Farmers, Risk and Brexit – Part 3 (Tariff barriers and who loses)

The analyses in Part 1 and 2 of this series looked at the total tonnage of livestock products and dairy that was traded with both the EU and Non-EU countries. See here and here. The quantities were expressed in raw Tonnes and the imbalance between these amounts traded between the UK and the EU gives a fairly crude risk assessment of the likelihood of a trade war. The willingness to engage upon a trade war with the UK by, say, French farmers protesting against the importation of English lamb (something they have done before) cannot be gauged by numbers alone. The French farmer is a law unto himself and likes nothing more than a good protest. Nevertheless, the farming communities in the rest of the EU are more pragmatic and will weigh up the pros and cons of a trade war. So too are their politicians, who will want to look carefully at the risks to their own trade and GDP.

This post will look at the tariffs that could be applied to the UK as a non-EU country for each of the main commodities traded within the livestock sector, including dairy. It then assumes that in the event of EU tariffs being applied against UK produce, that the UK would then retaliate by applying the same tariffs against the EU. This produces a balance of tariff burdens applying to each trading bloc. The tariffs are calculated as follows:

Screen Shot 2016-04-07 at 16.21.06

The tariffs vary in terms of effective percentages applied to the bulk prices of each commodity. There is an addition of 67% to milk powders, whilst pork attracts a tariff of 28%.  Beef and lamb have tariffs of 53% and 44% respectively.

When the quantities of each commodity are multiplied by the appropriate tariff structure, we get a total tariff burden (i.e. the amount of tariff actually paid). When this is calculated for the UK exports to the EU, and the EU exports to the UK, the following picture emerges:

Screen Shot 2016-04-07 at 16.17.46

The right hand bar shows the total tariffs that are applied against UK produce in the various categories. The left bar shows the same for the EU. In the above bar chart, the numbers for the dairy products, whilst considerable in their own right, are so small relative to the main meat products traded, that they do show up on the top of the chart. This gives a clear idea of the dominance of meat as the main source of tariff burden.

The gross figures suggest that whilst the UK would have to pay a gross tariff against these commodities of €471 million, the EU would have to pay to the UK a gross tariff of € 1,050 million – leaving the EU with a tariff deficit of €579 million.

However, this only assesses the cumulative tariffs on each side of the argument. Tariffs are applied to the bulk or wholesale value of the product because it is this that is traded across frontiers. So it is important to look at the actual value of trade (before application of potential tariffs). This gives the following bar chart:

Screen Shot 2016-04-07 at 15.50.58

Here the shape of the chart is very similar to that of the tariff burden chart, except that the numbers are bigger. The actual values show that the EU exports a total of €2,649 million of meat and dairy to the UK; whilst we export €1,047 million to the EU. This gives a trading deficit of €1,602 million. Once again, dairy has disappeared, showing that the UK is almost self sufficient in dairy products and trades relatively little in monetary terms.

From Part 1 of this series, it is clear that our trading relationship is far from uniform across other EU member states. It is therefore essential to look at the effect of a tariff war upon individual countries within the EU and see where the risk of loss of trade is most likely to fall. From the above, the trade in dairy products is shown to be very small in comparison with the trade in beef, lamb and pig meat. In the following section, dairy trade will be ignored.

It is clear from Part 1 of this series that the there are three countries which trade most with the UK in meat. These are Ireland, Denmark and the Netherlands. The following three bar charts give the balance of trade with each of those countries:

 

Screen Shot 2016-04-07 at 15.51.19

Screen Shot 2016-04-07 at 15.51.30

Screen Shot 2016-04-07 at 15.51.57

In each case, the UK runs a massive trade deficit in meat products with these countries, which are valued at:

  • Ireland: €645 million
  • Denmark: €376 million
  • Netherlands: €265 million

However, this is looking at it from the point of view of the UK. Looking at the problem from the Irish, Danish or Dutch point of view, we get the following picture:

 

Screen Shot 2016-04-08 at 10.22.41

The length of each bar gives the total value contribution to GDP by agriculture within that country. The red is the share of that agricultural output taken by exports to the UK. This gives an indication of the importance of the UK market to those countries. In the event of a tariff war resulting in the UK looking elsewhere for these products, the agricultural sectors of Ireland, Denmark and the Netherlands are at considerable risk of severe damage. These countries will be lobbying the EU for to maintain the existing trading relationship between the EU and the UK.

This series of posts have examined one small aspect of our trading relationship with EU countries – that of the livestock sector within agriculture. It has not considered such things as wine or cars. But these and other manufacturing sectors are all net exporters to the UK. It has been repeatedly stressed by the Leave campaign that the UK is the largest market for many EU countries and it is not in their interests to erect trade barriers against us. This post has looked at livestock and dairy only, and that alone is sufficient to see that nearly all of the cards are stacked in the favour of the UK achieving a beneficial outcome in trade talks.

One of the more blatant statistical sleights of hand shown by the Remain campaign is to try to plant the idea in peoples’ minds that when we trade with countries which are in the EU, we are trading with the EU as a whole. In this: “Sin 2” is a good example of the kind of specious nonsense that is repeated. On the contrary, when we buy a Volkswagen car or a bottle of French wine, or a cut of Irish beef, we are not buying them from the EU. We are buying them from Germany, France and Ireland respectively. But using this trick has allowed the Remain camp to give misleading impressions to the unwary. Political pressure to impose a tariff barrier against the UK because of our secession from the EU will not come from the European Commission. If it were to come at all, such pressure will come from one or two individual nation states who feel aggrieved because they feel that the UK has pulled a fast one over them in some way. However, even those nations who may feel like that will eventually be persuaded by their neighbours and the sheer scale of the financial disadvantages that they would suffer if they were to go down that route. A trade war between the UK and the EU would result in a large number of countries being damaged, Whilst the UK consumer would experience a few minor losses, but more gains as we move our trade to the rest of the world.

The losers would not the UK, but nearly all of those countries within the EU that trade extensively with us.

All three of the countries I have examined in this post have long historical links with England and the UK. Denmark gave us the Saxons who subsequently became the Anglo Saxons. They formed the basis of the most successful language in the world. The Dutch have links with their civil engineers who drained the fens of East Anglia. And the Irish have have had a long and sometimes troubled relationship with us, but one which has finally resolved into a friendly and mutually advantageous partnership. The UK is Ireland’s second largest export market for all their goods and services. None of these countries will want to see trade barriers erected against us. They have votes and lobbying power in the EU and will doubtless use them. So will many other countries who find that trading with the fifth largest economy in the world has considerable benefits.

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