Chapter 2: Tariffs
What are tariffs and why might they apply post-Brexit?
6.As explained in the EU Committee’s March 2017 report Brexit: trade in goods, tariffs are “a state levy imposed on goods crossing from one customs territory to another … usually expressed as a percentage of the value of the product”.2
7.Within the EU, the Single Market and customs union provide for the free movement of goods. This means that there are currently no tariffs on food imported into the UK from other EU countries. When the UK leaves the EU this could change.
8.The existence of tariffs post-Brexit, and the level they are set at, will depend on any agreement on future relations, including trade, that the UK reaches with the EU. The European Commission’s draft withdrawal Agreement, published on 15 March 2018, includes provisions that would allow for tariff-free imports of food to continue until the end of the transition period (which as currently agreed in principle will end on 31 December 2020).3 The Government has made clear, including in its evidence to this Committee,4 that it is seeking a free trade agreement (FTA) with the EU, which could result in a continuation of the no-tariff status quo at the end of this period. This is supported by the draft guidelines on the framework for a future relationship published by the European Council on 7 March 2018, which state that the Council will work towards a FTA with the UK that includes zero tariffs on trade in goods.5
9.If a FTA is not in place by December 2020, however, or if an agreement on the conditions of a transition period cannot be reached, then UK-EU trade would take place under the default framework governed by the World Trade Organization (WTO).6 This would oblige the UK to treat imports from the EU in the same way as imports from any other country,7 including imposing the same tariffs on food imported from the EU as from outside the EU.
10.The UK does not currently have its own tariff schedule (see Box 1). Giving evidence to the EU Internal Market and External Affairs Sub-Committees on 13 October 2016, the Minister of State for Trade Policy, Lord Price, said that “the simplest thing would be to adopt the current tariffs that we have with the EU”8—that is, the EU schedule agreed at the WTO for tariffs on non-EU imports (known as the EU most-favoured-nation (MFN) tariff).
Box 1: Tariffs and the World Trade Organization (WTO)
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The WTO was founded in 1995 to provide a global framework for trade. It currently has 164 members, accounting for 95% of world trade.9 WTO negotiations produce general rules that apply to all Members, and specific commitments made by individual Member governments which are listed in ‘schedules of concessions’.10 Schedules include the maximum tariff levels that will be imposed on a particular product, as well as tariff rate quotas (which allow for a product to be imported at a lower tariff, up to a set quota), limits on export subsidies and some kinds of domestic support.11 The EU has a single Schedule for all its Member States. One of the key principles that all WTO members sign up to is that countries should not discriminate between trading partners.12 This principle is known as most-favoured-nation (MFN) treatment and means that if a country decides, for example, to lower a tariff for one country it must do so for all WTO members.13 Some exceptions are allowed: countries can negotiate free trade agreements, for example, which might give preferential access to a country or group of countries with whom the agreement is negotiated.14 |
What might tariffs mean for the price and availability of food?
EU MFN tariffs
11.The average EU MFN tariff on food is approximately 22%.15 There is significant variation, however, depending on the type of food. Data provided by the UK Trade Policy Observatory show the average tariff for whole milk is 70%, but for low-fat milk it is 36%; beef is subject to a 56% average tariff, but the tariff on poultry is 14%.16
12.Witnesses to this inquiry were keen to stress that the imposition of a 22% tariff on imports from the EU did not automatically equate to a 22% increase in the price of food paid by consumers, as food prices are affected by a wide range of variables. Andrew Opie, Director of Food and Sustainability at the British Retail Consortium (BRC), for example, told us: “It is too simple to say that there is a tariff and therefore the food price will go up … the biggest influence on increasing food prices in the last 18 months was the currency devaluation … There are lots of other factors.”17
13.A number of organisations have, however, modelled what the impact of tariffs on food prices might be. Mr Opie told us that the BRC had calculated the likely increase in retail price attributable solely to tariffs was 5–29% for beef, 6–32% for cheddar cheese, 9–18% for tomatoes and 5–10% for broccoli.18 The BRC explained: “The reason for the range is we do not know how domestic producers would react to price increases … would they raise their prices or would they put more of their own product on the UK market if they face tariffs to export to the EU”.19
14.The UK Trade Policy Observatory’s modelling predicts price increases of 5.8% for meat, 8.1% for dairy products, 4% for vegetables, 3.1% for fruit, 1.8% for bread and cereals and 1.5% for fish.20 Dairy UK, in evidence to the EU Select Committee’s inquiry into ‘Brexit: deal or no deal’, stated their modelling showed “a WTO schedule would push up the wholesale price of cheese by one third with retail prices rising by 20%”.21
15.Professor Tim Benton, Dean of Strategic Research Initiatives at the University of Leeds and Distinguished Visiting Fellow at Chatham House, summarised the evidence heard by the Committee as follows: “If we put tariffs on European produce, we will pay more for European produce”.22
16.George Eustice MP, Minister of State at the Department for Environment, Food and Rural Affairs (Defra), reiterated that the Government’s ambition was for a free trade agreement with the EU. Even if the UK were to trade under MFN rules, the Minister argued that “the impact on food prices is quite marginal”.23 He noted that “in a typical year food prices will go up or down by between 5% and 10%” due to fluctuations in energy prices, fuel costs and other factors.24
17.Witnesses to this inquiry, however, were clear that they did not want to see tariffs on EU food imports. The BRC, for example, stated: “In terms of Government action, it is essential we agree a tariff free deal on trade with the EU”.25 The National Pig Association wrote: “Tariff-free trade must be prioritized by the Government in its negotiations with the EU”.26 Which?, the National Farmers’ Union (NFU) and the Food and Drink Federation also shared this view.27
18.The Government hopes to negotiate a free trade agreement that would allow tariff-free imports of food from the EU to continue. If an agreement cannot be reached, however, the default position would be for World Trade Organization tariffs to apply.
19.While estimates vary, if tariffs were imposed based on EU most-favoured-nation rates it seems highly probable that food prices for UK consumers would rise.
20.We acknowledge the Minister’s argument that food prices are affected by a wide range of factors, and fluctuate frequently. But all this means is that price rises resulting from tariffs would be on top of increases that would have occurred anyway. We do not share the Minister’s view that these levels of price increases would be marginal for UK food consumers.
21.A number of witnesses to this inquiry stressed the importance of maintaining tariff-free trade with the EU. Given the potential impact of tariffs on food imports for consumers, we endorse their view.
Unilateral removal of tariffs
22.If the UK Government is unable to agree a FTA with the EU, it could choose to mitigate the impact of MFN tariffs on prices by lowering or removing tariffs from food imports. A WTO tariff schedule sets the maximum tariff that can be applied, but a country can choose to lower a tariff—as long as it does so for all WTO members. This could offer another mechanism to maintain the status quo of tariff-free imports of food from the EU, but would come with the additional obligation of allowing tariff-free access to all WTO members (not just EU Member States); without a FTA, the UK Government cannot waive tariffs on EU food imports alone.
23.The implications of this are discussed further in Chapter 5, where we consider the potential effects of importing more food from non-EU countries.
Existing trade agreements with non-EU countries
24.As an EU Member State the UK currently benefits from a variety of preferential trade agreements with non-EU countries, which have been negotiated by the EU. Agreements vary, but typically include tariffs being reduced or removed, and/or mutual recognition of regulatory standards, resulting in fewer non-tariff trade barriers.
25.Deborah Hankins, Deputy Director of Food Chain Policy at Defra, told us that there were “40 EU international trade agreements that cover 56 countries”.28 The Food and Drink Federation (FDF) calculated that UK imports via these agreements made up “more than 11 per cent of all UK food and drink imports in 2017”.29 The FDF argued that the “Government will need to secure an agreement with each third country”, as “loss of preferential access to these markets … threaten[s] our ability to import ingredients and raw materials that complement our use of UK produce to deliver affordability, availability, and choice of food for UK consumers”.30
26.The Minister told us that the Government was working “to ensure that the various equivalency agreements and existing free trade agreements continue to apply to the UK after we have left the European Union”.31 He said that, in most cases, it should be possible “to simply roll those agreements over and for them to continue to apply to the UK”.32
27.The EU Committee’s 2016 report on Brexit: the options for trade, however, concluded that it was unlikely that the UK would be able to retain access to these FTAs. Witnesses to that inquiry explained that the language of the agreements made clear that they only applied to EU Member States and that if the UK were to attempt to become an individual signatory, the other countries involved could use it as an opportunity to attempt to negotiate more favourable terms.33
28.The status of these FTAs during any transition period is currently unclear. The EU Commission’s draft withdrawal Agreement states that “the United Kingdom shall be bound by the obligations stemming from the international agreements concluded by the Union”34 during the transition period, and that the “Union will notify the other parties to these agreements that during the transition period, the United Kingdom is to be treated as a Member State for the purposes of these agreements”;35 but it is not guaranteed that the third countries with whom the EU has agreed these FTAs will agree to this interpretation.36
Tariff rate quotas
29.Some EU trade agreements also include arrangements for tariff rate quotas (TRQs). As explained in our report Brexit: agriculture, these provide alternative arrangements for products that would normally incur a high tariff.37 A TRQ allows for a product to be imported at low or no tariff up to a certain limit, and then the higher tariff applies. There is, for example, a TRQ that allows for over 280,000 tonnes of lamb to be imported to the EU duty free from countries including New Zealand and Argentina.38
30.Post-Brexit, the UK’s share of TRQs will need to be disaggregated from the EU’s. The current position on this has been set out by the House of Commons’ International Trade Committee:
“The UK and EU have reached an agreement on an approach for sharing out the TRQs—splitting the existing quotas by reference to three years of data on quota consumption. However, several major agricultural exporters (namely Canada, the USA, Argentina, Brazil, New Zealand, Thailand and Uruguay) have objected to this”.39
31.The Minister reaffirmed the Government’s belief “that the sensible approach is to adopt a principle of technical rectification on these issues … Let us look at historic use of the TRQs and then split them accordingly”.40 He also suggested, however, that it would not be “essential to have unanimous agreement at the WTO for the approach that we are adopting”, since countries commonly worked to proposed TRQs, and then “maybe after a decade or so it gets formalised and certified properly”.41
32.The Minister’s view that separating out the UK’s TRQs is a “technical rectification” is not universally shared. Rectification is a process that allows WTO schedules to be amended when the change does not alter the scope of a concession; a substantive change, however, is considered a modification and is subject to lengthier negotiations.42 Evidence to previous inquiries has suggested that separating the UK’s TRQs could be viewed as a modification of the EU’s schedules.43
33.Agreements negotiated by the EU have allowed the UK to benefit from low-tariff or tariff-free imports of food from non-EU countries.
34.The UK Government is confident that the majority of these agreements can be easily ‘rolled over’ and the status quo maintained. This is not, however, a guaranteed outcome, either during any transition period or afterwards. If current arrangements are not maintained, it is likely that the sudden imposition of tariffs and loss of tariff rate quotas would affect the price and availability of food for UK consumers.
35.The Government should urgently seek agreement from the relevant third countries that existing FTAs will continue to be honoured during the transition period. Determining which might continue to apply post-December 2020 (or post-March 2019 if no transition arrangement is agreed) and which will need to be renegotiated will then become the priority.
2 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129), p 29
3 Articles 43 and 121, 15 March 2018, Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, TF50 (2018) 33/2
5 Council of the European Union, European Council (Art.50) (23 March 2018) - Draft guidelines (7 March 2018): https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2018/03/European-council-Art.50-23-March-2018-Draft-Guidelines-1.pdf [accessed 18 March 2018]
6 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
7 For a more detailed explanation see European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129)
8 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72), p 56
9 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
10 World Trade Organization, ‘Members’ commitments’: https://www.wto.org/english/tratop_e/schedules_e/goods_schedules_e.htm [accessed 29 March 2018]
11 Ibid.
12 World Trade Organization, ‘Principles of the trading system’: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm [accessed 29 March 2018]
13 Ibid.
14 Ibid.
16 Ibid.
18 Ibid.
21 Written evidence submitted to the EU Select Committee, inquiry on Brexit: deal or no deal (Session 2017–19), Dairy UK (DND0031)
27 Written evidence from Which? (BFS0013), the National Farmers’ Union (BFS0010) and the Food and Drink Federation (BFS0006)
30 Ibid.
32 Ibid.
33 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
34 See Article 124, 15 March 2018, Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community
35 Footnote to Article 124, 19 March 2018, Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, TF50 (2018) 35 [accessed 29 March 2018]
36 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)
37 European Union Committee, Brexit: agriculture (20th Report, Session 2016–17, HL Paper 169)
38 Written evidence submitted to the EU External Affairs Sub-Committee and the EU Internal Market Sub-Committee, joint inquiry on Brexit: the options for trade (Session 2016–17), Peter Ungphakorn (ETG0005)
39 House of Commons International Trade Committee, Continuing application of EU trade agreements after Brexit (First Report, Session 2017–19, HC 520)
42 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)