Tariffs back in vogue

Free trade is under threat. The US has withdrawn from the 12-nation Trans-Pacific Partnership; is set to renegotiate the North American Free Trade Agreement; and President Trump has stated he will only enter trade deals with individual allies. The UK, meanwhile, is coming to terms with Brexit.

By Charles Orton-Jones

Most businesses would rather have free trade and access to markets, but protectionism is gaining ground and trade maps are being redrawn. The UK is scheduled to leave the EU in March 2019. Assuming that goes ahead and that the exit takes the UK outside the single market and Customs Union, it will usher in a new era for trade.

The government wants the UK to be a global trading power but first, as a consequence of Brexit, it will need to exit the trade deals the EU has agreed with other world economies. Replacing the current network of deals will be complex. A report by the Financial Times estimates the UK will need to replace more than 750 international agreements to come close to what is being lost. This includes 295 bilateral trade deals, 202 regulatory co-operation arrangements, 69 fishing deals, 65 on transport, 45 on nuclear power and 34 on agriculture.

The UK won’t be entirely returning to scratch, however. World Trade Organization (WTO) rules govern trade for 164 member states and are collectively responsible for 95% of global trade. The UK will re-enter the WTO as an independent member and determine its own tariff schedules within the WTO rules.

> Read our guidance about preparing your business for Brexit 

Many nations, including Japan and China, conduct the bulk of their trade this way, and leaving the EU offers the UK the opportunity to sign bespoke trade agreements with these major economies. However, while the UK has the world’s fifth-largest economy, China is still likely to favour the EU, warns Simon Bevan, Head of the China Britain Services Group.

‘The UK isn’t even the biggest member of the EU in economic terms,’ he told Business Insider. ‘Is China more interested in the UK as a market than it is in the EU? Almost certainly not.’ Nevertheless, China will want to strike a deal with the UK to have a ‘friendly face in the West’.

What’s concerning for UK businesses is that while the government has stated its desire for ‘frictionless trade’, it remains committed to leaving the world’s biggest common market where frictionless trade already exists. As such, exporters could face significant tariffs under WTO rules. Cars could be subject to tariffs at 10%, lorries at 16%, and sugar beet at 109%.

Strategies will win the day

But tariffs are only part of the problem. Supply chains will be affected. Efficiency and competitiveness will suffer. Meeting different regulatory standards will be time-consuming and costly. Goods could be held up in Customs waiting for inspection. For some companies these barriers are more significant than the financial impositions.

However, there are ways to accelerate goods through Customs, even without a free trade agreement. A Mutual Recognition Agreement (MRA) is a sector-specific agreement, agreeing to recognise each other’s inspection processes. The EU has an MRA in place with the US for pharmaceutical goods, for example, which simplifies trade.

There is also Authorised Economic Operator status, a certification of reliability bestowed on a company to improve its conditions for export.

‘You need to develop strategies to mitigate the arrival of tariffs,’ advises Neil Barrell, Head of Manufacturing and Industrials, ‘such as focus on trading with economies where conditions will be favourable’.