News has broken that in the event of “No Deal”, up to 90 % of tariffs will be removed. Confirmation seems to have come from a refusal to deny from Greg Clark, Business Secretary.
Naturally, views have been expressed, from all political vantage points. The opposition can be expected to oppose. Some in government have expressed reservations.
The announcement seems to have been leaked to Sky News. Greg Clark was later quizzed on Radio 4, indicating that formal notification will be made depending on the results of votes in parliament next week.
Perhaps the decision should have been made known in parliament first. May’s government has already been deemed to be in contempt. However, the substance, if and when all is revealed, is far more important.
In short, Sky News were apparently told that “only the 10-20% of the most sensitive items would retain their protection, including cars, beef, lamb, dairy and some lines of textiles”. The devil will prove to be in the detail.
The motive, apparently, is to prevent shop prices increasing, therefore anti-inflationary. There may be more to it.
Perspectives always create debate. An obvious position is that such a move leaves the UK “nothing to negotiate with”. There is a wider context.
Tariffs are currently decided at EU level. The recent imposition of tariffs on rice from Cambodia and Myanmar is a case in point. Market share for Italian grown rice has halved as consumers in Italy have moved to cheaper options.
From a UK perspective, all this does is to increase rice prices for British consumers. The impact on British farmers is negligible if any. The same can be said for thousands of commodities, bananas, wine, oranges and lemons, in fact the majority of fruit and veg items that appear on supermarket shelves.
The benefit comes to consumers with the removal of taxes on healthy produce. Instead of having to pay high EU process for oranges, these can be sourced from other countries at a lower price; South Africa, USA, Brazil. Whilst increase in choice provides consumer benefit, there may even be a positive effect on the nation’s health.
The larger benefit goes to those who spend a higher proportion of their income on food, specifically the lower paid. Wading through economic theory and reminded of Keynes’ Circular Flow model, there is a knock on effect to the wider economy, income being made available to spend elsewhere. The lower paid are less likely to save so the benefit is multiplied.
Whether or not there is likely to be a detrimental effect on farmers depends on two main factors. Will British produce still be protected? As has been referred to, beef, lamb, dairy and other products from overseas would appear to retain tariffs.
The other critical factor is how the government reorganises payments to farmers. If tariffs are to be removed in some areas, then by implication, the UK will not have to follow the Common Agricultural Policy (CAP).
Payments can be made to protect land, husbandry and the environment rather than to manipulate markets. Of course, this may mean that farmers have to reassess how they look at costs and incomes. If incentives are land management based and sufficient, then output costs depend on marginal rather than average revenues.
This would not be new. Historically under CAP, farmers have often made losses on crops, the subsidy being higher than the loss. The onus is on DEFRA to process the figures with the government to make the right decisions.
Several parliamentary select committees have heard that productivity growth has been hampered by protectionism. USDA figures show British agricultural productivity from 2001-12 averaged 0.8% annual growth as compared to the developed country average of 2%. There is still ground to be made up.
Of course, there will also be losers. French, Italian and Spanish wine makers can expect to lose market share in Britain as tariffs are removed from USA, Australia, South Africa and South America.
Similarly, the Republic of Ireland will be subject to those tariffs on beef and dairy products. Their major export markets for beef, Irish Cheddar and Irish butter will see their products more expensive in the UK. However, this may provide other opportunities for UK farmers.
So what about manufacturing?
Some answers may be provided by further select committee hearings, notably involving the economist, Patrick Minford. For those who are unaware, Minford is maligned by many but has some outstanding credentials. He was one of a group of economists associated with the Thatcher government of the 1980s.
Much of his work related to the breakdown of the trade off between inflation and unemployment, referred to as the Phillips Curve. The late 1970s to early 1980s saw both increasing inflation and unemployment.
Minford is also known as a ‘supply side’ economist. Here is an attempt to summarise that particular school of thought.
A market is essentially where buyers and sellers meet. Demand from buyers is determined by a variety of factors, notably price, price of other goods, incomes and tastes. Supply is based on profit, in turn the difference between revenues from consumers and costs of inputs. For some goods, environmental factors, technological progress and government intervention also apply.
In general terms, the higher the price, the less will be demanded, conversely, the more suppliers are prepared to supply. Economists love their graphs. We are used to seeing the following:
In a normal market, if the price is set too high, what is supplied will not be sold. If the price is too low, the supplier will see that goods sell too quickly. The market will find its balance or equilibrium, on our graph at a price of p1 and output of q1.
If Minford is right and world prices for commodities are lower (without tariffs) than EU prices, British suppliers will be able to make more profit at any given price. This has the effect of shifting supply, diagrammatically, to the right:
We can see that our market produces more, resulting in a lower price, or at least with no inflationary pressure.
The same basic principle applies to a whole economy. If we can reduce costs by increasing productivity, whether that is in pure costs, technological progress or by any other means, we can experience economic growth without unnecessary increases in price. For Price, in a whole economy we can think of the Retail Price Index (RPI). For Quantity we can think of Gross Domestic Product (GDP).
In a nutshell, the essence of supply side policies in a free market leads to lower prices, higher output and incomes and potentially higher employment to meet that increased output. If Britain is capable of more supply, we will attract inward investment.
In the shorter term, the Business Secretary seems to have suggested selective removal of tariffs. Among those is the car industry, although it is suggested that car components will be tariff free.
According to the European Automobile Manufacturers Association, the EU accounts for 85% of UK car imports, roughly 69% of cars on British roads. However, the supply chain is heavily integrated. The cost of producing cars in the UK will therefore remain the same if components are imported from the EU, potentially reduced if sourced elsewhere.
If EU finished cars are to become more expensive, then there are opportunities for those manufacturers staying in the UK to target that 69%, for example Jaguar to replace BMW and Mercedes fleets, the Astra or Corolla to replace the Focus or Golf.
In the longer term, technologies are changing. Diesel and ultimately petrol are forecast to be in decline. Any tariffs that are collected can be redirected into infrastructure investment in electric vehicle technologies as illustrated by representatives of Nissan, with a view to FTAs in the future, thus competing on a world stage.
Should the extensive removal of tariffs be welcome or a threat?
Much depends on perspective. If on goods which are not produced in the UK, then there is an opportunity to improve quality of life, reduce costs and simulate growth for the future. If the objective is to maintain existing ties with the EU, then there may be some concerns.
On balance, the threat to one of the top export markets for EU output might just be enough to prompt the EU to make realistic concessions on the flawed Withdrawal Agreement.
This post was originally published by the author on his personal blog: http://www.rexn.uk/2019/03/07/tariff-reduction/