Liz Truss' post-Brexit tariff plan marks an important first step for Global Britain
The government has now published the tariffs it will levy on countries with which it has no free trade agreement (FTA). From the end of this year when we leave the EU, this will replace the EU tariff system which we still share within the EU customs union.
Briefly, what it does is abolish tariffs on inputs and goods we do not produce, while keeping tariffs at roughly current rates on products made here. It also abolishes a huge swathe of complex ‘variants’ put in place by the EU largely to satisfy special EU producer interests.
Remember these tariffs apply to those we do not have an FTA with. However, we are actively working to negotiate FTAs with non-EU countries, such as the US, Australia and other Asia-Pacific countries. Our aim is to give tariff and barrier-free access to them in exchange for the same for our key industries, both goods and services.
At the end of that process, effectively most of these tariffs will have no force since products from all over the world will come in under FTAs free of barriers; world prices will at last prevail in the UK market again, reverting to our distant free trade history.
As for the EU, with whom we are also trying to reach an FTA, either it will become more flexible and agree to Canada-plus; or there will be no EU FTA for now and tariffs will be levied both ways, as must happen under WTO rules, since these ‘MFN tariffs’ apply to any country without an FTA. WTO rules also rule out discriminatory action on standards and mandate a seamless border; so there should be no illegal border non-tariff barriers on EU-UK trade under WTO rules.
Tariffs on UK-EU trade will have little effect on UK exporters who will pass them on to EU consumers who suffer from much higher EU prices due to high EU total protection. EU exporters will not be able to pass on our UK tariffs because they will have to match world prices in our market. The implication is that the Treasury here gets some useful revenue, of around £13 billion a year from EU exporters; while the EU Commission gets about £5 billion per annum from EU consumers. A net plus to the UK, and a net minus to the EU, which if the EU is economically rational- a big if- should mean they will agree to the FTA we have been proposing.
What about our economy? Regardless of an EU FTA, we will gain from free trade. Yes, the moans from Remainers will continue, that we risk EU barriers costing us more, while FTAs with the rest of the world gain us little. But their models do not fit the UK trade facts. The UK trades all around the world, notably in services; we do not fit the Czech-style model of being trade-dependent on the EU through ‘gravity’.
Estimates based on our fact-fitting trade models are that we will gain long term about 4% of GDP, £80 billion a year at today’s GDP, from the trade policies the government is proposing. Much of this will come from a US FTA alone, since the US is such a dominant world supplier of goods, and with us pre-eminent in services. The gains come from much lower prices for our consumers, and higher productivity among our producers, who have proved they are world class by already selling widely around the non-EU world. Our service industries, led by the City, will also forge ahead in this new world.
Today’s announced UKGT is an important first step to these gains. Consumer prices will start falling at once. Industry can start preparing for the broader fall across the board in the next stage that will come as we sign FTAs around the world. Meanwhile, we must hope that the EU sees sense and signs up to an FTA too, so avoiding a tariff spat across the Channel that will only cause it damage.