Raising tariffs on imports of goods from the EU or other countries could harm the UK’s ability to export, an influential economics think tank will warn today.
There is a “pattern of interdependence” in the trade relationship between the UK and the EU which means tariffs could be damaging, according to Peter Levell, a senior research economist at the Institute for Fiscal Studies (IFS).
Levell said: “Over half of the UK’s imports from the EU are goods and services that are used as inputs in domestic industries – as are nearly 70 per cent of our exports to the EU.”
Imports from the EU accounted for 8.2 per cent of the added value embedded in UK exports in 2011, according to data from the Organisation for Economic Co-operation and Development cited by the IFS.
Tariffs on imports could therefore raise prices for British firms, with a significant knock-on impact on exports made with the goods.
The analysis comes as the government faces concerns around plans to make firms pay value-added tax (VAT) up front on imports from the EU, rather than at the point of sale.
The government is currently aiming for a trade deal which preserves much of the benefit of the tariff-free access to the EU’s Single Market the UK will have until Brexit in March next year.
However, the government has come under pressure from some members of the Conservative party to leave the EU without striking a trade deal. A “no deal” scenario would require the UK to impose tariffs set by the World Trade Organisation or a unilateral removal of all tariffs, a course favoured by some Brexit-supporting economists.
The economists also warned the government the complexity of modern supply chains, which can extend through multiple countries, makes striking out alone on bilateral trade deals with individual nations a risky course.
Levell said: “In such an interdependent world, multilateral trade agreements are more valuable than bilateral ones.”
Multilateral trade deals tend to be more beneficial for trade because of the importance of “rules of origin” requirements in trade agreements, the IFS said.
In many trade agreements goods must have a certain proportion of inputs from one country to qualify as an export from that country, in an effort to prevent firms from benefiting from favourable tariff regimes simply by adding finishing touches to products manufactured in another country.
Supply chains runnings across borders with separate trade deals can form a “spaghetti bowl” of agreements which can be tricky to negotiate, the IFS warned.
Levell said: “Outside the single market and customs union, UK trade would still be affected not only by the trade deals it strikes with other countries but also by the trade deals the EU has with third parties.”