The UK’s Post-Brexit Plan Undercuts Protectionism Fears

In non-COVID news, last week the UK announced its post-Brexit trade policy—both within the nation and with the rest of the world—chipping away at no-deal Brexit dread. EU trade deal or none, the country looks open for business, countering long-running fears that Brexit is a protectionist nightmare.

Last Tuesday, the government unveiled a tariff regime—the UK Global Tariff (UKGT)—that shows what a Brexit on World Trade Organization (WTO) terms would look like. As an EU member, the UK had to apply the tariffs Brussels set for EU trade with the rest of the world. Post-Brexit, the UK can set its own terms based on its most-favored-nation status at the WTO. UKGT fleshes out those terms, which will apply to all nations the UK doesn’t have a separate free-trade agreement with.

The result, contrary to widespread fears, is broadly freer trade with simpler terms than the EU’s. The plan eliminates all “nuisance” tariffs presently set at 2% or lower and reduces most others. It also reduces the percentage of imported products subject to tariffs from 53% to 40%. In value terms, 60% of imports will be tariff-free. But there are still carve-outs to “protect” pet industries. For instance, the plan cuts tariffs on car parts and other strategic manufacturers’ components, but levies will apply to competing final goods—such as assembled cars, as well as agricultural and fishing products.

Loopholes aside, the result is a post-Brexit Britain with broadly freer trade with non-EU nations. Pundits frequently portrayed Brexit as a nationalist, protectionist move. They seemingly focused on its implications for UK/EU trade ties, which remain TBD (more on this below), rather than trade with the rest of the world. Now we have clarity on this, and it is largely better than expected.

The next day brought clarity on what having a de facto EU border running down the Irish Sea could look like. 1998’s Northern Irish peace deal mandated an open border between Northern Ireland and the Republic. But Brexit moved the EU’s border there, technically requiring customs inspections. The solution, agreed to in January, kept the Irish border frictionless but mandated checks on certain goods crossing from Great Britain to Northern Ireland. Wednesday’s announcement revealed Britain’s interpretation of that treaty. Food and live animals crossing from Great Britain to Northern Ireland would face inspection, but not those traveling the other way. Tariffs would apply only to goods destined to be transshipped to the EU, though details on how officials would determine this aren’t available.

This gives UK businesses on both sides of the sea some clarity, but it probably won’t be the last word. The EU likely has its own interpretation of the treaty, and it wouldn’t surprise if either side used this as leverage in trade talks. However, considering we are dealing with two parties’ differing views of a signed treaty rather than starting from scratch, any debate seems mostly symbolic.

While last week’s events probably affect Brexit trade talks, we don’t think they much alter the likelihood of a no-deal Brexit. Rather, they provide clarity on how that scenario would look. Failing a deal, the UK’s Irish interpretation would hold, and UKGT would apply to trade with the EU. While that does represent new barriers, they aren’t high. UK companies dependent on European parts won’t see their supply chains interrupted. Questions linger over how differing regulatory standards could create non-tariff trade barriers, but just as the UK unilaterally lowered tariffs, it could also unilaterally recognize EU standards as sufficient. In the meantime, these moves on trade and Ireland could give EU negotiators the impetus to resume trade talks in earnest. Time will tell how that evolves, but if what we heard last week is the worst-case scenario, that seems like a positive surprise.