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The EU and import tariffs – who really pays?

David Green, 1 November 2016

Civitas recently published a study of trade with the EU in order to estimate the balance of power between the EU and UK in the forthcoming negotiations. A free trade agreement with the EU that continued the current zero-tariff policy would be the best approach, but the study started with assumption that we should be prepared for the EU to act in a self-harming manner by imposing its current external tariffs on exports from the UK. It worked out the impact of adding tariffs to UK exports at 2015 trading volumes. Other things equal, it would add £5.2 billion to the cost of UK exports to the EU. If we retaliated by imposing tariffs on EU exports to the UK, then it would add £12.9 billion to their costs.

Ryan Bourne of the IEA has reacted by declaring that the import tariffs would be paid by UK consumers and, by implication, that it is incorrect to think of the tariffs as a cost to exporters. He thinks that supporters of remaining in the customs union (which would mean keeping the external tariffs intact) and supporters of retaliatory tariffs do not understand this fact.

I agree with Ryan Bourne that we should not remain in the customs union, but if the EU will not enter into a free trade agreement based on the zero tariffs we currently enjoy, then we should impose equivalent tariffs on them, until they come to their senses.

Mr Bourne says that consumers will not be able avoid paying tariffs on imports and appears to believe that the outcome of retaliatory tariffs will be that UK consumers will simply have to pay more.

Perhaps he would consider this alternative possibility. There are many uncertainties: manufacturers may absorb the tariff as a cost of doing business, consumer demand may fall, or producers may no longer feel it is worthwhile selling to the UK. But let’s assume that significant demand remains and that HMRC receives a windfall increase in revenue from the tariff. It will then have the means to lower other taxes, such as VAT, in which case the net fiscal effect on consumers will be neutral.

However, the price of imported goods will have increased by the amount of the tariff (other things equal) unless the exporters absorb some of the costs for consumers. This increase is a burden on EU exporters. Demand is likely to fall, output may need to be reduced, and jobs may need to be cut. It is even possible that price changes could make it uneconomic to export to the UK, with obvious implications for employment. In an earlier study we estimated that 5.8 million jobs are linked to exports from the EU to the UK.

Mr Bourne feels so confident of his claim that UK consumers would bear the full cost of import duties that he accuses anyone who disagrees with him of being economically illiterate and, in his opening paragraph, goes so far as to say that his ‘insight’ is so important that ‘it deserves reiterating, nay, repeating ad nauseam until everyone understands it’.

I ask him to reflect on the possibility that he may have overstated his case: so long as the UK Government reduces other taxes by the amount of the duty on tariffs, there will be no net fiscal cost to consumers. He could also consider whether or not his frustration with the lack of understanding of ‘everyone’ else is fully justified. The World Trade Organisation, for example, treats certain import tariffs as injuries to exporters and provides for them to take countervailing measures via its disputes procedure. The EU regards tariffs as injurious to overseas companies that want to sell goods in the EU, which is why it imposes them. The UK’s exporters also regard tariffs as injurious to their interests for the obvious reason that they would compel them to raise the prices of the goods they want to sell in the EU. This possibility is, after all, why many people want a free trade agreement with no tariffs.

This brings us back to the starting point of the argument. A free trade agreement would be best, but what do we do if the EU refuses to cooperate? The EU’s leaders have a utopian attachment to their project that makes them blind to the harm they cause. We only have to look at the economic suffering of countries such as Greece, Portugal, Italy and Spain, to see how utopianism can lead to callousness.

If the EU imposes tariffs on the UK, I believe we need to retaliate by imposing equivalent tariffs on them until the penchant of its leaders for self-harm subsides. If we follow Ryan Bourne’s prescription of allowing the EU to charge tariffs on our exports while not charging them at all, then the EU is likely to continue imposing costs on our exporters for the foreseeable future, with inevitable consequences for people who work in those sectors.

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