A granular analysis of the exposure of UK exports to EU tariffs, quotas and antidumping under ‘no deal’

Giancarlo Corsetti, Meredith Crowley, Oliver Exton, Lu Han 13 December 2017

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Exporters in the UK today face heightened uncertainty over their access to the EU market. Brexit has created uncertainty regarding the future trade agreement between the UK and EU, and the resulting tariffs that UK firms will face to export to the EU. Leaving the Customs Union will also expose firms in the UK to the risk of anti-dumping orders imposed by the EU under the WTO’s rules on unfair trade.

There are, of course, a number of important studies assessing the economic consequences of Brexit (HM Treasury 2016, Bloom et. al. 2017, Breinlich, et. al. 2017, Dhingra et. al. forthcoming).  But as stressed in the UK Parliament’s Select Committee hearing on 6 December, there is a dearth of analysis of the sector-level risk to exports of a ‘no deal’ scenario.

To try to clarify matters, we conducted a detailed analysis of the exposure of UK exports to EU tariffs under a ‘no deal’ scenario. We identified, by product classification, the value of UK exports to the EU facing different levels of trade policy risk. Our analysis focuses on the two most pressing and quantifiable sources of trade policy uncertainty facing firms in the UK following statements by both the UK and EU that ‘no deal’ is a realistic potential outcome.

Regarding uncertainty over the baseline tariffs and quotas the EU will impose on imports from the UK in the future, our starting point is that the UK is a full member of the WTO and has the right to remain a member of the WTO after leaving the EU. Therefore, the highest possible import tariffs that firms in the UK will face to export to the EU in a ‘no deal’ scenario are determined by the EU’s WTO commitments. This means that some products will be able to enter the EU tariff-free, but others might be subject to high tariffs or restrictive quotas.

UK exporters also face the risk of special EU tariffs under the WTO’s antidumping or anti-subsidy rules.  This is not as far-fetched as it sounds – around the world, members of free trade agreements (FTAs) frequently use antidumping duties against one another. The EU is one of the most active users of trade remedies in the world, with 8.1% of imported products subject to a trade remedy over 1995-2013 (Bown and Crowley 2016). Previous EU antidumping measures have targeted imports from high-income countries including Australia, Japan, Norway, Singapore, South Korea, and the US.  Moreover, these types of tariffs are already a problem for UK exports. Currently, the US restricts imports of British steel wire rod because a 2016 US investigation found that British firms were dumping steel in the US market, while a major concern for the UK today is the US anti-subsidy tariff against Bombadier jets from Canada, which will hit UK exports of aircraft wings. With exit from the EU, the risk of more special tariffs is set to grow.

The sectoral risk under a ‘no deal’ scenario

Figures 1 and 2 use data from the WTO and the World Bank on product-level tariffs, quotas and trade remedy measures along with trade flow data from UN Comtrade to quantify the trade policy uncertainty facing firms exporting from Britain to the EU. We use data on UK exports to the EU in 2015 and provide two granular breakdowns of this trade policy risk. In figure 1, we provide a breakdown based on product classification (the acronyms are provided in Table A). In figure 2, we organize the same information into UK Standard Industrial Classifications to show which industries are most exposed.

Figure 1 The exposure of UK exports to EU tariffs, quotas and antidumping duties under ‘no deal’, by product classification

Notes: ANIM: Animal products, live animals; VEGE: Vegetable products; FOOD: Prepared foodstuffs, beverages, spirits, tobacco, edible oils; MINE: Mineral products; FUEL: Mineral fuels; CHEM: Chemicals; PLAS: Plastics and rubber; HIDE: Hides, skins, leather, etc; WOOD: Wood and articles of wood, pulp, and paper; TEXT: Textiles, fibers, apparel, etc.; FOOT: Footwear, headgear, umbrellas, etc.; STON: Stone, cement, plaster, ceramics, glassware, etc.; META: Base metals and articles of base meta; MACH: Machinery, mechanical appliances, electrical equipment; TRAN: Transportation: vehicles, aircraft, vessels; MISC: Miscellaneous.

Figure 2 The exposure of UK exports to EU tariffs, quotas and antidumping duties under ‘no deal’, by UKSIC industries

To start with the good news, we calculate that 34% of UK exports to the EU will remain tariff-free under a ‘no deal’ scenario, as long as the UK remains a member of the WTO. The green bars in both figures represent the value of UK exports that face no trade policy uncertainty in exporting to the EU – even under a ‘no deal’ Brexit, these exports will pay no tariffs and face no quantitative restrictions in the EU. From Figure 1, we can see that these tariff-free exports are largely in fuels and chemicals. Figure 2 refines the large chemical product group into chemicals and pharmaceuticals and shows that most pharmaceutical exports will enter the EU duty-free even if the UK leaves the EU without a deal.

Similarly, the blue bars quantify the value of exports that face low uncertainty – worst-case scenario tariffs of 1-5% ad valorem. Concern rises for yellow exports where tariffs could rise to 5-10%. The UK’s main concern comes from the orange exports suffering high uncertainty, with EU tariffs that could rise to 11-15%, and the red exports exposed to extreme levels of trade policy uncertainty – a worst case ad valorem tariff over 15% or the imposition of a quota or an EU trade remedy.

The bad news is that 27% of UK exports face high or extreme trade policy barriers in a ‘no deal’ scenario (this is represented by the sum of the orange and red bars in the figures). Products facing a risk of high or extreme trade policy barriers are predominantly concentrated in high-skilled and technologically advanced manufactured products, including transportation equipment and machinery. There is also considerable risk facing one of the UK’s environmentally friendly exports – biodiesel – a high-value export that has been the target of EU antidumping activity.

A gentler Europe in a ‘no deal’ scenario

Despite Europe’s history as an active user of antidumping policy against high-income trading partners, some might argue that antidumping duties against the UK are unlikely. If the EU commits to refraining from using antidumping duties on UK exports, then the ‘no deal’ scenario is slightly less gloomy. Figures 3 and 4 repeat the tariff-risk analysis in Figures 1 and 2, but omit antidumping duty risk. This is an alternative, extreme assumption. Under this assumption, the share of UK trade to the EU at risk of high or extreme trade policy barriers falls to 15% (from 27%) and the value of exports falls to £25.4 billion (from £47 billion). Thus, this is the lower bound of how bad things would get under a ‘no deal’ outcome in which the EU never used antidumping policy against the UK.

The preceding analyses have omitted other important sources of trade policy risk facing the UK. With the UK’s exit from the EU comes the danger that the UK will not be able to roll over the FTAS it subscribes to as a member of the EU. This could result in higher baseline tariffs as well as the loss of quota rights in these non-EU markets. The UK also faces considerable uncertainty over access to different sectors of the US market arising from the protectionist agenda of the Trump administration. These additional risks in markets outside the European Union underscore the difficulties that lie ahead.

Figure 3 The exposure of UK exports to EU tariffs and quotas under ‘no deal’, by product classifications

Notes: ANIM: Animal products, live animals; VEGE: Vegetable products; FOOD: Prepared foodstuffs, beverages, spirits, tobacco, edible oils; MINE: Mineral products; FUEL: Mineral fuels; CHEM: Chemicals; PLAS: Plastics and rubber; HIDE: Hides, skins, leather, etc; WOOD: Wood and articles of wood, pulp, and paper; TEXT: Textiles, fibers, apparel, etc.; FOOT: Footwear, headgear, umbrellas, etc.; STON: Stone, cement, plaster, ceramics, glassware, etc.; META: Base metals and articles of base meta; MACH: Machinery, mechanical appliances, electrical equipment; TRAN: Transportation: vehicles, aircraft, vessels; MISC: Miscellaneous.

Figure 4 The exposure of UK exports to EU tariffs and quotas under ‘no deal’, by UKSIC industries

Conclusions

On 6 December, the UK’s Parliamentary Select Committee on Brexit held a hearing on the impact of Brexit, emphasising the need for sound quantitative analysis at the sectoral level. In this column, we have offered a detailed assessment for manufacturing exports.

In summary, if the UK leaves the EU with no trade deal, firms in the UK will face significant policy barriers to export to the EU across a wide range of products. Under a ‘no deal’ scenario, £47 billion in UK exports to the EU would face high or extreme tariffs, quotas, or antidumping duties.

If the UK chooses to leave the Customs Union and attempts to negotiate a bespoke trade deal with the EU, then these products should be the priority in the trade negotiations.

Authors’ note: This research has been generously funded by the ESRC UK in a Changing Europe programme of Brexit Priority Grants.

References

Bloom, N, P Bunn, P Mizen, P Smietanka, G Thwaites and G Young (2017) “Tracking the views of British businesses: evidence from the Decision Maker Panel” Bank of England Quarterly Bulletin, 2017Q2.

Breinlich, H, E Leromain, D Novy and T Sampson (2017a), “The Brexit Vote, Inflation and UK Living Standards”, Centre for Economic Performance Brexit Analysis No. 11, London School of Economics.

Bown, Chad P. and Meredith A. Crowley (2016) “The Empirical Landscape of Trade Policy,” in Kyle Bagwell and Robert W. Staiger (eds.), The Handbook of Commercial Policy, Netherlands: Elsevier, forthcoming (chapter 1). Available as CEPR Discussion Paper No. 11216.

Dhingra, S., H. Huang, G. Ottaviano, J. Pessoa, T. Sampson and J. Van Reenen (forthcoming) “The Costs and Benefits of Leaving the EU: Trade Effects,” Economic Policy.

HM Treasury (2016), The Long-term Economic Impact of EU Membership and the Alternatives, HMSO.

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Topics:  Europe's nations and regions International trade

Tags:  Brexit, 'no deal', UK exports, EU tariffs, quotas, antidumping

Professor of Macroeconomics, University of Cambridge; Director, Cambridge-INET

University Lecturer, University of Cambridge; Fellow, St. John’s College

PhD candidate in Economics, University of Cambridge

Post-doctoral researcher, Faculty of Economics, University of Cambridge

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