Nissan could increase trade and margin with WTO tariffs in place. I put this together pre vote and we have seen the £ drop and Nissan decide to invest so perhaps I was making valid points.Originally Posted by noel
International Trade for Dummies.
During the referendum discussions, the subject of international trade has often come up and many claims have been made by both sides. My experience of international trade is limited to a few product groups that I have worked in but the principles of the tariff system are the same unless distorted by artificial factors such as the Common Agricultural Policy. I have seen what I believe to be misleading assumptions from both sides, even from supposedly expert people and bodies.
One of the points often made and presented as a fact is that if the UK were to leave the single market, the UK would be hit as the UK would lose access to a market of 500 million people. UK Car manufacturing has been identified as a key industry that would be hit. It has been suggested that tariffs would almost certainly be introduced and that is bound to hit our exports of UK made cars.
So below I will examine this assertion going through a few simple points and calculations based on moving to a situation where the UK and EU introduce trade tariffs to cars following a Brexit.
Firstly, excessive tariffs are not good for trade. But under WTO terms over recent decades tariffs have reduced gradually to their lowest levels, unless anti-dumping measures are in place or perhaps sanctions to apply pressure on rogue states. The UK, EU and RoW operate quite happily under the WTO regime for the majority of international trade and the trend is for continually lower tariff levels and inter-country trade deals to offer even lower barriers to international trade going forward.
UK Car Manufacturing and our Imports and Exports
Table 1 figures are 1st quarter 2016 and are from HMRC trade info figures for Chapter 87 Products (Vehicles). Amounts are £s Billions.
Table 1
EU Imports = 11.9 UK Exports to EU = 4.3
RoW Imports = 2.3 UK Exports to RoW = 4.4
UK Sales in UK = 2.6
Ttl UK Market = 16.8 Ttl UK Manufactured = 11.3
So Table 1 is the current state of affairs in Billions and these are the figures I’m going to use as a base for my example.
Let’s assume we leave. How does that impact in these figures? Initially it won’t as the UK and EU will enter a period of negotiation to sort out the formalities. This is scheduled for two years but could take longer. So any effect is likely to be gradual rather than sudden.
However, a time will come when we may have to accept a WTO tariff regime so let’s look at a WTO level 10% trade tariff on the trade in vehicles between EU and UK.
A 10% tariff means that when a UK car is sold in to the EU a 10% import duty is charged at the EU border. That duty is payable by the importer (eg it could be Honda France if a Civic made in Swindon) and the duty collected goes to the EU, with the collecting nation retaining a small proportion to cover administration costs.
The duty is calculated on the landed cost, which in basic terms is the manufacturer selling price + carriage.
So again in simple terms, the EU forecourt price of UK manufactured cars will increase by 10%.
That will have an impact on sales. How much is debatable and no one knows, but for this example I am assuming that for every 1% move in price there will be a 2% move in sales.
So the 10% duty applied to the UK made cars would mean a drop of 20% in EU sales from the current £4.3 Billion to a figure of around £3.4 Billion. This is equivalent to about 8% of the total UK manufactured cars.
In the EU people will still want cars and so the EU manufacturers and RoW manufacturers will pick up this £0.9 Billion of business and share it between them.
That doesn’t look good. An 8% drop in UK manufacturing could put UK jobs at stake and jeopardise the viability of the plants here in the UK.
However, there is a balancing effect of these duties.
EU Cars coming in to the UK would also be subject to a 10% duty and would have a similar effect ie a drop of 20%. EU made car imports would fall from £11.9 Billion to £9.5 Billion. That’s a drop of £2.4 Billion and of course the UK would still need it’s cars and the £2.4 Billion would be split between UK and RoW Manufacturers.
For example, assuming a 50/50 split then the UK would pick up £1.2 Billion of additional business here in the UK.
In summary the UK could actually increase total sales by replacing the lost EU sales by even more sales in the UK market and from the current Table 1 base the UK would see an increase in UK Car sales and production by around £0.3 Billion. The biggest gainers would be the RoW who would pick up sales in both markets as they already have the 10% duty in place. The net losers would be the EU producers and that is because when tariffs are introduced they almost always hit the side with the trade surplus.
Without trying to over complicate things though, there is another important factor and that is exchange rate.
It’s perhaps fair to say that Sterling may drop against other international currencies after a vote to leave the EU. Whilst international markets may see a UK leave as a concern, whether justified or not, they may also see it as a concern for the EU. So Sterling (and the Euro) may fall when compared to the US$ and Yen, the other main international currencies.
But for this exercise let’s just keep it simple and look at Sterling and consider a 5% drop in the value of Sterling. After all, a drop in Sterling has been identified as one of the “risks” of leaving.
What this would do is make imports 5% more expensive and exports 5% cheaper. So following the imposition of 10% tariffs a 5% drop in Sterling would:
• Halve the effect of the 10% tariff on our sales to the EU to feel like 5%.
• Exaggerate the effect of the tariff on the EU Sales in to the UK, making it feel like 15%.
• Make the UK made cars 5% more competitive in RoW.
• Make the RoW cars 5% more expensive in the UK.
So the effect on the UK Car Manufacturers when faced with 10% duty and a 5% drop in the value of Sterling would give us a breakdown looking something like this.
Table 2
EU Imports = 8.6 UK Exports to EU = 3.7
RoW Imports = 3.6 UK Exports to RoW = 4.8
UK Sales in UK = 4.6
Ttl UK Market = 16.8 Ttl UK Manufactured = 13.1
So the UK loses £0.4B to the EU, but gains that back selling to RoW and gains £1.8B Net from the increase in the domestic market.
Are you with me so far?
Tariffs reduce trade both ways. The higher the rate, the greater the effect and it affects the party in trade surplus proportionately more.
When a nations currency falls, its exports become cheaper and its imports become more expensive.
These principles are irrefutable and I have applied them to the above established HMRC trade figures for 1st Quarter 2016 set out in Table 1.
You may seek to discredit this by drawing attention to some of my assumptions such as for every 1% increase in tariff or price, there is a commensurate 2% drop in sales.
Fair enough. But there will be a drop in sales. Whether it is 1%, 2%.... 5% it really doesn’t matter as all it does is increase or reduce the effect.
The effect is still the same.
My assumption that the RoW and UK made cars will split the loss of EU made sales 50/50 is of course open to challenge. Currently the UK sells £2.6B and the RoW £2.3B in the UK market and so you can see they are currently fairly even players and so a 50/50 share is a fair and realistic assumption. Faced with a more expensive Peugeot, buyers may opt for a Kia or a Yaris.
Just one final point and that is about the actual import duty.
Currently, duty on products entering the EU goes to the EU. If the UK decides to leave the EU and tariffs are applied between the UK and EU, then the EU will keep the duty on our exports to the EU and the UK Government will keep the duty on EU imports to the UK.
(RoW duty is almost neutral as it is already there now)
So let’s look at the effect of that.
Based on Table 1, the current trade figures, the EU would receive £430 Million in duty and the UK would receive £1.19 Billion is duty ie 10% of the goods coming in to the respective market.
That’s unrealistic though as if tariffs were imposed, Table 2 would be more reflective of the position.
Table 2 figures would yield £370 Million to the EU and £860 Million to the UK.
So there would be a flow of money from the EU to the UK HMRC in the region of £0.5 Billion per quarter or £2 Billion a year.
Surprised?
Tariffs are used to protect the domestic supply base whether in goods or services. We’ve recently seen the discussion on steel and how using anti-dumping measures (short-term increases in duty) can and is being used to reduce the volume of steel coming in to the EU from RoW.
So following a leave, any tariffs introduced will reduce the volume of trade going in each direction and if more is coming from one side, it will hit that side a little more.
So to summarise, if the UK leaves the EU and we have trade tariffs on cars:
• The UK Manufactured cars would likely see total worldwide sales rise.
• A fall in the value of Sterling would further boost exports to EU and RoW.
• The UK would see a net gain through duty receipts that could be as much as £2 Billion per year.
• This illustration does not have any allowance for any improved trade to RoW as a result of new trade deals, which will further boost sale to RoW.
These principles apply to all 99 International Trade Chapters and are, in my opinion, a good reason why we shouldn’t be afraid of leaving the EU.
Brexit could provide a real boost to our exports and prospects in world trade overall.
Richard Taylor
12/06/16
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