Talking Trade – the good news about WTO terms
With exclusive comments for Brexit Facts4EU.Org readers from the Rt Hon Sir John Redwood MP
Official figures show that WTO tariffs will be no barrier for British business
Exchange rate fluctuations have had more impact than WTO tariffs – even before the Referendum
4 June, 2019
by Brexit Facts4EU.Org
We have been told to expect a catastrophic drop in UK exports to the EU. Is there a huge risk to export markets?
With the exception of the 10% on motor vehicles and the 11.7% on clothing, the WTO tariff averages are mainly very low and unlikely to make a great deal of difference to demand, even assuming the EU does not make any trade concessions to the UK at all in the future.
The untold exchange rate story
There are various aspects to the price of exported goods and tariffs is just one of them. Anyone who has ever exported will tell you this.
One of the most important factors is exchange rates. In other words: how much does it cost your overseas customers to pay you, in their own currency?
Brexit Facts4EU.Org analysed the exchange rate fluctuations in the last few years. It turns out that the price of most British goods sold abroad has been affected more by movements in currency valuations, than would have been the case under the EU’s tariff regime with the WTO.
The value of the British pound has often gone up and down at a rate greater than the tariff averages – and this was happening before the Referendum, as may be seen from the fluctuation of 13% during 2015.
This means that British businesses and their overseas customers are already used to price changes – of a greater magnitude than any tariffs which might be applied in the future.
But what about high tariff industries, such as motor vehicles and clothing?
With any export product, it’s not just about price. How desirable and specialized are our products? Economists understand that all exports are valuable – but some are more valuable than others.
The best exports are those where demand remains healthy, no matter what happens to price. Economists refer to this as the ‘elasticity’ of a product. When a product has low ‘elasticity’, people will keep buying it, even if there is a price rise. Think branded goods, luxury goods and specialized goods.
This is most likely to be the case when products are of very high quality and have few direct equivalents. Britain has a sophisticated economy and many of the products we sell abroad compete on the basis of quality rather than price.
This is important when, for example, looking at some of the car marques still based in the UK. Aston Martin, Bentley, Caterham Cars, Jaguar, Lotus, Maclaren, Rolls-Royce and Morgan are luxury brands famous all over the world for their quality.
Politicians who denounce a WTO Brexit never mention this – but they should
One MP who has written extensively on this subject is the Rt Hon Sir John Redwood. We asked him for his observations:-
Sir John Redwood MP comments on our article
“If the UK just leaves the EU soon without signing the Agreement [Surrender] Treaty we can trade successfully with the rest of the EU as we do today with the USA, China and other major countries. We do so with them under WTO rules with no special trade agreement. We have to impose EU tariffs.
“We can cut the tariffs we have to pay on imports from non EU countries once out, as we will then decide for ourselves what tariff if any to impose.
“As Facts4EU show, even with the same tariffs on UK exports as the EU imposes on the rest of the world at the moment we would still trade well. All our extensive trade in services will continue to be tariff free, and around half our goods exports as well. Aerospace where we have big exports are tariff free, for example.
“The tariffs we do impose bring revenue to the UK government. To avoid our customers being worse off, the UK government can give us that money back in general tax cuts, with tax cuts help to businesses facing some tariffs on exports to the continent. We have already experienced a fall in the value of the pound greater than the increase in tariffs, so our goods should still be competitive.”
– Exclusive commentary from the Rt Hon Sir John Redwood, MP for Wokingham, and former Single Market Minister
This article is part of a series looking at the impact of Brexit on trade and the economy.
Our conclusion overall is that the risks of using WTO tariffs for trading with the EU have been vastly exaggerated, for political purposes.
In future articles, we shall discuss the impact on consumer inflation, the car industry, the future of the City of London after Brexit, and the prospects for growth in non-EU trade.[Sources: WTO | ONS | Bank of England | The Rt Hon Sir John Redwood MP]