30 days until Brexit and still no clarity on trade terms

There’s only 30 days before the UK is due to leave the EU and we still do not know what our terms of trade will be in the event of no-deal. Yes, we know that in a no-deal scenario, both sides will be obliged to apply their “MFN” tariff rates to the other’s trade. And yes we also know how this would effect UK exports because the EU’s MFN rates are already published. However, the government remains silent on what tariff rates would be applied to imports, despite constant assurances of an imminent announcement.

Up until last autumn, the general assumption had been that the government would simply copy and paste the EU’s tariff rates. After all, this is what the government said it would do in its Trade White Paper and other official publications and it was an approach widely supported by business groups keen for continuity and predictability. But it all assumed that the UK and the EU would reach a trade deal in which the two sides would grant each other preferential access to their markets and MFN rates would not apply.

The growing prospect of a no deal Brexit forced the government to reconsider that approach. The first indication of a change in the government’s thinking came just before Christmas in the no deal “technical note” on customs which casually mentioned that the UK’s MFN tariff rates “may be different” to those of the EU. Since then there appears to have been a significant and protracted argument between government departments as to exactly what rates should apply.

Not surprisingly, the most contentious area appears to have been food and agricultural products. The Treasury, concerned about the effect of high MFN tariff rates on food prices, has pressed hard for cuts to existing MFN rates, even if these are not mirrored by the EU. DEFRA, on the other hand, keen to protect farming stakeholders, has pressed for high MFN tariffs and Michael Gove listed sheep meat, beef, poultry, dairy and pig meat specifically in his recent speech to the NFU.

There should be no surprise that the Treasury and DEFRA are taking different views, reflecting the interests of their stakeholders and at some stage there needs to be a properly rounded debate about tariffs as part of the UK’s future independent trade policy.  But in the short term it is more important for traders to have clarity on what actual rates will apply on 29 March as these will be affecting orders that are now being placed.

And it is not just those the trade with the EU that need to know what the rates will be. These rates will also apply to imports from any other country that the UK has an MFN relationship with. That includes China and the US.

There is also the issue of what tariff rates would apply to imports from countries that currently enjoy preferential access to the UK market because they have signed free trade agreements with the EU. Where there is no agreement to extend these deals to the UK post Brexit then imports from these countries will also be subject to MFN duties. As of 27 February, extensions of bilateral free trade agreements had been secured with only Chile, Switzerland and group of Southern and Eastern African states, the Palestinian Authority, Israel and the Faroe Islands.

On the other hand, Japan and Turkey have both said that it will not be possible to extend existing EU agreements to the UK from 29 March. The reasons differ, but the effect will be the same; imports from these countries to the UK in the event of a no-deal Brexit will become subject to UK MFN rates. In the case of Turkey this raises the prospect of new tariffs of up to 11-16% on imports of clothing and footwear (depending upon what level the UK decides to set its MFN rates at).

That leaves about 50 countries (albeit some of them very small in trade terms) where discussions about the possibility of transitioning their trade deals by 29 March are ongoing including with significant suppliers such as Canada, Mexico, Norway, South Africa and South Korea.

There is slightly better news for those that import from developing countries, where the government has pledged to maintain at least the same level of preferential tariff access to the UK, regardless of the level of MFN rates. This will ensure that duty free access from the very poorest countries (e.g. Bangladesh and Cambodia) will continue whatever else happens.

The UK’s MFN rates will affect the cost of importing not only from the EU, but from almost every other major supplier of retail products to the UK. However, since before Christmas the government has removed any sense of certainty as to what these MFN rates should be creating even more uncertainty for business.  It must remove this certainty by publishing in full its no-deal tariff rates immediately.