selectively reinstated, selectively reduced and selectively eliminated. This is the stage at which Britain’s trade policy will begin to take shape. It is important to emphasise that Britain will have no freedom to raise tariffs above their CET level. It will be tied by WTO bindings not to do so. Trade policy will take the form of selective reductions and eliminations of import duty, below their present CET levels – cuts which Britain can now make (and has hitherto been prevented from making) include the following:
1. Foodstuffs will be imported free of all duties. Note that this is one of the principal benefits of Brexit. The present CAP duties are very high, often above 50%. Eliminating them would bring major reductions in food prices, to the benefit of families. It would restore the traditional British policy of leaving food untaxed. Many countries in the world are exporters of food. The return of Britain as a buyer of food in world markets will be seen as a major advance towards freer trade from the EU’s protectionism.
2. Clothing and footwear. Duties should be cut to a maximum of 5%. Under the EU’s CET, these currently attract duties up to 20%. Again, the UK is a substantial net importer of these items and eliminating duties on them will bring major reductions in prices, to the benefit of families.
3. Automotive components, parts and sub-assemblies. Duties should be removed. These currently attract duties of around 5%. Eliminating them will help UK assembly plants relying on supplies from Europe and Japan on a “just-in-time” basis.
4. Semiconductors. These attract CET duties of 12%-15%. These should be removed. British IT industries are substantial net importers of semiconductors and are currently burdened by duties intended to protect continental suppliers.
5. Other industrial intermediates, materials, components, sub-assemblies etc. Duties should be removed wherever the UK is a substantial net importer.
6. Other products of any kind not made in the UK. Duties should be removed.
THIRD PHASE OF TARIFF POLICY: PREPARING FOR FREE TRADE AGREEMENTS
While it is making these unilateral tariff cuts, the UK should also announce its willingness to conclude free trade agreements with any willing partner on a basis of reciprocity, eliminating all import duties in both directions. This should apply to all the UK’s trading partners worldwide, not excluding the EU.
The detail of each negotiation will of course take time to tie down. However, the WTO Agreement allows GATT (Art. XXIV) the formation of interim agreements which can be brought into provisional application, and thus given early effect. In this way, tariffs can be eliminated in advance.
Negotiating priority should be given to:
a) suppliers of products which the UK needs to buy, where the European CET is high and where the British aim is to secure more affordable prices (e.g. foodstuffs from Argentina, New Zealand, clothing and footwear from China and India); and
b) promising markets where import duties against British exports are still high (as with India and China). One may note in passing that the EU comes into neither of these categories: EU duties against British industrial exports will be low (average 3%). A free trade agreement eliminating these will be of modest value and not worth paying too high a negotiating price to obtain. Meanwhile, Britain will have no need for expensive European food once supplies are available duty-free from other more reasonable suppliers.
Thus Britain will make important tariff cuts unilaterally, and others will follow free trade negotiations. Together they will add up to a significant liberalisation and a clear declaration that Britain, on regaining the right to direct its own trade policy, intends to drive it strongly in a liberalising direction. These tariff cuts would establish Britain as once again a beacon of freer trade, to its own benefit and to the benefit of its trading partners worldwide. It is important to send this signal immediately on Britain gaining the freedom to do so.
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