UK exports face re-imposition of EU import duties in post-Brexit world

AS the British government starts the complex process of considering the form of the UK’s post-Brexit relationship with the European Union (EU), one issue will be foremost in the minds of exporters – tariffs.

These have not existed for UK exports to other members of the EU since 1973, when Britain joined what was then called the European Economic Community (EEC). Then there were just eight other members (Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg and the Netherlands), but of course, the EU has expanded dramatically since then to today’s 28 countries.

This has eased the flow of British exports to these countries. For goods, which are the key target of tariffs, these were worth £134bn in 2015, (although the UK still has a trade deficit in goods with the rest of the EU).

So for UK companies exporting goods to the rest of the EU, there will be concern that once Brexit takes place, possibly in 2019, the remaining 27 countries of the EU will impose duties on British exports could become a major worry.

There will be no picking and choosing here. The EU is a customs union with common external customs tariff rates, so Britain will not be able to strike individual deals with separate member states on reducing duties bilaterally.

Also, some industries will be more worried than others. Under a worst case-scenario for the Brexit talks, where the rest of the EU refuses to allow British exporters special access to its markets, UK exports would probably be hit by bound tariff rates that the EU has promised to respect under its agreements at the World Trade Organisation (WTO).

Typically, these keep tariffs low (or at zero) for goods that the EU needs to import, especially raw materials and basic manufactured goods, such as most steel exports or minerals such as clays and gypsum – so UK exporters of these goods would not have to worry.

But for higher tech products, such as automobiles and parts (10%) and nuclear reactors (5.4%) for instance, or many fast moving consumer goods, such as aftershave (5.4%) and shrimps and prawns (12%), or quality materials (for example 8% on woollen fabrics), there could be some real headaches for British exporters should the EU refuse a Brexited Britain a privileged trade relationship.

So UK exporters will be keeping a close eye on the two years of talks that would follow Britain triggering Article 50 of the Treaty on European Union which starts the process of a country leaving the EU.

For traders, the best option would be membership of the European Economic Area (EEA) halfway house EU membership used by Norway and Iceland. This involves duty free trade in industrial goods, but not food and drink – where many duties are still levied.

But with the new UK government of Prime Minister Theresa May saying she recognises that a key force behind the referendum vote was a dislike of unrestricted immigration from the EU, Britain will probably have to forge a new bilateral trade deal with the EU that could be looser than the EEA, which requires members to allow largely unrestricted immigration from the EU.

If so, maybe the second best option would be a comprehensive bilateral free trade deal, such as that enjoyed by Swiss exporters. Switzerland remains outside the EU and the EEA, but has extensive free trade with the EU for industrial goods.

But even this preferential agreement might be out of reach for Britain, Switzerland’s special EU market access has also been based on accepting that EU citizens can live in Switzerland and this deal could unravel – the country is preparing to implement its own immigration caps by 2017, following its own referendum in 2014. Talks on giving Swiss exporters even better access to EU markets have been frozen – and some existing Swiss EU trading rights might ultimately be lost. The same fate could face a UK government determined to impose EU immigration caps. And if that happens, British exporters really might face a situation where WTO-bound duties are levied.