In the second of a series of articles looking at how Brexit is working out for the UK, we discuss tariff reductions that took effect on 1 January 2021. Which sectors benefit, what will be the wider impact and what more could be done?
We have recently carried out an analysis of the new UK Global Tariff Schedule (the UKGT), focussing on the over 2000 products where tariffs have been removed. Our key conclusions are:
Tariffs are duties which governments levy on imported products. They are usually paid by the importer, although as between the importer and the exporter, it is possible for the parties to agree that the exporter will pay them.
On 1 January 2021, the UK left the EU Single Market and Customs Union. This has enabled it to introduce its own UK Global Tariff schedule (UKGT), which determines how much duty must be paid for imports of goods on a "Most Favoured Nation" (MFN) basis under WTO rules (and which are not covered by a free trade agreement, such as the Trade and Cooperation Agreement with the EU). Previously, the UK was obliged to impose such tariffs in accordance with the EU's Common External Tariff (CET).
The most significant change is that, compared with the CET, the UKGT removes tariffs altogether on just over 2000 tariff lines (this is known as "liberalisation"); these products appear to have chosen in the main because the UK does not produce them in significant quantities and therefore domestic businesses should not be adversely impacted. Although the majority of the tariffs removed were already relatively low, over a third (i.e. more than 700 tariff lines) have benefitted from more substantial changes, involving the removal of tariffs in the 4-10% range (in some cases even higher).
The UKGT also simplifies tariffs on over 4700 products, but as this involves (in most cases) rounding them down by 0.5% or less, it is less likely to have a significant impact. In addition, there are some tariff reductions that go beyond mere simplification (e.g. retaining the tariff but reducing it from 16% to 10%). However, the reductions only apply to 36 tariff lines, relating to certain types of rice (see Section 5) and various road vehicles (for reasons explained in Section 9, we doubt that the road vehicle reductions will have much impact in practice). This is why our analysis focusses on the roughly 2000 products where tariffs have been removed.
Our interactive graphic below shows how the product categories with the largest number of changes – such as machinery, electronics and tools encompassing over 650 products – do not necessarily offer the largest savings, because in many cases most of the tariffs removed were already low (e.g. 1-3.9%). Instead, it is categories such as chemicals and plastics, textiles/apparel, certain food products, metals and horticulture which offer greater scope for savings because a higher proportion of the tariffs removed were in the 4-10% range. Move your mouse pointer or finger over different areas of the bar chart to display more detail:
There are, however, a number of factors which may limit the impact of these changes:
Moves to a zero tariff may put some non-EU products on a level playing field with goods from the EU. Previously, many non-EU goods were effectively at a double disadvantage compared with EU goods, as they faced both tariffs (unless covered by a free trade agreement) and the cost of border red tape such as customs declarations. However, the UK's exit from the EU Single Market and Customs Union means that EU goods now face much the same border red tape (and associated costs) as non-EU products; meanwhile the removal of tariffs on a range of non-EU products may be sufficient to make such goods competitive with EU imports. Whilst this is unlikely to make anything cheaper, it could contribute to a reshaping of UK supply chains (see the example in the textbox below).
Historically, much of the maize imported into the UK has come from Ukraine. It was able to enter the EU free from tariffs under an agreed EU quota system. Maize products from the US or Brazil (two of the world's leading producers), by contrast, were subject to volume tariffs set by the EU of €98-173 per tonne, depending on the type of maize imported. However, from 1 January 2021, tariffs on a range of maize products imported into the UK were reduced to zero. From a tariffs perspective, this puts US or Brazilian maize suppliers on a level playing field with Ukrainian producers. For more discussion of the ways in which Brexit could reshape UK supply chains, see: What do Brexit and COVID-19 mean for UK ports, distribution and manufacturing?
Of course, where EU suppliers remain the best value option (e.g. due to lower transportation costs or simply being more efficient producers), then UK customers are unlikely to switch to non-EU competitors. That said, the changes may help to keep costs down because EU suppliers will not need to demonstrate that their products qualify for tariff-free treatment under the UK-EU Trade and Cooperation Agreement (based on rules of origin).
Unless otherwise agreed, tariffs are normally paid by the importer; it follows that these purchasing businesses will generally be the most direct beneficiaries of any reductions. But it does not necessarily follow that the benefits will be passed on to the rest of the supply chain. For example:
Some media reports have suggested that for example, 10% reductions in tariffs will lead to 10% reductions in the retail price of the relevant goods as paid by individual consumers. In practice, such an outcome is likely to be extremely rare, partly for the reasons outlined above – but even where those factors are not relevant, retailers normally apply a substantial uplift to the purchase price of goods to cover their overheads and make a margin on sales. A 10% reduction in the cost of the goods to the retailer is therefore very unlikely to translate into a similar-sized reduction in the retail price paid by the final consumer. That said, the consensus amongst economists is that overall, final consumers do ultimately benefit from lower tariffs because this tends to make businesses more efficient and intensifies competition (leading to lower prices).
In both these cases, it may be worth challenging your supplier to justify its decision not to pass on the savings (but bear in mind the points made above about extra costs which the supplier may be experiencing as a result of other, more negative impacts of Brexit or, potentially, COVID-19).
Our analysis indicates that in the chemicals and plastics sector, tariffs have been removed from almost 200 products, over two thirds of which were subject to tariffs of 5-6.5% under the CET. At first sight, this would appear to make the UK a more attractive market for many non-EU suppliers, whose products should be cheaper as a result of these changes. However, as we explain in the textbox below, non-tariff barriers can act as a significant deterrent, particularly where suppliers are entering the UK market for the first time (or the first time with this particular product).
If the non-EU supplier is responsible for importing the product, it will have to comply with UK chemicals regulation; for example, each product that it supplies in the UK must be registered with the UK authorities, which can involve significant time and expense. The more products it wishes to supply, the higher the total compliance cost – so a business with a large portfolio may wish to be quite selective about which products it registers (and may also prefer to spend money on gaining access to the EEA, which involves incurring similar compliance costs but for a market that is substantially larger than the UK's). A further complication is that registration must be supported by data, which may involve additional costs in carrying out tests relying on existing data provided by other suppliers for the same product; this has become more difficult because Brexit means that the UK no longer has access to data provided under the EU REACH regime, in which it used to participate. In some cases, these issues may well deter non-EU suppliers from entering the market. This example highlights the scope for non-tariff barriers to negate the potential economic benefits of a wide range of tariffs having been removed.
However, it does not necessarily mean that all such benefits are negated. For example, an alternative is for the UK customer to act as the importer. If the UK business already holds a relevant registration with the authorities, then it should not need to incur significant extra costs; it will therefore be able to import the product and take the benefit of the duty savings (as compared with the position before 1 January 2021).
Whilst significant levels of duty remain on a wide range of food and drink products (retained in many instances to protect UK producers), tariffs have been removed or reduced significantly on over 100 products. Some of the more substantial changes relevant to this sector are highlighted below:
Also of note is the removal of tariffs on a range of glass bottles (previously subject to a 5% tariff) and corks (previously subject to a 4.7% tariff), which could benefit the UK bottling sector.
Highlights include:
See also Clothing, fashion and cosmetics.
Highlights include:
Whilst the tariffs applicable to glass, building stone and plaster boards under the CET were already relatively low in percentage terms, the products concerned are likely to be purchased in bulk and therefore savings in absolute terms may be significant.
Also potentially of note as regards demolition work is the removal of tariffs of 6.5% on a limited range of explosives-related products (mostly fuses and detonators).
Highlights include:
Whilst the overall impact of these tariff reductions on the UK economy may not be all that significant, we have argued previously that Brexit gives the UK government room to make incremental changes which, taken as a whole, could have a major positive impact. For example, on tariffs, the UK now has the opportunity to adapt its schedule to its own specific needs as a country – and the same is now true of many other areas.
Although the Government consulted on the changes, it appears to acknowledge that there may be a case for tariff removal/reduction on products which it has not considered – hence its recent announcement of a system for businesses to apply for tariffs on certain products to be temporarily reduced or withdrawn. This is a welcome move. Meanwhile, new trade agreements could result in tariff-free imports from a wider range of countries, leading to further savings for importers, together with new opportunities for UK exporters (although as we have noted previously, the UK's new trading relationship with the EU has made it more difficult to export to many of its closest geographic markets – and when it comes to new trade agreements, rules of origin may be a problem for UK exporters if they limit the extent to which UK products made with imported raw materials or components can qualify for tariff-free trade).
There are, however, limits to what can be achieved with tariffs. For example, the removal/reduction of tariffs on a broad range of intermediate products arguably helps to create a more favourable environment for manufacturers – but if the overall aim is to boost manufacturing activity in the UK, further measures are likely to be needed to address other challenges facing the sector, such as skills or labour shortages. To maximise the benefit of tariff reductions, therefore, Government needs to "join the dots" between trade policy and its policies in other areas, notably its approach to regulatory reform (which would also help to reduce non-tariff barriers, as highlighted in Section 4 above). A recent Institute for Government report highlights the problems of a "siloed" approach by different Government Departments and argues for greater coordination.
Finally, whilst measures to encourage manufacturing are welcome, the UK economy as a whole is heavily skewed towards services. Although the UK is now free to pursue a trade policy which reflects its strengths in this area, the fact remains that persuading other countries to open up their services markets to greater competition is typically much more difficult than reducing or removing tariffs on goods.
If you would like to see our full analysis of the tariff changes, please email us at commercial@traverssmith.com.
