Tariffs, quotas, and the impossible task of disaggregation

As part of its exit from the EU, the UK is having to consider its trading relationship with not just the rest of Europe but also the rest of the world. International trade is governed by a series of rules which is set by the World Trade Organisation, an international body. These rules include provisions for transfer of currency, standards, and discrimination between countries. There are also a set of standard tariffs on goods – which vary by the type of produce.

Tariffs are generally used by countries who want to protect their internal industry. Recent high profile examples are the importation of steel from China to the EU, which would have been at a much lower price than European-produced steel and would have inhibited production there, and the increase of tariffs on many goods to the US, largely driven by Donald Trump’s desire to protect the jobs of his core supporter base. For developing countries these can be crucial to prevent domestic low-level industries from losing out to overseas. However, they generally inhibit international efficiency gains where countries are able to specialise in certain industries, and can prevent developing countries from accessing richer markets.

Given this, countries worldwide try to come to an agreement whereby tariffs are reduced, or even eliminated altogether. In some cases this is done through unilateral decisions – for example, the EU’s ‘Everything But Arms’ initiative reduces the tariffs to zero on produce from the least developed countries, other than weaponry; see Section 3 Article 12 of Council Regulation (EC) No 980/2005. However in most cases there must be a negotiation and agreement between the two countries involved.  The benefits to each side will tend to depend on the negotiating power – which in turn depends on the size of the market that can be accessed.  If the US were to sign a trade agreement with Tunisia, the Tunisian government would be expected to allow much greater access to its services and goods markets in return for the ability to access the US’s 330 million consumers.

For the past forty years, the UK has negotiated as part of the EEC and then the EU, acting as a trading bloc of 500 million people.  There are a number of trade deals in place, including a recently-signed deal with Japan.  These deals do not always cover entire economies, but sometimes relate only to individual categories of goods.  With the UK leaving the EU, the question of how these deals will continue needs to be answered.

A simple answer would be to simply replicate the tariffs in a separate trade deal. However, each agreement would need to be ratified between the parties.  For the EU agreements, this may not be much of an issue, since the market that will be accessible will be not much smaller than today (and in many cases is much larger now than when the agreements were made).  However, other countries may not be happy to sign an agreement for the same terms with a country of 15% of the size of population.  The UK should expect more concessions to be inserted to make up for this.

But it’s not that simple even for the EU.  As well as tariffs, most trade agreements include quotas as well, to prevent the flooding of domestic markets. For example, New Zealand may be able to export 25,000 sheep to the EU at 5% tariff, and anything above that would incur a 15% tariff.  When splitting up the trade agreements between the UK and the EU, how should these quotas be split?

The initial proposal is that the past few years of exports should be examined to see how many went to the UK and how many to the rest of the EU.  This would then form the basis of the split.  This is complicated by the fact that many goods are exported to one EU port and then transferred onwards, but point of origin analysis should be able to produce a robust estimate.

This proposal will not be accepted.  One of the huge benefits of the EU acting as a bloc for a third country like New Zealand is the flexibility it offers. If the weather in Wales is bad for lamb farming in one year, New Zealand can export more of its quota to the UK. In good years in Wales, that quota may be redirected to Sweden.  By defining the quota by a hard proportion between countries, New Zealand will lose out.  Representatives from a number of countries have already written to the WTO stating they expect the negotiations to not leave anyone else worse off.

The UK faces a future where all existing trading agreements become null and void.

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