1. News
March 21, 2018

Post-Brexit tariff cuts will have little impact on shop prices says IFS

The Institute for Fiscal Studies (IFS) has said that cutting tariffs after Britain leaves the European Union would make little difference to the prices paid by consumers in shops.

By Pamela Kokoszka

The Institute for Fiscal Studies (IFS) has said that cutting tariffs after Britain leaves the European Union would make little difference to the prices paid by consumers in shops.

Import tariffs on goods arriving in Britain, which are designed to protect domestic industry and agriculture, are currently dictated by Brussels as part of the UK’s membership of the EU customs union.

However, leaving the EU could give the government an opportunity to set an independent trade policy and cut the tariffs charged on imports.

Some supporters of Brexit have argued that abolishing tariffs would lower prices for UK consumers and bring down the cost of living.

However the IFS has said that even if all tariffs were scrapped, the reduction in prices would be less than the increase in prices, which followed the referendum vote in 2016 and the subsequent fall in the value of the pound.

IFS senior research economist Peter Levell said: “This is because tariff rates are not particularly high on average, especially when one accounts for the EU’s various trade agreements.”

He added: “In addition, the costs of goods imported from outside the EU make up only a relatively small fraction of UK household spending. If tariff reductions were restricted to products that the UK did not produce domestically, as some have proposed, the impact on prices would be smaller still.”

According to the report, the tariff for goods imported into the UK averages around 2.8%, and for every £100 spent by UK households only £26 is affected by the import prices of goods on which tariffs are charged.

Even under some ‘quite optimistic assumptions’ about the likely effect on prices paid by households, the IFS believes the complete abolition of tariffs would lead to a reduction between 0.7% and 1.2%.

That compares with the estimated 2% increase in consumer prices which resulted from the depreciation of sterling following the Brexit referendum.

According to IFS, while getting rid of tariffs could bring economic benefits in the long run, it could be ‘very damaging’ for some UK firms in the short term.

If tariffs were only removed from goods which the UK does not produce itself—in order to protect such businesses—the fall in prices would amount to 0.4% at most.

At the same time, IFS said that any benefits to consumers from abolishing tariffs had to be set against the ‘inevitable costs’ to UK trade that would result from leaving the EU customs union.

The report said: “Firms will likely be affected by customs delays and storage costs that would result from the erection of customs barriers on trade with the EU.”

“New regulatory differences between the EU and the UK are also likely to create various non-tariff barriers to trade.”

Leader of the pro-Brexit Economists for Free Trade group Professor Patrick Minford criticised the findings of the IFS report, which was funded by the group UK in a Changing Europe.

According to Minford, abolishing import tariffs could lower consumer prices by 8% and boost economic output.