Government continues to tread tariff tightrope - Capital Economics
UK Economics

Government continues to tread tariff tightrope

UK Economics Update
Written by Ruth Gregory

When faced with the choice of deciding whether to impose higher import tariffs on goods (exposing consumers to higher inflation) or lower ones (exposing firms to greater competition), the government’s latest tariff proposals suggest it has plumped for the latter. Even so, on aggregate the changes are not large and suggest that the effects on total UK GDP growth of the new tariff regime will be very small.

  • When faced with the choice of deciding whether to impose higher import tariffs on goods (exposing consumers to higher inflation) or lower ones (exposing firms to greater competition), the government’s latest tariff proposals suggest it has plumped for the latter. Even so, on aggregate the changes are not large and suggest that the effects on total UK GDP growth of the new tariff regime will be very small.
  • Until the status-quo transition period ends on 31st December 2020, the UK will continue to apply existing tariffs on goods just like an EU member. Those are zero tariffs on imports from the EU, EFTA and countries that have a trade agreement with the EU and an approximate 3.5% tariff (when weighted by the volume of trade) on imports from elsewhere. (Note that the tariff rates for individual products, set out under more than 5,000 headings, vary from zero to about 80%.) When weighted by the share of imports coming from the EU and countries that have a trade deal with the EU (around 75%) and from elsewhere (around 25%), this all equates to an average import tariff of just under 1%. (See the “Situation Now” bar in Chart 1.)
  • But once the transition period ends, the government has to decide what tariffs to apply to UK imports. Based on the “UK Global Tariff” proposals released on 6th February and now under consultation until 5th March, tariffs of 2.5% or less on any goods would be scrapped and all other tariffs rounded down to the nearest 2.5%, 5% or 10%. If the government agrees a zero-tariff goods deal with the EU by 31st December, as it hopes, that would lower the trade-weighted average tariff a bit further below 1%. (See “EU Trade Deal & UK Global Tariffs” bar in Chart 1.) That’s because while tariffs on imported goods from the EU would remain at zero, tariffs on all other goods would be lowered a bit.
  • Even so, the resulting impact on total UK GDP may be pretty much zero. Indeed, the reduction in import prices might only lower inflation a touch, leading to a boost to consumers’ spending power of less than 0.05ppts. And although some sectors previously protected by relatively high tariff rates would face a bit more competition from overseas, the reductions would in most cases be small. (See Table 1.)
  • If, however, the UK doesn’t secure a trade deal with the EU and those countries that have a trading arrangement with the EU, then the average tariff might rise from just under 1% now to about 2.5%. That’s because all EU and non-EU trade would be subject to the UK’s Global Tariffs. (See the “No EU Trade Deal & UK Global Tariffs” bar.) That would be above that under Theresa May’s previous “no deal” tariff plans published in April 2019 of about 1.3%. (See the middle bar.) But it would be below the 3.5% if the UK were to apply the EU’s WTO tariffs to all imported goods. (See the bar on the right.)
  • In the no trade deal scenario, the rise in import prices could add 0.4ppts to inflation and, unless consumers were to dip into their savings, cut GDP by about 0.2ppts. Admittedly, there may be some offsetting boost to GDP growth from net trade, as consumers substitute away from imports and towards cheaper domestic goods. But the EU would levy tariffs on UK exports, so UK exports might suffer by an equivalent amount.
  • Overall, if the UK agrees a zero-tariff goods deal with the EU, then the new regime is likely to result in slightly lower import tariffs, although with very few implications for total GDP. It is only if the UK fails to agree a trade deal with the EU that the new tariff regime will act as a drag on growth – and by more than under the previous government’s “no deal” tariff plans published a year ago.

Chart 1: Goods Import Tariff* (%)

Table 1: Average Tariff Rates* (%)

Sources: WTO, uktradeinfo, Capital Economics

Sources: WTO, HMT, Capital Economics


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com