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A Zero Tariff Trading Relationship Removes the Need for ‘the Irish Backstop’

by John Brian Shannon

Q: Why do EU negotiators feel the need to have an Irish Backstop?

A: The simple answer is that the EU has one set of tariffs (a tariff regime that’s part of the EU’s Single Market) and it’s expected that the UK would enact their own tariff structure after Brexit (as part of the UK’s modern industrial strategy) that might conflict with the EU’s tariff structure.


In Business for the EU or the UK?

European Union leaders feel the UK should remain in the Single Market to make life easier for the EU by ensuring that all tariffs are duly collected and remitted to the proper EU department and once you consider the serious budgetary pressures of Brussels-based politicians it’s understandable why they feel that way.

The question though is; Should the UK give up some amount of sovereignty (the ability to sign its own trade deals) so that another country or bloc can ease their budgetary pressures? What kind of logic is that?

Keep in mind that the day after Brexit, the EU becomes a competitor trade bloc and why should the UK help their competitors? Do other countries do that for the EU? (No) For that matter, do other countries do that for the UK? (Also; No)

The simple answer, of course, is that no countries do that. Ever.

The exception is where countries have reciprocal free trade deals with each other.

In the NAFTA countries (NAFTA remains in force until USMCA supersedes it) those countries collect and remit tariffs, levies, and fees on behalf of the others all the time, and nobody thinks a thing about it because it’s just normal business. That’s what valued trading partners do for each other.

See the problem here? The UK and the EU need a reciprocal free trade deal to solve any remaining Brexit issues — and more importantly — to prevent future problems in the relationship.

The UK and the EU have taken each other for granted for so long, that both sides think that taking each other for granted should remain the default mode even after Brexit.

Which is completely unreasonable — and such liberty-taking will eventually result in messy, unpredictable, and ultimately, disastrous results for business on both sides.

Living in each other’s back pocket since 1973 has been fun, hasn’t it? (Depends upon whom you ask, but for a time there were benefits for both sides) But that part of the relationship has ended and it’s time to create an honest relationship, one based on mutual respect, formal lines of communication, and healthy self-interest.


A Zero Tariff Free Trade Agreement with Equivalence Standards Solves All Remaining Brexit & Future Relationship Issues

So get on it!

Waiting and hoping isn’t going to get the job done, nor is each side trying to out-bluff the other going to get the job done, as we’ve seen over the past 2 1/2 years. Someone needs to grab the bull by the horns now before the official Brexit date of March 29, 2019 and do what needs to be done.

Playing the eternal political blame game as each side waits for political support in the other country to collapse isn’t what clear vision and leadership excellence is all about.

So, instead of defaulting to the failed Us vs. Them problem solving modality of the 20th-century, today’s leaders must move boldly towards a Win-Win problem solving modality, especially between Europeans sharing a hemisphere and as fellow NATO allies. And there’s no excuse good enough to do otherwise.

When you begin with a clear vision and add great leadership to carry out that vision, the results can only be good. Europe’s people on both sides of the English Channel deserve that good/better/best future!

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!

How a Tiny Tariff Could Change America

by John Brian Shannon

As the debate heats up over President Trump’s 25 per cent steel tariffs and 10 per cent aluminum tariffs (some countries are exempted by Presidential Order) it’s interesting to look at other scenarios that might play out better for the United States — and for other countries too.

First, let’s look at the scale of the American trade deficit problem, then we can compare different methods to adjust trade flows to help the United States avoid a projected $880 billion trade deficit with the rest of the world by FY 2019. No country, not even the mighty United States of America can withstand annual trade deficits of that magnitude.

At the moment, America’s biggest trade deficit is with China ($215 billion/yr) followed by Japan ($68 billion/yr) and Mexico ($65 billion/yr) while many other countries run double-digit trade deficits against the United States. In totality, such trade deficits are simply unsustainable for the U.S. and President Trump is right to address the issue, however, there’s always more than one way to accomplish a thing.


Total value of U.S. goods and services imports 2000-2017.

The timeline shows the total value of international U.S. imports of goods and services from 2000 to 2017.

U.S. Imports: The timeline shows the total value of international U.S. imports of goods and services from 2000 to 2017. In 2017, the total value of international U.S. imports of goods and services amounted to 2.9 trillion U.S. dollars. Image courtesy of Statista.


U.S. Exports. Total value of U S goods and services exports 2000 to 2017.

U.S. Exports chart. Total value of U S goods and services exports 2000 to 2017.

U.S. Exports: The timeline shows the total value of international U.S. exports of goods and services from 2000 to 2017. In 2017, the total value of international U.S. exports of goods and services amounted to 2.33 trillion U.S. dollars. Image courtesy of Statista


The Nature of the Problem

America’s trade deficit is an astonishingly simple problem that has developed over four decades — because when a thing evolves without proper guidance and oversight, eventually it becomes the thing that eats you — which is what’s happening to the United States in the 21st century.

Because policymakers allowed this monster to grow, it means the U.S. will import $557 billion more than it exports in 2017, instead of maintaining a normal balance of trade like other countries. And 2018 is projected to produce an $880 billion trade deficit for the United States, with a $1 trillion trade deficit sure to arrive by FY 2020 if action isn’t taken to address this catastrophe.

President Trump claims that the American trade negotiators of previous decades were ‘weak’ and got ‘out-negotiated’ by other countries and blames them for the present (uncomfortable) moment. But that isn’t accurate. However, it plays well with voters, and media outlets especially, thank Donald Trump for that characterization.

What happened is that America opened trade with China and other developing nations beginning in earnest in 1974, allowing generous trading terms to add impetus to America’s trade liberalisation goals. American policymakers assumed that once those developing nations got a real economy going, citizens of those countries would then purchase billions of dollars of American goods and the gamble would pay off handsomely. And therein lies the problem. Not every country reciprocated America’s largesse.

China, Japan, and other countries simply grabbed the Americans by their largesse and began exporting evermore billions of dollars worth of goods and services to America without buying much of anything from the United States.

Note: In Japan’s favour, the country’s carmakers aggressively lobbied Washington to be allowed to build factories throughout the United States and Canada which provided thousands of jobs across North America every year since 1987. Also, Japan bought hundreds of billions of dollars worth of U.S. Treasury Bills to help maintain the American economy. These wise actions ameliorated the concerns of U.S. legislators about Japan’s trade imbalance with the United States from 1987-2017.
Which should qualify Japan for a ‘Free Pass’ from all steel and aluminum tariffs IMHO, as Japan was led to believe by American legislators that their actions neatly covered any trade negatives in the U.S. / Japan relationship.


Asleep at the Switch?

If someone in America had been ‘on this’ it would have never gone this far. But someone in America was asleep at the switch and that’s why we are where we are, in 2018.

The problem, therefore, isn’t that America got ‘out-negotiated’. The problem is that certain countries took advantage of America’s generous trade terms but were reluctant to accept imports from the United States.

Whoever was in charge of international trade in the U.S. from 1990 until 2018 should have Fried in Hell for not raising the alarm and writing some appropriate ‘fair trade’ legislation that would serve as a check and balance against such one-sided trade flows.


The $10 Billion Tripwire Method

Countries that run trade surpluses of less than $10 billion/yr with the U.S. shouldn’t face American tariffs as those numbers typically go up and down many times over the course of a decade and can even reverse direction to America’s benefit, and in any case, rarely become double-digit or triple-digit trade imbalances.

But once a country hits the $10 billion trade deficit threshold with the United States, it should trigger alarm bells from Alaska to Maine and appropriate tariffs (like Donald Trump’s high-ish steel and aluminum tariffs) should automatically apply on exports to the U.S. from any country that surpasses the $10 billion tripwire.

It’s such a good idea that every country should do it.


The 5% Method

If the United States charged a truly nominal 5 per cent tariff on every foreign good and service it would raise $150 billion per year which is a substantial amount of money for any country, even a superpower.

The U.S. could use that money to subsidize American companies hit hard by low-priced imports since 1990 (maybe by providing financing assistance to allow them to build newer, more energy-efficient factories for example), to improve transportation corridors throughout the country (especially near America’s seaports), to upgrade the actual port facilities to allow for faster and more efficient throughputs of American products being shipped overseas, and to enhance security at every single U.S. port of entry.

This too, is such a good idea that every country should do it.


Balancing an Unbalanced Equation

If the United States adds a nominal 5% tariff to all foreign goods and services, and then on top of that tariff penalizes (with industry-specific tariffs) only the countries that run more than $10 billion trade deficits with the U.S., the entire problem will be solved within 5 years and the American economy will boom like never before.

Also, in a booming U.S. economy, countries like China will find that orders from America will increase and any losses felt now will be recovered within a year or two.


‘Corrective’ Tariffs Need to Replace ‘Punitive’ Tariffs

The only way to conduct international trade is with respect, with proper checks and balances, with mild tariffs designed to make corrections to uneven trade flows resulting from poor policy in previous decades, and none of it needs to be confrontational or nasty.

For the sake of its hard-working citizens, American policymakers must address these imbalances in a businesslike way — not to punish other countries — but rather, to ensure that every country that trades with the U.S. is doing so in a fair and transparent manner.