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Cost of living gains from Brexit trade deals illusory, say experts

The Independent logo The Independent 09/12/2020 Ben Chu
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The general cost of living of UK households is unlikely to fall in the wake of Brexit and could well rise, experts have warned.

The government has suggested that new trade deals from next year will lower import costs, with the Department for International Trade recently suggesting the price of soy sauce in Britain is set to come down because of the new UK-Japan trade agreement which kicks in on 1 January.

But analysts warn that if the UK fails to secure a free trade deal with the European Union average prices faced by many British households are likely to go up rather than down.

They also stress that even if a deal with Brussels is concluded ministers are exaggerating the potential cost of living benefits from future new trade deals with countries outside the EU.

The argument made by many Brexit supporters is that the EU is actually “protectionist” when it comes to many agricultural imports and that by leaving the EU’s customs union the UK will be able to benefit from cheaper imports of foodstuffs ranging from meat, to fruit, to sugar.

While it’s possible some products could become cheaper in UK shops as a result of lower import tariffs from next year, this effect would almost certainly be swamped, in a no-deal Brexit scenario, by the upward price impact of new tariffs the UK would be forced to impose on food imports from the EU, the source of around a quarter of the UK’s food.

Research by the UK Trade Policy Observatory (UKTPO) at the University of Sussex and the Resolution Foundation has found that tariffs on EU dairy and oil imports could push prices up by around 8 per cent.

Meat tariffs could push prices up by 6 per cent and fruit and vegetable tariffs might increase prices by 3-4 per cent.

Some have urged the UK to unilaterally drop all import tariffs from 1 January in order to deliver a windfall of lower prices to consumers.

Yet the UKTPO has found that even this so-called unilateral free-trade approach would only result in a roughly 1 per cent fall in the price of affected imported goods.

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Separate analysis by the Institute for Fiscal Studies (IFS) found a similarly small effect.

“The reason the benefits were lower than people might expect is that the EU’s external tariff isn’t as high as people think,” says Peter Levell of the IFS.

“We also spend less than we think on actual goods. When you buy a tin of baked beans the price you’re paying is less the commodity than the transport and the storage and the marketing.”

In any case the government has decided against unilateral tariffs reductions next year.

Britain’s new “Global Tariff”, lodged at the World Trade Organisation in May, outlines the import charges that the UK would impose on every item from third countries with which UK does not have a trade deal.

Some tariffs are lower than the EU’s Common External Tariff, such as the zero import charges that would apply to items such as dishwashers, paints and baking powder.

Yet the government has largely retained the EU’s import tariffs on agricultural products such as lamb, beef and poultry in order to shield UK farmers from cheaper global competition and to retain negotiating chips for future trade deal talks with the likes of the US, Australia and New Zealand.

The benefits of trade deals are supposed to manifest as lower prices to consumers

Peter Levell, IFS

Unilateral tariff reductions would give other countries no incentive to reduce their own tariffs to UK exporters in these talks.

This leaves the question of what would happen to prices if the government did manage to conclude a free trade deal with the EU in time and also to roll over the EU’s various trade agreement from which the UK currently benefits.

Experts warn that, even then, there could be price increases because of new border bureaucracy and checks which would be passed on to consumers.

A study by analysts at Warwick and Bristol universities published earlier this year found some experts anticipate food prices rising by 6 per cent even if there is a Brexit deal. 

“The benefits of trade deals are supposed to manifest as lower prices to consumers,” says Peter Levell of the IFS.

The problem is that most experts are doubtful over how much genuine scope there is for the UK to achieve substantive tariff-reduction deals with other countries such as China and the US that would compensate for the increased cost of trade with the EU.

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