20 March 2018

The true cost of Customs Union membership


There has been much debate in recent months as to whether or not the UK should leave the Customs Union with the EU. Doing so could result in additional costs to UK businesses, but also gives the UK the ability to strike free trade deals with the rest of the world and to set its own tariffs on goods imported into the country.

The Institute for Fiscal Studies has today waded into the debate, publishing a new paper on the impact of tariff reductions on consumer prices. The paper points out that the average tariff is only 2.8 per cent and, with a depreciated pound, scrapping tariffs would only result in a saving for consumers of approximately 1.2 per cent.

The paper is, as you would expect from the IFS, thorough, well reasoned, and rigorous in its analysis. However, it doesn’t tell the full story. And so underestimates the full benefits to consumers of leaving the customs union.

The paper, like the vast majority of economics, is based on assumptions. For example, it assumes sterling will continue to take a hit and be worth less. As such, the benefits to consumers might be reduced by a weak pound. However, they might not. We just can’t say at this point; assumptions are just that and should be treated as such.

The paper correctly points out that the average tariff levied by the EU is low at just 2.8 per cent, but this is only part of the picture. Although tariffs are, on average, quite low, they are certainly not low on food. At 8.5 per cent, agriculture tariffs are more than three times higher than the average EU tariff. Moreover, for some product groups, tariffs can be much higher than this. For example, 37.4 per cent for dairy, 24.6 per cent on sugar, and 16.2 per cent on animal products.

Tariffs can be even higher for individual products. For example, calculations by the Agriculture and Horticulture Development Board have revealed that the tariff on processed chicken is 88 per cent.

Furthermore, the Common Agricultural Product means that tariffs are also placed on farming machinery and equipment such as tractors that are imported from outside of the EU. This raises the price of these products, placing increased pressure on farmers. This increases the cost associated with production which is then passed onto consumers. The result is higher food prices and increased pressure on household budgets.

This is supported by the work of Liam Halligan and Gerard Lyons, who calculated that food in the UK is approximately 17 per cent more expensive as a result of tariffs. Moreover, this was not an unforeseen consequence of the CAP, as the White Paper which set out the UK government’s case for joining the European Economic Community in 1971 estimated that: “membership will affect food prices gradually over a period of 6 years, with an increase of about 2.5 per cent each year in retail prices”.

Economists have a tendency to disagree with each other on just about everything. However, one exception to this is that they all, apart from those on the extreme fringe, accept that barriers to trade are bad. No matter what Peter Navarro and co may say, the fact is that barriers to trade hurt consumers and businesses and only ever benefit special interests..

Again, focussing on food, there are numerous barriers in the form of regulations and prohibitions will increase the price of food for consumers in the UK.

For example, under the CAP, food which has been treated in various ways and which comply with the health and safety standards of countries outside of the EU and EEA are not allowed to be sold within the UK. A well known example of this is chlorine-washed chicken.

In the United States it is common to wash chicken carcasses in chlorine water at the end of the production process in order to kill harmful bacteria such as salmonella. This differs from the EU’s more expensive, “farm to fork” approach which aims to control hygiene at all stages of production. The CAP means that chlorine washed chicken cannot be sold in the EU on health and safety grounds.

Despite a report by the Adam Smith Institute demonstrating that eating chlorine washed chicken is as harmful as drinking a glass of water, the idea that it might be sold in UK stores generated a flurry of febrile reporting as journalists and commentators got themselves into a flap. The Guardian’s feathers were particularly ruffled.

The EU has adopted a similar position on hormone treated beef and genetically modified organisms. As such these are not allowed to be sold in the UK, despite the evidence overwhelmingly demonstrating that they are safe.

Washing chicken in chlorine, treating beef with hormones, and the use of GM technology all allow farmers to produce their goods in a more cost effective way. Not only are they safe, but they also result in savings being passed on to consumers, meaning cheaper prices in the shops. Such a position is particularly galling given the scandals relating to eggs and pork which have brought to light the EU’s own shoddy standards.

There are also the subsidies paid to farmers. Although leaving the Customs Union will have no impact on the money paid by the EU to farmers within the EEA, it will mean that UK farmers will no longer receive this subsidy. This is good news for consumers as there is a great deal of evidence revealing that farming subsidies lead to higher food prices.

This is because subsidies are used to prop up producers. As such, they are shielded from the true impact of the market. This results in the agricultural sector being inefficient and unproductive. The end result is higher food prices for consumers.

Switzerland and New Zealand serve as useful illustrations for this point. For example, farmers in Switzerland receive very generous subsidies and the sector is inefficient, which leads to high food prices for consumers. Compare this with New Zealand which scrapped the majority of its subsidies to farmers. The sector is now thriving and the result is low food prices for consumers.

There is a cost of living crisis in the UK. One of the main drivers of this is the high price of food which is caused by the Common Agricultural Policy. Leaving the Customs Union would allow the UK to abolish tariffs on food products and to remove other barrier to trade which increase the price of food.

The paper from the IFS is right to be cautious — pointing out the fact that the average tariff is only 2.8 per cent. As such, on many items consumers might not receive much of a benefit from leaving the Customs Union. However, when it comes to food, then leaving the Customs Union has the potential to bestow huge benefits on consumers in the UK.

Ben Ramanauskas is Policy Analyst at the Taxpayers' Alliance.