Beyond customs duties

BREXIT DEMONSTRATES THAT NONTARIFF BARRIERS AFFECT THE ENDCONSUMER COSTS MORE THAN TARIFF BARRIERS. THEREFORE THEY MUST NOT BE UNDERESTIMATED

by Jan David Bakker, assistant professor at Department of economics

In June 2016, the people of the United Kingdom voted to leave the European Union (EU), a deep economic union with few internal trade barriers. The economic integration of the European Union goes beyond the elimination of tariffs within its borders but also minimises non-tariff barriers (NTB) to trade, for example, through mutual recognition of standards (i.e. a steak of beef that Italy imports from France is not checked for public health certificates at the border while a steak imported from Algeria is).
Since January 2021, the trade relationship between the EU and the UK is governed by the Trade and Cooperation Agreement (TCA) which ensures that trade between the two areas remains tariff free. However, given the aim of the UK to increase its independence from the EU in terms of domestic regulation and trade policy, the TCA only contains very limited provision of regulatory alignment between the two blocs. This allows for future regulatory divergence between the UK and the EU and therefore has created a regulatory and customs border in the English Channel which has led to an increase in NTBs between the UK and the EU. These NTBs include new comprehensive customs checks, rules of origin requirements and sanitary, and phytosanitary (SPS) measures for trade in animals and plants.

A recent study by Bocconi University and the Centre for Economic Performance at the London School of Economics documents that these NTBs have increased consumer prices of food items in the UK. It found that food prices increased by around 6% due to Brexit which added an average £210 onto household food bills – costing consumers £5.8bn across the UK over 2020 and 2021. This rise in consumer prices was driven only by products with high NTBs and there was no statistically significant rise in prices for products with low NTBs, suggesting that EU exporters and UK importers face higher costs due to these new barriers, and estimates suggest between 50% and 88% of these costs have been passed on to consumers. While UK importers and EU exporters incur higher costs and UK consumers are hurt by higher prices, domestic UK producers benefit from the price increase. However, overall, this protectionist rise in NTBs has hurt the UK economy.

These findings highlight the importance of deep economic integration that goes beyond simple tariff reductions, in order for consumers to reap the benefits of lower prices associated with free trade. Even though non-tariff barriers are less commonly discussed in the public debate than tariffs, they account for a much larger share of the trade policy costs in advanced economies. According to recent estimates (while tariffs are a tax, NTBs generate administrative and bureaucratic costs that are not directly observable so have to be estimated), the average ad valorem cost of non-tariff barriers stands at 13.1% compared to 1.8% for tariffs in the European Union. Non-tariff barriers and tariffs both increase the costs of trade but have very different benefits: tariffs generate government revenue while NTBs can be an important tool for protecting public health or the environment (e.g. through enforcing that imported goods abide by the same environmental standards than those produced domestically). So, there is a potential benefit of adjusting regulation unilaterally for the UK that it was not able to do as part of the European Union. That said, so far UK regulations have remained very similar to EU regulations. It is unclear whether there are any policy fields where the UK can benefit substantially from diverging from the EU regulatory framework unless the UK decides to align its regulatory framework with another major trading bloc such as the United States, which would significantly lower trade costs with and hence reduce the cost of goods imported from the US.