“As a result of cutting these tariffs, we should see a 15 per cent reduction in the cost of honey from New Zealand, a 9 per cent cut in the cost of grapes from South America and of course a 7 per cent reduction in the cost of wine from Argentina”
That’s what Michael Gove told MPs this week. He was talking about new plans to cut tariffs on certain imports if we leave the EU without a withdrawal agreement on 31 October.
In a press release, the government put these stats alongside the claim “this will mean lower prices in shops for consumers and the opportunity to source the best goods from around the world.”
But there’s a lot more going on here than meets the eye.
If you own a company that buys goods from abroad, you’ll probably have to pay a tax to bring those products into the country. That tax is a “tariff”.
At the moment, the UK is part of the EU customs union, which means British firms don’t pay any tariffs on goods imported from the rest of the trade bloc. In theory, this means Brits are paying less than they otherwise would for products from the EU — which is handy, as more than half of UK imports come from the continent.
But critics of the customs union point to the fact that every EU member state has to slap the same tariffs on imports from non-EU countries. This means that the UK can’t set its own rules on how much to charge companies shipping from countries like Australia, Nigeria, the US or India.
After Brexit, things are going to change. The current government has ruled out any chance of the UK staying in the customs union, even if we leave with a deal. In theory, that will give the UK government more autonomy over import taxes, although we’ll still be bound by World Trade Organisation rules.
Who pockets the savings?
Michael Gove says the government will cut tariffs to zero on a range of products from various parts of the world if we leave without a deal.
There’s a slight mismatch between the numbers he cited in the Commons and the government’s press release (e.g. Mr Gove said honey would drop 15 per cent but the International Trade department said 17 per cent). We asked the Cabinet Office to clarify, and we’ll update this article if they do.
In either case, his comments and the press release strongly suggest that there’s a direct relationship between how much the tariff is cut and how much consumers will save. But it’s not quite that straightforward.
Dr Garry Young, Director of Macroeconomic Modelling and Forecasting at the National Institute of Economic and Social Research (NIESR) tells FactCheck: “Cutting tariffs is generally good as it enables us to import goods and services that can be produced more cheaply abroad so that we can focus on producing the things that we are relatively good at.”
But he points out that “cutting tariffs does not necessarily mean that the cost to us [the consumers] will fall proportionately.”
“The benefits of tariff reduction would be shared between consumers and producers,” he says. “Tariff reduction does not translate directly to cost reduction”
Dr Swati Dhingra, Lecturer in Economics at the London School of Economics explains why consumers don’t always pocket the savings when tariffs are cut: “companies increase their profit margins and only pass on a fraction of the tariff cut to consumers.”
She says it is “highly unlikely that, for example, a 15 percent tariff cut would lead to a 15 percent fall in prices — the fall in prices is likely to be much smaller than 15 percent.”
Benefits of tariff cuts ‘offset by the costs’ of no-deal
So a cut in tariffs doesn’t necessarily mean consumers will pay less at the tills. But more importantly, tariffs are just one of many factors that are expected to affect the price of food if we leave the EU without a deal.
Dr Young points us to the latest NIESR no-deal Brexit analysis, which “suggests that any benefits from reducing tariffs on imports from outside the EU would be more than offset by the costs arising from a loss of access to the EU single market and customs union.”
This, he says “would damage our exports leading to a depreciation of the pound that would raise inflation and hit living standards in the UK.”
Essentially, if the pound falls in value — as many experts, including the Bank of England, predict will happen in a no-deal Brexit — this will push up prices for British consumers because we import so many products from abroad.
For example, government figures reveal that 50 per cent of the food we consume in Britain is from overseas. If the pound drops in value, it won’t go as far when we’re bringing those products back to the UK.
So what sort of price hikes are we talking about? Before we look at these stats, we should remember that no-one has a crystal ball: forecasts and predictions can be wrong. This is the best available evidence, not an infallible prophecy.
The latest NIESR report from August 2019 estimates that an “orderly no-deal” Brexit of the kind Mr Gove is describing would see inflation exceed 4 per cent by the end of next year, versus 2 per cent if we leave with a deal.
In September, the governor of the Bank of England, Mark Carney, wrote to the Treasury Select Committee to say that the Bank had revised down its “worst case” no-deal Brexit scenario, which had previously suggested inflation could reach 6.5 per cent. The Bank now says a more likely “worst case” is 5.25 per cent, which remains well above the government’s target rate of 2.0 per cent.
(You might think that a 4 or 5 per cent increase in prices would be offset by the 9 per cent or 15 per cent reductions Mr Gove seems to be promising. But remember: he’s referring to individual products like New Zealand honey and Argentinian wine — not the overall cost of living, which is what inflation tells us about).
Michael Gove rattled off some tariffs that the government will cut in the event of a no-deal Brexit. It’s true that if we leave the EU without a deal, we will have greater flexibility over the taxes we charge on imports, which is currently the preserve of Brussels.
But will these new tariffs cut prices at the tills?
Removing tariffs doesn’t always lead to equivalent savings for the consumer, as companies often pocket the difference.
And in the case of a no-deal Brexit, there are more significant factors at play. The pound is expected to fall in value if we leave the EU without a deal, which will make imports more expensive for Brits. This is significant, given that half the food we eat is bought from abroad.
The latest forecasts predict that the cost of living could rise by 4 or 5 per cent in the event of a no-deal Brexit. These price rises are likely to dwarf the savings that may or may not be passed on to consumers by a new tariff regime.