Slashing tariffs won't redeem a no-deal Brexit

Fast-forward past next week’s critical Brexit votes in the United Kingdom parliament. If Britain ends up leaving the European Union without a deal, it will have to set its own independent trade policy for the first time in a generation.

How would it mitigate the trade frictions it will face outside the bloc?

Brexit supporters have a beguiling answer: eliminate all tariffs unilaterally. Some, including a former Australian prime minister, even suggest this could make leaving the European Union a net positive for the UK economy.

Expect to hear a lot more of these arguments if Prime Minister Theresa May’s deal is rejected next week.

There are good economic reasons for removing tariff barriers unilaterally. If Britain leaves without a deal, it should seriously consider doing so; amid the ensuing chaos, it would be a long time before the UK got a free trade agreement with the EU or any country for that matter.

The problem with these arguments, though, isn’t that they are wrong, but that they over-promise. Removing tariffs really won’t offset the cost of Brexit.

The UK government has yet to say exactly how it will treat imports, but reports have emerged over the past week that the Department for International Trade plans to slash tariffs by 80% to 90% if there is no deal.

These kind of cuts are hardly a radical idea: two-thirds of all tariff cuts between 1983 and 2003 were unilateral.

The simple reason for this is that tariffs tend to hurt the country imposing them as much as, or more than, they hurt its trading partners, something economists have long known.

Tariffs are a form of subsidy and a tax on one’s own citizens. United States President Donald Trump’s measures were costing US consumers about $1.4bn a month by the end of 2018, according to research by the Center for Economic and Policy Research.

Freeing trade by eliminating such protectionist measures allows human capital to be redeployed where it is more competitive and gives consumers access to goods that are cheaper.

But the disruption can be painful, and industrial and farming lobbies powerful: the rural shires are the traditional backbone of Britain’s ruling Conservative Party.

Little surprise, then, that the government has reportedly sought to mollify opposition by exempting agriculture from its liberalization agenda.

With or without a carve-out for politically sensitive industries, though, unilateral tariff reductions (or unilateral free trade, as it’s sometimes called) will not, as some Brexiters claim, make a no-deal exit economically attractive.

An analysis by researchers from Princeton University, the Federal Reserve Bank and Columbia University found that unilateral liberalization would reduce the damage to the UK economy from a no-deal Brexit by 0.3 percentage points; but leaving would still have a cost.

In a paper last year by the UK Trade Policy Observatory, each of the five Brexit scenarios that it studied led to UK manufacturing taking a hit. Unilateral tariff elimination, the think tank estimated, would halve the costs of a hard Brexit – meaning UK prices would rise by 2.5% instead of 5%.

But unilateral tariff elimination would have a negative impact on producers: demand for UK goods would drop by more than 12% instead of 5.5%.

The tariff talk feels like a smokescreen. The Brexit-related costs that will have the greatest impact over time are the non-tariff barriers, applied to both goods and services.

These include things like regulations on product standards, certifications and mutual recognition of qualifications. Then there are the costs of border controls to ensure regulatory compliance, collect tax and conduct inspections.

And, of course, unilateral tariff reductions won’t help Britain compete in services, since tariffs aren’t applied there.

All this may seem far removed from the political frenzy about next week’s vote. It’s not. With parliament poised to reject May’s proposals a second time, expect much rehashing of arguments in favor of a departure without a deal.

Slashing tariffs may make the best of an awful situation, but it’s no magic formula for wiping away the trade costs of Brexit.

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