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Trade: tariffs

Tariffs are taxes charged on the import of goods from foreign countries.

What are tariffs and why do they exist?

Tariffs are taxes charged on the import of goods from foreign countries. While historically tariffs were used as a source of revenue for governments, they are now used mainly to protect domestic industries from foreign competition. They do this by increasing the price of imported goods in order to persuade consumers to purchase domestic products instead.

Who pays tariffs?

In general, the importer pays the tariff. Tariffs are collected by the national customs authority of the country into which the goods are being brought (so tariffs on goods entering the UK will be paid to HMRC). Exporters do not usually ‘pay’ the tariff as such ­– rather, they experience adverse effects from their product being made more expensive on the foreign market. This means they may have to cut their prices to remain competitive, for example.

How are tariffs charged?

Almost all tariffs are set as a percentage of the value of the goods in question. For instance, the current EU tariff on cars is 10% – so if a car imported from outside the EU costs £10,000, the tariff will be £1,000.

Some agricultural tariffs are set in relation to the weight of the product, rather than the value. For example, the EU tariff on butter is €189.60 per 100kg. So if an EU-based importer were to import a single kilo of New Zealand butter, regardless of the price, they would pay a tariff of €1.90.  

There are also more complex tariffs that combine a percentage and a per-kilo charge. These apply to highly sensitive agricultural products such as beef. Others still are based on the weight of a specific ingredient used in the product – for example, the tariff on chocolate is based in part on the weight of its sugar content.

Are there any restrictions on tariffs?

The ability of national governments to set tariffs is restricted by international commitments. Most major trading nations are members of the World Trade Organization (WTO) and so are subject to the obligations in its General Agreement on Tariffs and Trade.

The first of these is the ‘most-favoured nation’ (MFN) obligation: WTO members must charge all other members the same tariff unless they have a free-trade agreement (FTA) with them. This is often referred to as trading ‘on WTO terms’.

The second is that WTO members must not exceed the tariff rates they have committed themselves to in their schedules (essentially long tables of tariffs, itemised by type of goods, which members submit on joining the WTO). These maximum tariff rates are called ‘bound tariffs’. Some WTO members choose to apply tariffs below their ‘bound rate’ because they consider that a lower tariff rate would benefit their economies by encouraging trade.

Many countries also choose to sign FTAs to sit on top of their WTO commitments. Once a country has signed an FTA, the tariffs it can charge on imports from its partner (or very occasionally partners) are limited to the levels prescribed in that agreement. But it will continue to charge its standard WTO tariffs on imports from countries with which it doesn’t have an FTA.

Countries or trading blocs can also form customs unions. The European Union’s (EU) customs union is one example. In general, there are no tariffs on the movement of goods between members of a customs union, and a common tariff is placed on the import of goods from outside the union. In the case of the EU, this is the ‘common external tariff’.

Who sets the UK’s tariffs?

During the Brexit transition period, the UK remained subject to EU customs legislation, including the EU’s common external tariff (as well as enjoying free trade within the EU member states). This means that the EU’s common external tariff continues to apply.

The government is developing a new MFN tariff, to replace the common external tariff, which will come into effect at the end of the transition period. This new ‘UK Global Tariff’ will apply to all countries with which the UK does not have an FTA – which would include the EU, its largest trading partner, if no trade deal is agreed. This new UK Global Tariff would constitute ‘WTO terms’ as regards imports into the UK.

Under the Taxation (Cross-border Trade) Act 2018, the UK’s tariff is to be set in statutory instruments made by the Treasury. The Treasury is required to consider a number of factors before it sets the tariff, including the interests of producers and consumers in the UK. It must also have regard to any recommendation made by the Department for International Trade (DIT).

What tariffs is the UK going to apply?

When a no-deal Brexit first began to look likely, in February 2019, the government published a ‘temporary tariff regime’ (TTR) aimed at mitigating the shock of leaving the EU without an FTA. The TTR unilaterally eliminated the tariffs on about 87% of all goods imported into the UK. This would have helped to reduce price increases for UK consumers but producer groups, especially farmers, expressed concern at the impact it would have on their business.

Their main concern was that they would be opened up to greater international competition. While consumers might benefit from, say, cheap Argentinian steak flooding the UK market, UK beef farmers would stand to lose out, by losing market share or being forced to lower their prices to remain competitive. Despite these concerns, the Johnson government nonetheless chose to retain the TTR, with only minor changes, when the prospect of a no-deal Brexit was raised again in October 2019.

On 6 February 2020, DIT launched a public consultation on the UK Global Tariff. This, it stated, would replace the TTR, which was developed for a no-deal scenario that was “no longer relevant” following the signature of the Withdrawal Agreement.

The consultation proposes a range of simplification measures, such as the removal of so-called ‘nuisance’ tariffs (very low tariffs that cost more to collect than they raise in revenue). But it has been suggested that the government intends to take a less radical approach for the UK Global Tariff than it did with the TTR, with a higher proportion of tariffs remaining in place.

Institute for Government

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