Brexit: UK has strong negotiating position with EU
The UK has put itself in a strong position to negotiate a free trade agreement with the EU. For one thing, the fallback solution now in place in the event of no FTA is significantly more expensive for the EU than Theresa May’s backstop would have been. Secondly, London has presented a clever customs strategy for the period after the final withdrawal, which puts pressure on the EU.
„After leaving the European Union, the United Kingdom will only impose duties on a few products. These have been chosen so cleverly that the country will secure its supply through cheap imports from third countries, while at the same time record high customs revenues. EU exporters would be particularly affected,“ said Kiel Institute President Gabriel Felbermayr on the occasion of a joint analysis with the researchers Alexander Sandkamp and Vincent Stamer. „Britain has thus put itself in a strong negotiating position for a free trade agreement with the EU.“
According to the report, the UK intends to levy duties on just under 800 products after their definitive withdrawal from the European Union. That is only 4.8 percent of all 16,000 products on the EU-British customs list. No customs duties would be levied on more than 95 percent of the goods. Based on the value of the goods, the average duty on imports into the UK would then be only 1.2 percent. This means that the UK levies significantly lower customs duties than the EU, which imposes duties on around 80 percent of all products. With respect to the value of the goods, this constitutes an average duty of 3 percent.
Strong incentive for EU to achieve free trade agreement
Nevertheless, the UK would still generate 1.4 billion euros in customs revenue from countries outside the EU, because high-volume products from the automotive and textile sectors are primarily targeted. Due to the specific trade structure, EU exporters would be particularly hit and, without a free trade agreement, would have to pay 4.9 billion euros in customs duties to the UK. If European exporters lose market shares in the United Kingdom because of the tariffs, this will cause significant economic damage in the EU.
„London puts pressure on the EU through its customs strategy. After leaving the EU, the UK will become more attractive as a trading partner for other countries. European exporters will be facing significantly more competition. This constitutes a strong incentive for the EU to achieve a free trade agreement with the UK,“ says Felbermayr.
Johnson deal bureaucratically cumbersome and fraud-prone
Additional pressure for success for the EU comes from the complex fall-back solution that it has agreed with Boris Johnson, should no free trade agreement be reached. “In this case, Northern Ireland is de facto simultaneously part of the British customs territory and part of the single European market,” adds co-author Stamer. „The EU will then be dependent on the British customs authority to protect its interests, which it cannot control. Compared to the May solution and the backstop, which had envisaged Britain remaining in the EU customs union, the Johnson solution is significantly more expensive, bureaucratically extremely complex, and there is a risk of massive fraud.“
After the Brexit, the EU will have to do without Britain’s contribution to the budget amounting to 6.8 billion euros and also its previous customs revenues from imports from third countries to Great Britain. Due to the higher customs rates applied by the EU, this currently amounts to 3.7 billion euros, minus the costs of the customs authorities. Without the agreement, exporters from the UK would have to pay 6.7 billion euros in customs duties to the EU.
Read full analysis (German): https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/Media/Images/News_Press_Releases/2020/draft_brexit_kpb_gf.pdf
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Kiel Institute for the World Economy
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Prof. Gabriel Felbermayr, Ph. D.
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