As the UK sets its tariff policy for international trade, it faces a series of challenges from World Trade Organisation Members. Generally, the UK proposed a less protectionist trade regime, with lower trade barriers, which will be good news for many more competitive countries to access the UK, while it will push existing exporters from less competitive developing countries out.

In the past few months, the attention of the media, governments, and the world alike, has been focused on the Coronavirus pandemic. This includes a few of our recent CEO Insights.[1]

However, despite the rising number of COVID-19 cases, this new virus looks like it might be here to stay, and in turn countries have started – or are trying – to get back to “normal.” The re-emergence of Brexit negotiations and regained media attention is one such example.

Between February 6 and March 5, 2020, the United Kingdom (UK) held a public consultation to decide its future Most-Favoured Nation (MFN) tariff schedule. This tariff schedule will be the one applicable to all imports coming from countries that: (1) do not have a trade agreement with the UK, or that (2) do not benefit from unilateral preferences (such as least-developed countries or developing countries benefiting from the Generalised Scheme of Preferences – GSP).

Why is such a schedule important? In the past, tariffs were an essential source of revenue for the UK Government.[2] Currently, tariffs are almost solely used to protect domestic industries from foreign competition by increasing the price of imported goods, therefore making local products more . In all, the UK’s schedule not only sets up the overall tariffs applicable to UK imports, it also identifies  the key sensitive industries to be protected by the Government in future trade negotiations.

What are the current tariffs applied by the UK? Until December 31, 2021, the UK will use the European Union’s (EU) tariff schedule. This schedule is characterised by a high level of protection for the agricultural sector, with an average applied tariff rate of 14.2%, in comparison to the average 4.2% applied to non-agricultural products (see Figure 1). Within the agricultural sector, the highest levels of protection are granted to animal and animal products, dairy, and sugar. The agricultural industry is also protected through specific tariff rates, and the application of tariff-rate quotas (see Box 1).

Figure 1 EU MFN Tariff Schedules

Source: World Bank WITS.

Box 1 Understanding specific tariff rates and tariff rates quotas

Specific tariff rates are those that are not determined by the value of the imported good, but by other factors, such as weight or unit imported. An example of a specific tariff rate is the application of a fixed GBP 100 per ton of rice imported. The total amount to be paid to the UK Customs Authority is thus not determined by the value of the rice imported, but by its weight.

Tariff-rate quotas are a tool used to discourage the importation of a large amount of a specific product, while allowing the entry of sufficient imports to cover the domestic needs that cannot be satisfied by domestic production. Let’s assume that the UK’s internal demand for sugar in a given year is 500,000 tons, and its internal production capacity is 300,000 tons. In this scenario, policymakers could adopt a graduated tariff rate for imports needed, and try to block out any additional imports. For example:

0 – 150,000 imported tons: 0% tariff

150,001 – 200,000 imported tons: 5% tariff

>200,001 imported tons: 150% tariff

 

What will change from January 1, 2021?

First of all, 20% of the tariff lines (2,004 lines) have been made duty-free. This has been done with a double objective: (1) removal of so-called “nuisance tariffs”, those below 2%, for their limited significance, such as in the case of wood, knives, etc.; and (2) benefit the UK’s supply chains and consumers, i.e. intermediate goods used in production lines in the UK, such as ‘petric substances’, which face a 19.2% tariff in the EU’s CET and will be be able to access the UK duty-free.

Secondly, around 40% of the 10,000+ tariff lines have been reduced and simplified:

Thirdly, around 10% of the tariffs, specific tariffs in particular, have been converted from EUR to GBP.

What does this mean for the rest of the world? Overall, the UK’s efforts to lower its MFN rates will translate into a higher amount of goods entering the UK on a duty-free status. This is particularly relevant to those countries with which the UK has not yet secured a free trade agreement, as it is expected that 60% of the UK’s import will come from these countries.

However, the UK Global Tariff will represent a significant preference erosion for those countries that have already secured both fully fledged or interim trade agreements with the UK. For example, the tariff applied to canned tuna coming from Mauritius has been reduced by 4%, moving from 24% to 20

Interestingly, if the EU and UK fail to reach a trade agreement, the UK’s Global Tariff would also apply to the EU, in which case, less than % of imports from the EU would be tariff-free, in comparison to the current 100% duty-free.[3]

How can we help? At International Economics, through our in-house international expertise, we help companies adopt the right strategy to adapt to changing and challenging times. Our extensive experience across Africa and Asia-Pacific, in particular, coupled with our solutions using economic and analytics models, have proved to be powerful tools to assist our clients in their expansion into new frontier markets and niche sectors. If you are an exporter to the UK and would like to better understand how Brexit might affect you, including exploration of other markets that could be of interest, do not hesitate to get in touch.

[1] See the CEO Insights for June 2020 – Africa’s responses to COVID-19 and May 2020 – The Impact of COVID-19: Reflections on the Transport and Logistics Sector

[2] Tariff revenue is still an important source of government revenue for many developing countries – Botswana, for example, obtains nearly a third of its government budget from tariffs.

[3] UKTPO (2020). New Tariff on the Block: What is in the UK’s Global Tariff? UK Trade Policy Observatory.