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ESRI: Brexit To Hit UK-Europe Trade

by Amanda Banks, Tax-News.com, London

28 November 2016

If the UK's trading relationship with the EU reverts to World Trade Organisation (WTO) rules post-Brexit, the impact on trade with individual EU member states will depend on the volume and nature of the merchandise traded, Ireland's Economic and Social Research Institute (ESRI) has said.

ESRI analyzed bilateral trade flows between the UK and each of the 27 other EU member states. It obtained information on the value and unit/weight of over 5,200 product lines and matched each line to the external tariff applied by the EU to third country trade as registered with the WTO where there is no separately agreed trade agreement.

"In the event of a 'hard' Brexit and no immediately agreed trade treaty, we assume these third country tariffs would be the fall-back or default position between the EU and UK. We further assume that these tariffs would be applied by both the EU and the UK," ESRI stated.

The report explained: "The WTO tariffs vary widely across products with many subject to a zero tariff while some products are subject to a tariff as high as 75 percent (for water pipe tobacco). Many basic products and commodities are subject to both an ad valorem tariff and a weight based tariff which often results in high overall levels of tariff."

"This implies that the aggregate impact of Brexit under a WTO scenario is a function of the detailed trade patterns and the impact will thus vary considerably across EU member states."

The report noted that the UK's most important trading partners are Germany (10.2 percent of total merchandise exports) and France (5.9 percent), while Croatia and Latvia account for only 0.05 percent and 0.07 percent of UK exports, respectively. It said that the UK is a particularly important destination for merchandise exports for certain countries, accounting for 13.7 percent of Irish exports and 10.1 percent of Cypriot exports. By contrast, Croatia and Slovenia export only 1.7 percent and 2.2 percent of their merchandise to the UK, respectively.

ESRI calculated that, overall, the application of WTO tariff rates on exports from the EU to the UK would result in an average (minimum) tariff of 4.1 percent. At two percent, the lowest tariff would be imposed by Luxembourg, whereas the tariff on UK exports to Ireland would be six percent (with a potential maximum value of 11.7 percent).

ESRI also found that "the implied tariff that would be imposed by the UK on goods coming from the EU would be higher than that applied by the EU." It estimated that the average minimum tariff would be 5.7 percent, but that tariffs imposed on imports from Denmark and Ireland would be over 10 percent.

On a sector-by-sector basis, a number of sectors – including paper products, pharmaceuticals, iron and steel – would face either no tariff or a rate set very close to zero. On the other hand, ESRI calculated that food, clothing, and tobacco products would face the highest tariffs. Meat products exported from the UK to the EU could be hit by tariffs of 49.4 percent, while cereals could face tariffs of 45.7 percent, and tobacco 38.1 percent.

Overall, ESRI estimated that, under this scenario, the EU's exports to the UK would fall by 30 percent, representing a two percent reduction in its total world trade. Ireland and Belgium would be worst affected, losing four percent and 3.1 percent of their total exports, respectively.

It added that the UK's exports to the EU would fall by 22 percent. However, "as these reductions apply to 27 trading partners, the aggregate effect is larger than that of the EU with the UK facing a fall in its total trade of 9.8 percent," it explained.

TAGS: tax | free trade agreement (FTA) | value added tax (VAT) | Belgium | Denmark | Ireland | Slovenia | tariffs | World Trade Organisation (WTO) | trade treaty | Latvia | Luxembourg | United Kingdom | food | France | Germany | trade | European Union (EU) | Croatia | Europe

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