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A Zero Tariff UK Economy

by John Brian Shannon

Think about it for a second. The thing we call Brexit is being held-up by a tiny item called tariffs. It’s ridiculous. (OK, there are some other things too, but for today let’s talk tariffs)

At the moment, the UK is still a dues-paying member of the European Union and is therefore obligated to charge the same tariffs as any other EU country, and such broad agreement on external tariffs, combined with low or no tariffs between members, or even standardized tariffs between members, is part of what makes up what’s commonly called a Customs Union.

When the UK exits the European Union it’s right to assume that the UK will no longer charge the same tariffs as the EU.

In fact, that difference is part of the problem between the EU and the UK in the post-Brexit timeframe, and businesses near the Republic of Ireland and Northern Ireland border may find themselves affected by this change-up.


How Would a Zero-Tariff UK Economy Work vis-à-vis the European Union post-Brexit?

What if the UK decides to embrace an economy where no tariffs are charged?

There would, of course, be people who complain (on the UK side) about a loss of tariff revenue for UK government budgets, while on the Republic of Ireland (RoI) side, businesses located near the border might worry their customers will drive to Northern Ireland (NI) to save 6.5% worth of tariff value on their purchases.

Which are immensely easy problems to solve!


How to Solve a Disparity in Consumer Prices (Due to Tariffs) Across an Uncontrolled Border

  1. Offer a rebate to Republic of Ireland businesses located within, say, 100 miles (160 kilometres) of the Irish border and such rebates would be equal to the (tariff portion of the) savings RoI consumers would enjoy by shopping in Northern Ireland. In this way, RoI shoppers won’t bother travelling to NI to save (usually about 6.5%) on the price of imported goods and consequently, RoI businesses won’t lose sales to the (then) zero-tariff regime north of the Irish border. We’re talking about small amounts of money on each transaction — but over the course of a year, especially for small ‘Mom and Pop’ businesses in RoI, it could add up and potentially at least, represent a hardship for those business owners. Who will cover the cost of the rebates? The UK, of course. Why would the UK government want to do that? It’s just one more irritation that the UK government can remove from the negotiating table to simplify Brexit. Such rebates might cost the UK government as little as £1 million per year. Of course, it might cost as much as £20 million per year. But, with so much to gain (a quicker and less hairy Brexit) the UK government could afford to pay the Republic of Ireland those rebates a full 10-years in advance at the beginning of each decade.
  2. For businesses in the EU that import from other countries and are required to charge tariffs on behalf of their government — all they need to do after March 29, 2019 is add the UK to the list of countries they must charge tariffs.
  3. For companies that export from the UK in the case where those goods are shipped to the EU or other countries — there’s no hassle with a UK zero-tariff regime because there are no UK tariffs to add to the final price — no matter where those goods land in the EU or wherever in the world they go after that.
  4. The same is true for goods that originate in America (for example) but are shipped through the UK before being shipped on to the EU. Whatever the price of the item from America + zero tariffs added by the UK = landing in the EU with only the taxes or tariffs that originated in America. The UK adds nothing in the way of tariffs, nor takes anything away from those tariffs. The term for that is revenue-neutral tariffs.

It’s so easy when you know how!


How Could the UK Recover Lost Tariff Revenue and Pay the Proposed Irish Tariff Rebates?

There would be two costs for the Chancellor of the Exchequer to cover:

One would be the loss of tariff revenue which would represent a large annual cost — and the other would be the relatively small cost of rebates to RoI businesses located within 100 miles (for example) of the Irish border.

a. For as long as the UK has been in the EU Customs Union, consumers have unknowingly paid the cost of tariffs on goods imported from outside the EU. In some cases the tariffs involved are quite low, but in other cases EU countries are required to charge up to 18% tariffs on certain goods coming into the EU28. All EU consumers pay an average of 6.5% more for goods imported from outside the EU due to those EU tariffs. But as soon as the UK leaves the EU Customs Union it would no longer charge EU tariffs and the cost of imported goods in the UK would fall by an average of 6.5%. Which is a good thing, except that the Chancellor of the Exchequer would need to cut spending by that total sterling amount or, add 1% (or less) to the national sales tax to make-up for that lost revenue. Most Britons won’t even see the difference. But if you’re a Briton who buys a lot of imported goods you’ll be slightly better off.
b. If you’re a UK business, it’s one less piece of paperwork you have to deal with and one less revenue stream you must collect on behalf of HM government.
c. If you’re the Chancellor of the Exchequer, you’ll lose millions in tariff revenue, but you’ll gain even more from the (less than) 1% addition to the national sales tax. But even more important, you’ll save millions of pounds in spending to oversee, police, and navigate all that tariff collection. Those tariffs don’t get collected by themselves! Nor does every business remember to forward those tariff revenues to the government on time, etc. Nor will the Chancellor be required to keep abreast of competitor nation tariff structures and constantly adjust tariffs for the UK to remain tariff competitive, nor will the Chancellor be required to notify the WTO about tariff changes. Because, no tariffs!


A Word About the WTO

The World Trade Organization (WTO) is a great organization that was created to ensure countries play fair with each other, especially on tariffs and on the dumping of goods at outrageously low prices, thereby harming the country importing their goods. And if you’re a developing country, you definitely want to be a WTO member as the WTO will protect you from larger, more aggressive countries and their powerful transnational corporations.

However, it makes rules in accordance with its membership wishes and some of those rules may surprise you.

WTO rules do not apply to trading partners that charge tariffs lower than the WTO tariff schedule (which was recently increased to an average of 6.55% on a long list of goods) therefore, trade deals can be done more quickly without WTO tariff regulations to complicate things.

The WTO won’t arbitrate between non-WTO members, nor will it intervene where countries charge tariffs that are lower than the WTO tariff schedule. Nor will it involve itself where two countries have a dispute within a free trade agreement previously agreed by both sides — unless requested by one or both parties to mediate disagreements within that free trade agreement.

In short, countries that don’t charge tariffs have no dealings with the WTO, they owe it nothing, and they have no tariff disputes. (Because they have no tariffs to argue about)


Summary

Many things come together beautifully for the UK were the government to decide to operate a tariff-free economy.

Not only would Brexit be streamlined, the Irish border situation becomes simpler to settle, relatively small rebates can offset any hardships for RoI businesses located close to the Irish border, CEO’s from other countries would appreciate the ease of doing business in the UK, any losses in tariff revenue for HM government can be offset by a (less than) 1% increase in the national sales tax, and free trade agreements become simpler to negotiate.

The UK wouldn’t need to re-apply to become a WTO member, nor would it fall under WTO jurisdiction in trade matters, nor would the UK need to pay annual dues to the WTO.

And imported goods in the UK would become cheaper by an average of 5.5% roughly speaking (dropping the 6.5% average tariff on imported goods + 1% national sales tax increase on all goods = 5.5% cheaper on imported goods) which can help consumers in regards to their discretionary spending.

The government would save millions of pounds sterling annually because it wouldn’t need thousands of workers to work in the Treasury’s tariff section, adjusting tariffs, comparing tariffs, ensuring tariffs are properly implemented, ensuring that tariff revenue is properly submitted to the government by UK business, dealing with the WTO, and handling lawsuits caused by disagreements over which tariff schedule must be applied on a given product. And many more miles of red tape than that, that the UK government could forget about forever.

Just another list of the benefits of Brexit, my friends! Happy weekend!

Theresa the Brilliant, or Theresa the Appeaser?

by John Brian Shannon

It’s starting to heat up in Brexit-land after 17 months of jockeying for position, and this month more than any month since June 2016 might indicate whether UK Prime Minister Theresa May’s critics are right or wrong.

Will Theresa May travel confidently to the European Union this week to explain what she expects to receive in exchange for offering a £40 billion divorce payment? Or will she arrive and meekly accept whatever crumbs fall from the EU master’s table?

The result will determine what Prime Minister Theresa May will be called for the rest of her political life — she’ll either be known as ‘Theresa the Brilliant’ or ‘Theresa the Appeaser’ — or worse variations of those two titles.


Why Would the UK Choose to Offer £40 billion to the EU?

Certainly, the UK has pension and other legitimate obligations to the European Union that must be covered in the post-Brexit timeframe, no one is disputing that.

Also important to this discussion is that the UK has been and remains the second-largest contributor to the EU budget and is thereby part owner with the European Union of many shared buildings and properties — like the EU Parliament building in Brussels, for instance. (Total UK equity in the EC/EEC/EU institutions and real estate could be as high as £9.65 billion, although it’s difficult to find agreement on the amount)

So the question becomes; What’s the UK paying for, when it offers apropos of nothing, £40 billion?

Clearly, it isn’t to cover the legitimate obligations of the UK post-Brexit which amount to £6.15 billion, nor does it factor-in the UK’s share of the EU’s institutional equity — some £9.65 billion worth of land, buildings, and other holdings.

Indeed, Germany (#1) and the UK (#2) have paid the largest share of the EC/EEC/EU’s operating budget since 1972, and in recent years the UK’s annual net payment to the EU has hovered around £8 billion.

British Taxpayers: “If £40 Billion Isn’t Enough, Then It’s a WTO Brexit, Prime Minister”

Therefore it would seem that the £40 billion offer to the EU isn’t to pay future obligations, but that PM Theresa May has decided to pay in advance for (a) a bespoke free trade agreement with the European Union, (b) a bespoke Northern Ireland border agreement, and (c) to clear every single miscellaneous issue so that Brexit can proceed quickly.

And if that’s the Prime Minister’s thinking, it seems sound logic although it could be seen by some pundits as an expensive way to go.


Q: “Could I Have a Nice and Clean Brexit?”
A: “That Will be £40 Billion, Please.”

If Prime Minister May gets a nice clean Brexit, the UK can then sign free trade agreements with most of the countries and trading blocs in the world, in addition to maintaining a healthy trading relationship with the European Union which accounts for 15% of all global trade.

In addition to that, such a bespoke Brexit payment should guarantee perfect cooperation on a soft border between the Republic of Ireland and Northern Ireland.

It should guarantee that the European Court of Justice won’t comment or interfere on UK matters, and it will simply become one of many global courts that UK judges consult when making precedent-setting rulings.

And because in the whole history of the world there has never been such an unprecedented £40 billion divorce payment, Prime Minister Theresa May and every subsequent UK Prime Minister should be entitled to the utmost respect in EU capitals until the year 2100.


It Sounds Expensive, But It Isn’t

Once the UK signs free trade agreements with China, with all of the UK’s Commonwealth partner nations, with the United States, and perhaps ASEAN nations, MERCOSUR, Russia and its CIS partners, African Union member nations, and with other free trade associations like the Pacific Alliance, the UK will dramatically ramp-up exports to more than five billion people around the world.

If the Prime Minister and her negotiators can sign reasonable free trade agreements with much of the world immediately post-Brexit, it means that instead of paying the EU a net annual payment of £8 billion — increased exports and other positive economic activity (such as increased tourism) will boost the UK economy by £10 to £20 billion annually.

Making Theresa May’s present plan look brilliant, in retrospect.


A Slight Lag, Followed by Economic Boom

Although the first year won’t show instant results, and it depends on the quantity and quality of those free trade agreements and upon how quickly UK exporters can respond to the changed market, as time rolls forward, paying £40 billion to the EU in order to gain a bespoke Brexit and Free Trade Agreement might seem like an exceptionally wise decision by Theresa May.

At the very least and to get the ball rolling in the first few days after Brexit, the United Kingdom could coordinate military procurement with other Commonwealth of Nations countries so that navy destroyers, frigates, coastal patrol craft and army tanks required by Commonwealth countries could be sourced from the United Kingdom. The bonus of such a plan is that through bulk purchasing power and common design parameters, such military equipment costs could be reduced for all member nations.

That plan has ‘instant success’ written all over it because there is a real need among those countries for new and used UK military equipment.

Either Theresa May is one of the brightest politicians of our century (paying £40 billion to get free of the EU more quickly and completely, and by obtaining a bespoke UK/EU free trade agreement) or she’s heading off to Brussels this week to accept whatever crumbs the EU mandarins toss her way.

As the entire country waits this week for the news reports, let’s hope she’s the former.