December 23, 2019 8:54AM

Just Say No To UK-EU Tariffs

It’s hard to figure out sometimes whether Twitter reflects reality, but I’ve seen some discussion there suggesting that as part of the Brexit negotiations, the UK and the EU may be negotiating about the extent to which they will impose tariffs on each other. My measured and calm response to this is as follows: Stop it, stop it, stop it! The following is a brief elaboration of that response.

The debate over Brexit is a complex one. Oversimplifying quite a bit, from what I can tell, the majority of people in the UK hold the view that the economic integration aspect of the EU is good, but there is a sizable group that is concerned about the political integration aspect. Brexit is mainly a withdrawal from the political integration, but it necessitates a rethinking of the economic integration.

There are several key components of the economic integration: Zero tariffs on trade between the UK and EU; a common external trade policy; and regulatory alignment (also some complicated stuff about fishing rights). I want to focus here on the first one.

EU economic integration involves zero tariffs and zero quotas on all trade among EU member states. That’s the status quo. That’s where we are now. And that’s a great achievement. You don’t often see that in economic integration agreements. Tariffs are generally lowered, but not eliminated.

Normally, a trade negotiation would take place between countries who impose tariffs on each other, and they haggle over how much to bring them down. But the UK and EU are in a different situation, with a different starting point. There are no tariffs, so there should be nothing to haggle about it.

What this means is that when the UK and EU start negotiating their new economic relationship, they don’t have to haggle about tariffs. They can declare at the outset that tariffs (and quotas) will stay at zero, and they can move on to other things.

Now, there are some tariff‐​related issues they do have to talk about: Rules of origin (which products qualify as products of the UK or the EU and therefore benefit from the zero tariffs) and trade remedies (anti‐​dumping, countervailing duties, safeguards). I favor loose rules of origin and no trade remedies, but I acknowledge that these are hard issues and there is no way to avoid discussing them in the negotiations.

But with regard to ordinary tariffs, there is nothing to talk about. The current situation is great. Don’t mess with it!

I’ve heard two specific arguments for bringing up the possibility of ordinary tariffs in the UK-EU negotiations. First, the EU might want tariffs on agriculture, for instance if the UK deregulates food safety (e.g. the famous chlorinated chickens). But tariffs here make no sense. If the EU is concerned about imported UK products based on food safety issues, it can adjust its own regulations accordingly. Trying to set a tariff that accounts for the regulatory differences would be an ineffective approach.

The second argument is that the UK’s new regulatory approach (whatever it may be) could lead to trade barriers, and tariff‐​free trade is a “bargaining chip” the EU can use as part of the negotiations on regulation. (This could go in the other direction as well). In my view, this is a dangerous tactic. The idea seems to be that the other side will be more afraid of losing tariff‐​free trade than you are, and thus will cave to your demands on other issues. But there is a big risk that by putting tariffs on the table, you don’t achieve your other goals and you just end up with tariffs.

As hinted at in the previous two paragraphs, the really difficult issue is going to be regulation. As things stand now, the EU involves significant mutual recognition and some harmonization related to goods and services regulation, creating a “single market” for goods and many services. How do the two sides move to a new economic relationship that preserves as much of that as possible? There are no easy answers.

But on tariffs, there is an easy answer: Stay away from the tariff haggling, and move directly to the real issues that need to be negotiated.