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There won't be a tariffs bonanza
06 Nov, 2018

But the poor would lose out

Some Leavers hold that imposing tariffs would bring in revenue to the Exchequer. The effects are small – perhaps half of one per cent of public revenue. But import duties raise prices, making consumers poorer and markets less efficient. London4Europe Committee member and former HM Treasury senior civil servant Michael Romberg looks at the issue.

If we traded on WTO terms we would raise tariffs on imports including from the EU. That money would benefit the Exchequer. Some Leavers see that as a major benefit. But it is more complicated than that. Professor Alan Winters summarises the issue:

Some commentators celebrate that the UK would collect twice the tariff revenue on mutual trade that the EU would, but that is to miss the point. Tariffs – which are merely taxes on imports – raise prices to consumers and users, who either suffer a loss of spending power or just don’t bother to consume the good at all. And because imports are set at a competitive disadvantage, markets become less competitive and local producers are likely to raise their prices as well, compounding the costs.

How much would tariffs bring in

Professor Alan Winters reports that if UK-EU trade in 2015 had been subject to MFN tariffs, the UK would have collected £12.9 billion on imports from the EU (with an average rate of 5.8%) and the EU would have collected £5.2 billion (at an average of 4.5%).

So assuming that tariffs are paid wholly by the exporter, that the imposition of tariffs does not change behaviour, and that UK exporters’ other taxes fall by an equal amount, the net benefit to the UK and the Exchequer would be £7.7bn.

In 2015-16, total public sector current receipts amounted to £682bn. (ONS). So net tariff income would have increased income by just over 1%. Nice to have, but not transformative. If it was all taken by big red bus to the NHS it would provide just under £150m a week.

If the cost of tariffs was shared equally between exporter and the importing consumer and if UK entities paid less of other UK taxes by the same amount (and thus did not change their UK+EU tax bill), the net tariff income would be halved to £3.8bn, about half of one per cent of Government receipts, about £75m a week.

If all the cost of tariffs was borne by importers, then on the same assumptions the UK fiscal position would be unchanged.

Tax incidence

Tax incidence looks through who mechanically pays taxes and asks who bears the economic cost. So for example employers pay employers’ national insurance contributions. But they set wages knowing what their total employment costs will be. So the economic incidence of employers’ NICs is mainly on workers’ pay.

The incidence of tariffs would be shared between importing consumers/ companies and exporting producers. What the balance would be would depend on the price elasticities (how much supply and demand varies with price changes) of individual goods and markets. There is no obvious information on the incidence.

To the extent that tariffs led to higher prices they would make consumers and intermediate producers poorer or mean that they would not consume the import at all (which is also a welfare loss).

It is of course one thing to tax foreigners and another to tax UK entities. If tariffs made people and firms poorer, the Government could reduce other taxes (or increase benefits) to offset the effect – which would neutralise tariff income.

Distributional effects

It would be the poor who would pay most. Food prices would rise more than the prices of manufactured goods. So those households that spend the highest proportion of their incomes on food would be hardest hit: the unemployed, those with children, pensioners.

Competitiveness of markets

Tariffs would also damage the competitiveness of markets. Imports would be set at a competitive disadvantage. That would distort purchasing decisions and so reduce efficiency. Local producers would be able to increase their prices, compounding the increase in costs for consumers (though adding to producers’ profits).

Overall Economic Effect

It is not possible to say what the overall welfare effect on the UK would be. Gaining tax income from foreigners is a plus. But there are minuses from paying taxes abroad, from raising prices, especially for the poor, and less competitive markets. In overall terms, the effects of tariffs are likely to be small – but they could be significant where tariffs are particularly high, as on dairy products.

To be clear, to the extent that tariffs are borne by UK firms and not offset by other tax reductions they would lead to lower profits which in turn would lead to less investment and lower pay.

Other effects of trading on WTO terms, in particular non-tariff barriers and the consequent disruption to and reduction in trade, are likely to have much larger and almost universally negative effects on the economy and the Exchequer, dwarfing any benefit from collecting tariffs.

Note that the assumption that the Office for Budget Responsibility has made in its post Brexit work is that the UK would have zero benefit from the £3½bn of EU customs duties it collects on behalf of the EU at the moment on trade with third countries. While it is too difficult to know what the right number should be, zero would seem to be too low. So the overall fiscal harms from Brexit are likely to be smaller than forecast. However, the sum is too small materially to alter the overall assessment.

The arrangement we have now – in the Single Market, in the Customs Union – allows the most frictionless trade with no tariff and few non-tariff barriers. That brings the most competitive markets, leading to more innovation and keener prices in the shops. The alternative trade relationships being promoted by Brexiters differ only in how much harm they do to the UK economy.

Economists for Brexit/ Free Trade

Another reason to doubt that there would be high income from tariffs is that the favourite economists of Jacob Rees-Mogg and the other Brexiters – indeed, pretty well the only experts who think that Brexit will be good for the economy – envisage the unilateral abolition of tariffs. No tariffs, no income from tariffs.

According to Economists for Free Trade (formerly for Brexit) tariff abolition would lead to the elimination of manufacturing in the UK. Their work has been criticised by others as being outside the academic norm because their model ignores distance and quality, looking only at price.

Others also argue that cutting tariffs would cut prices. But it is not so simple, as the IFS sets out. Tariffs are only a small part of most prices. So the overall effect of abolishing tariffs on products where there is no UK industry to protect, olives say, would be much less than one half of a per cent of prices overall.

Conclusion

Different Brexiters run two quite different and incompatible sets of arguments: “tariffs will bring in lots of money” and “we can eliminate tariffs altogether”. That tells us above all that the Brexiters still have no plan.

That is why we need a People’s Vote, a choice between the Brexit plan that the Government will eventually work up and Remain, giving us the Final Say.

 

 

 

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