If The EU Impose Tariffs On Post-Brexit UK, They Would Only Be Damaging Their Own Economies

06/03/2017 14:58
Chris Radburn/PA Archive

It is a fallacy to propose that the imposition of EU tariffs on UK goods would benefit Europe and economically damage the United Kingdom.

To begin with, why do people buy imported goods? They do so either because (a) these goods cannot be manufactured in the importing country, or (b) because the domestically produced goods are more expensive, or of lower quality. It would firstly be illogical to expect the EU to impose tariffs on any goods falling within the criteria of (a) - a point illustrated by the exclusion of Russian energy exports to the EU from sanctions - so the argument rests only on goods within (b).

Taking car exports as our example:

Around half of the UK's car exports head to the EU each year worth about £13 billion annually. The argument runs along the lines of 'if we leave the EU, then our manufacturing industries will face tariffs and decline." This would benefit the EU car manufacturers and disadvantage the UK's manufacturing sector as a whole.

However, in certain classes of cars - in particular the luxury end of the market, demand is inelastic (Geffen Goods), owing to a smaller pool of available substitutes. In this case, the effect is for the German consumer simply having to pay more for his Range Rover diverting his Euros away from other goods he would otherwise have purchased. The economic damage is, in this case, not felt by the German auto industry, but by other industries as a knock-on effect.

However, if the cars in question have an elastic demand then the effects are different, but still negative for the tariff imposer. Once the UK manufactured cars become more expensive and are effectively shut out of the European market the capacity within the market is reduced. Initially, the demand over balance will increase prices for EU manufactured cars. The second effect will be that European manufacturers will be forced to expand to meet the rising demand. Given that car manufacturing is a skilled occupation jobs will be taken from other skilled occupations. This will result in the first instance in higher wages within car manufacturing further increasing car inflation. In the second instance, there will be a skills loss in the other industries as workers are lured away to work in the car sector. This will result in lower productivity, capital loss, and sub-optimal economic performance.

In the UK, the effects will be reversed. Firstly, with an oversupply of UK produced cars in the domestic market, prices will fall leading to consumers being able to divert their surplus income into other consumer areas or they will save/invest their change. Secondly, there will be inevitable layoffs within the UK car sector putting skilled workers (of which there are a reported shortage of in the UK) into other sectors boosting their productivity. This is not pain-free for all, but the overall effect will be an enhancement of wealth creation and productivity.

With a contraction of imports the EU would also face balance of payments issues assuming that its exports remained at the same level, or alternatively face a reduction in exports adding to its economic deterioration. "The greater exports we have, the greater imports we must have, if we ever expect to get paid." The European exporter to the UK is paid in Sterling, and must import goods from the UK in order to redeem his Pounds. Therefore, any reduction in imports will lead to a balance of payments deficiency and a reduction in exports resulting in economic contraction in the EU.

Finally, that any imposition of EU tariffs on UK manufactured goods would result in plant closures is a fallacy. It is accepted that there will be some job losses in the sectors affected, but these would be limited as explained above. It would not make any economic sense for large scale manufacturers (assuming that they enjoy some form of optimal efficiency) as the cost of relocation into the EU would make such a move prohibitive, as would the loss of experienced and skilled workers, who could not reasonably be expected to relocate overseas, especially when their skills would be placed in demand by other manufacturers within the UK. Delays brought about by the establishment of a new plant within the EU, hiring and training of new staff, plus the negotiations of new contracts with suppliers would take many months, if not years, and result in a vast loss of market share and brand recognition.

Politicians in both the EU and the UK have been scaremongering us with stories of job losses and plant closures as Europe pulls up the drawbridge, but they are trying to take us for fools. Economists for decades have pointed out that tariffs damage the imposer. The politicians know this and this is why they actively seek free trade deals. It is perverse, then, for Brussels to try and warn us of Hard Brexit by the bogeyman of tariffs, when they know that they are in fact, threatening to shoot themselves in the foot.