The UK-EU Trade Relationship: Part II

Looking again at UK trade data, I discuss what tariff costs UK exporters would face in the unlikely scenario that no Brexit deal (or interim trade agreement) can be reached and commercial relations would have to continue on a ‘most favoured nation’ (MFN) basis. The analysis is based on product groups established in the Harmonized System (HS) on the two-digit level, which allows to calculate some broad estimates of potential costs, but does not constitute a detailed assessment for each traded product.

1. An Update on UK Exports in 2016

Using data provided by the International Trade Centre (based on Eurostat data), I complement my previous analysis in Part I with information on UK exports in 2016. Interestingly, the data shows that UK exports to the EU increased again relative to 2015 while trade with other regions decreased. The difference between both trade flows narrowed from nearly £38,000 million in 2015 to about £17,000 million in 2016. See below for a brief overview:

UK_exports_2014-2016

Source: own compilation based on ITC & Eurostat data

2. UK Exports to EU Members by Product Group

As I have already shown in my first post, new markets for UK goods emerged rapidly over the last decade and British companies have increasingly found new customers in East Asia and other regions. Yet, a significant amount of UK exports are still directed towards Europe. For three-quarters of all HS-2 product groups, a majority of exports were traded with the EU in 2016 – see below for the quantiles:

0% 25% 50% 75% 100%
2.91 49.95 60.91 70.84 92.62

The following figure summarises these findings for each product category: the x-axis depicts the UK trade volume with Europe in percent; the y-axis shows the number of HS-2 product groups for each segment. The dashed line depicts the average UK trade across product categories with the EU, which equals 58.94 percent.

UK_Export_By_Product

Source: own compilation based on Eurostat data

3. EU MFN Tariffs 

The big question for the immediate future is whether the EU and the UK will be able to spell out an agreement that preserves most aspects of current relations concerning trade in goods. A free trade agreement (FTAs) would, at a minimum, consist of abolishing tariffs on most or all goods traded between the parties, thus leaving both sides free to conclude FTAs with other countries – which is an explicit goal of the UK government.

Preserving the mutual access to national markets that EU member states currently enjoy certainly constitutes a priority for both sides in the Brexit negotiations. The diversity of interests within both parties and diverging priorities – as well as any conditionality on other parts of the package Brexit deal – could, however, render the negotiations on trade in goods laborious and time-consuming. (Of course, the negotiations on trade will also be affected by many more issues, such as product standards, rules of origin, rules on the services trade, taxation, dumping, …)

In case no (interim) agreement is reached in time, the UK would revert back to WTO rules, i.e., UK exports to the EU would be subject to the EU’s MFN tariffs. The figures below describe the current EU MFN tariff structure. They both show that EU MFN tariffs are actually relatively low, with an average (dashed lines) between 4.7 (figure on the left) and 6.6 percent (on the right), and only few extreme values for individual HS-2 product groups.

EU_MFN_Tariffs

Source: own compilation based on Eurostat data 

Of course, there is a technical detail that makes both figures important for different reasons: in the one on the left, the average tariff for each product group is calculated by dividing the sum of tariffs through the number of all products in the group (including those without a tariff). This reduces the average tariff and introduces groups with an average tariff of practically zero. On the right, the sum of tariffs in a particular HS-2 product group is only divided by the number of dutiable items in the same group, thereby creating a potentially more accurate representation of the true impact of the EU tariff on traded goods, but reducing the utility of the figure for an assessment which does not distinguish between specific products and, instead, merely looks at the product groups as a whole.

4. Potential MFN Tariff Impact on UK Exports 

What would be the immediate costs for UK exports to the EU if MFN-tariffs would apply and which sectors could be affected most?

In 2016, the UK exported goods with a total value of £142,244 million to the EU. Multiplying the value of UK exports in each product category with the respective EU MFN tariff yields tariff costs of approximately £5,140 million, i.e., an effective tariff rate of 3.61 percent. Caveat: Because I calculate the potential tariff costs for whole HS two-digit product groups and tariffs vary widely for individual products, my results can only present a very rough estimate of potential costs.

Overall, there seems to be a linear positive relationship between the trade volume and tariff costs, with only a few outliers. Interestingly, product category 87 “Vehicles and parts thereof” would incur particularly high tariff costs (about £1,126 million) – a finding that is consistent with the present debate about the future of the UK automotive industry after Brexit. The 15 product groups with the largest trade volumes to the EU could potentially face the following tariffs:

HS Product Group HS Group Name UK Exports to EU 2016 in £ million Potential Tariff Cost in £ million
22 Beverages, spirits and vinegar 2742.44 32.18
27 Mineral fuels/oils 13111.46 190.47
29 Organic chemicals 3963.96 166.42
33 Essential oils; perfumery, cosmetic or toilet products 2643.90 62.71
38 Miscellaneous chemical products 2631.10 137.02
39 Plastics and articles thereof 5603.66 310.11
61 Apparel and clothing, knitted or crocheted 2036.47 236.30
62 Apparel and clothing, not knitted or crocheted 2469.59 285.57
71 Pearls, precious stones, precious metals 2686.91 15.59
72 Iron and steel 2065.63 4.83
84 Machinery and parts thereof 16241.82 311.27
85 Electrical machinery and equipment 10058.70 304.49
87 Vehicles other than railway and parts 17884.69 1125.57
88 Aircraft, spacecraft, and parts thereof 7246.19 222.56
90 Precision Instruments 5083.13 102.23

The figure below briefly summarizes the statistics for all product categories. The UK exports to the EU for each HS-2 product category are plotted on the y-axis; the potential tariff costs on the y-axis.

UK_ExportstoEU_UKTariffCosts

Source: own compilation based on ITC & Eurostat data 

5. Tariff Cost vs. Export Dependency on Europe

Finally, are UK exports highly dependent on the EU as a market and does this affect some product categories with high potential tariffs?

To answer this question, I subdivide the product categories into four groups based on the percentage of goods in each category that are exported to the EU. (See the table describing quantiles above.) I find that the first quantile – the product groups for which the trade dependence on the EU market is relatively low, i.e., below 50 percent of goods go to EU members – account for about £2,092 million of potential tariffs. This, includes several product categories with large trade volumes, for example, 87 for motor vehicles and 84 for machinery.

The product categories in quantiles two and three represent £779 million and £1,104 million respectively. The HS-2 product groups with the highest dependence on the EU as an export market, which describes categories in which more than 70 percent of exports go to EU member states, would incur approximately £1,164 million in tariff costs.

The figure below provides a rough overview of potential costs by plotting the EU’s MFN-tariffs on the x-axis and the UK exports to the EU for each HS-2 product category on the y-axis. All observations are labelled with the two-digit number of the respective HS product group. In addition, the colour of the individual observations indicates the amount of UK exports in the respective product group that is traded with EU member states.

UK_Exports_By_EU_Tariff.png

Source: own compilation; note that one observation with an extreme tariff value of 45 percent (product group 24 for tobacco products) was omitted in the figure.

 

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The UK-EU Trade Relationship: Part II