I am sure we all understand the situation Nissan and other companies which export a majority of their UK production to the Eurozone will find themselves in after Brexit. They will face 10% tariffs by the EU on these exports, and it stands to commercial reason they would then be better off re-locating their production into the Eurozone, where they would face 10% tariffs only on their re-exports into the UK – a lesser percentage of their total turnover. Neither we nor they want that.
The obvious solution is export subsidies. Payments would be made directly to the foreign importer on presentation of their receipt for import tariffs paid, with the exporter acting simply as agent. We could for example implement an export subsidy regime which is a mirror-image of our import tariff regime, with the latter funding the former. For as long as we run a deficit the Treasury would make a profit, but when we move into surplus it would make sense to negotiate trade deals wholly or partly removing both subsidies and tariffs together. Provided our import tariffs, and thus export subsidies, on cars are the same as the EU’s Nissan will not be affected by Brexit. Indeed the effect would be like unilateral free trade for exports only – no need to negotiate anything with anyone!
The question then arises as to whether this would contravene WTO rules. These are governed by the Anti-Dumping Regulations and the Agreement on Subsidies and Countervailing Measures, often referred to together as “AD-CVD”. Dumping and subsidies — together with anti-dumping (AD) measures and countervailing duties (CVD) — share a number of similarities. Many countries handle the two under a single law, apply a similar process to deal with them and give a single authority responsibility for investigations. Occasionally, the two WTO committees responsible for these issues meet jointly.
I am not a lawyer but it seems clear to me that my proposal would neither be dumping – defined as the export of a product at a price lower than the price it normally charges on its own home market, nor would it contravene either of the two categories of subsidy –Prohibited subsidies: subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods, or Actionable subsidies: in this category the complaining country has to show that the subsidy has an adverse effect on its interests, otherwise the subsidy is permitted.
Article 2 of the Agreement on Subsidies and Countervailing Measures defines a prohibited subsidy as being a payment to a specific entity within the jurisdiction of the granting authority. The payments I advocate here are payment to entities outside our own jurisdiction and are therefore perfectly legal.
In any case the most sensible course of action, which needless to say Theresa May’s government has not taken, is to negotiate a special transitional agreement with the WTO which could remain in force until we have eliminated our trade deficit. Such an agreement would be in the WTO’s interests as it has been unable to negotiate any further General Agreements on Tariffs and Trade (GATTs) since 1994, due to the massive international trade imbalances that have developed around the world since the onset of globalisation.
We need a new international regime which promotes equilibrium at balance. My proposal would not only do that from the UK’s perspective, it could also, with the proviso that only deficit countries may pay subsidies, be rolled out by the WTO as an international standard to everyone’s benefit, thereby recreating the conditions under which free-trade deals would be mutually beneficial. Otherwise there is always the option of not re-joining the WTO! For our economic survival our prime focus must be on eliminating our current account deficit as described in my last post. My proposal gives us for the first time the tools to manage our trade balance.
Let’s also just think through what WTO Rules mean as far as import tariffs are concerned. There are two principal requirements. First the Most Favoured Nation (MFN) rules require us to charge the same tariffs to all countries for each product category, and second, once we have re-joined, we cannot increase our tariffs we can only reduce them.
This means we have quite a wide range of options on how we set these tariffs (strictly speaking after Brexit but before we rejoin). We can level up to the EU tariffs, or even beyond, or we can level down to zero, or we can cherry-pick somewhere in between. It would make most sense to charge tariffs on those goods where UK producers can substitute, but zero-rate those we cannot or where we don’t want a cliff-edge increase in prices such as lettuces. However we do want to encourage UK producers to substitute for imports. This means a gradualist and selective approach; the former would have to be agreed with the WTO. We also want to make sure we raise tariffs as much as we can to maximise revenues for the Treasury as well as reduce the deficit.
Import tariffs are just another tax, but they are unique as a form of taxation that boosts the economy and creates jobs. Obviously (one would have thought) placing tariffs on both sides of the Channel will make foreign stuff more expensive than British stuff, which means people will buy more British stuff and less foreign stuff, thereby reducing the deficit, creating jobs, boosting the economy and providing additional income for the Treasury all at the same time! If we level up to EU tariff rates the additional income for the Treasury could be as much as £25bn. Of course the same is true on the other side of the Channel, but as we have a deficit the impact is less. All this talk of crashing out and disaster is pure Remainian fantasy.
Of course there are always those Magic Money Tree growers who want zero tariffs now! Zero tariffs will have the opposite effect and just increase the deficit still further. But consider this. Given that the Treasury must fund public expenditure somehow, whatever level of expenditure we settle at, and that all other forms of taxation reduce consumer demand and employment, surely it makes sense to have import tariffs in the mix?
In recent days we have seen a resumption of Project Fear, but we must address the points that arise and show how we will deal with them otherwise uncertainty will continue. I have answered the Nissan and Lettuce issues above, so that leaves Felixstowe and Whisky unless I have missed something.
The Felixstowe issue involves bonded containers arriving from Asia with products for re-export all over Europe. The concern is that they will face double tariffs; once here and then again on re-export. Again the solution is obvious – zero-rate imports for re-export! We will be perfectly free to do that. Yes we would lose 20% of the tariff revenues (the other 80% is paid across to Brussels anyway at present), but that is peanuts compared to the revenues we will be getting after Brexit.
The Whisky issue is a classic government cock-up. This concerns those countries with which the EU has free-trade agreements, such as South Korea. On Brexit, if we haven’t agreed roll-over treaties with those countries, our exports will face their normal tariffs – 20% in the case of whisky to South Korea. Needless to say the Government could have started doing this two years ago but hasn’t. As a result there are now ships loaded to the gunnels with whisky for South Korea, for example, and they are not expected to arrive until after 29th March. As the Government is culpable it should bear the cost of these tariffs until the relevant roll-over treaty is in place so that trade can continue smoothly.
John Poynton 