Over the cliff edge – what would happen if exports to the EU were subject to tariffs

The continuing deterioration of relations between the British Government and the European Union has led to a renewed focus on the possibility of a hard Brexit, where all trade between the UK and the European Union would be subject to tariffs in line with WTO rules.

Previously, I had written about how Northern Ireland would bear a disproportionate cost of a hard Brexit, due to cross-border exports of dairy playing a substantial segment of the local economy. Under WTO rules, such exports can attract tariffs of 42%, which would render such trade uneconomic.

To show how a hard Brexit would impact upon Northern Ireland, I used data from the WTO’s tariffs database, and compared this with the Regional Trade Series data for 2016 published by HMRC for the 66 different product categories that they release statistics on. I used this to estimate what tariffs would have been payable if all of the UK’s exports to the EU in 2016 had have incurred tariffs in line with WTO rules.

A couple of caveats; the tariff data is highly complex, with tens of thousands of individual tariffs published for different products, so the tariff applicable for each product category is necessarily a simplified estimate. Also, were these tariffs to be introduced, the amount of trade with the EU would be expected to drop sharply, so obviously, the tariffs payable would fall as well.

Total exports from the UK to the EU in 2016 were £142.86 billion, which notionally would have attracted tariffs of £6.79 billion if such trade had incurred tariffs under WTO rules. At a total level, this would mean that exports to the EU would have incurred tariffs of 4.75%. However, due to the differences in the types of goods that are exported amongst the various parts of the UK, the impact of a hard Brexit would vary significantly.

The chart below shows the estimated tariffs that would have been levied on exports to the EU (the bars and the left hand axis), compared with EU exports as a percentage of GVA (the line and the right hand axis).

Scotland would have the lowest tariffs on exports to the EU (3.5%), due to the fact that petroleum products are such a proportionally large part of the Scottish economy, and these exports attract low tariffs. Conversely, Northern Ireland’s exports would attract the highest tariffs (7.6%), due to the high levies on agricultural and food exports, which are a proportionally large part of the Northern Ireland economy.

However, Wales and Northern Ireland would be doubly impacted by a hard Brexit, because in addition to their exports attracting the highest tariffs, exports to the EU form a larger segment of their overall economy than is the case in Scotland and England. Exports from England to the EU in 2016 totalled £107 billion, which represented 7.6% of total GVA of £1.433 trillion. By comparison, Welsh exports to the EU were worth £8.27 billion, or 14.8% of Welsh GVA.

Northern Ireland and Wales are already the two areas of the UK with the weakest economies. Northern Ireland GVA per capita was £18,584 in 2015, whilst in Wales it was £18,002. Scotland (£23,685) and England (£26,159) are already better off, yet it is Northern Ireland and Wales who would pay the biggest cost for a hard Brexit, due to the double whammy of their economies being both more exposed to the EU and their exports attracting higher levies than their English and Scottish counterparts.

The chart below shows the composition of 2016 exports to the EU by category for each of the UK areas, with the UK average WTO tariff for each product category in brackets. It shows how exports from Northern Ireland and Wales have proportionally more exports in higher bracket tariff goods than in other parts of the UK.

Of course, England is a huge and highly diverse region, and the composition of English exports will vary significantly amongst its regions. Imports of cars into the EU can attract tariffs of 10%, and so areas such as the northeast of England which export large numbers of vehicles to the EU could see significant costs from a hard Brexit as well.

If the UK goes over the cliff edge and leaves the European Union without a free trade deal, it will have severe ramifications for the entire UK economy. However, some parts of the UK will have a much heavier burden to carry than others, and it is the poorest parts of the country that have the most to lose.