The UK government has today published details of the UK’s temporary tariff regime in the event of a ‘no deal’ Brexit. The move follows a vote in the House of Commons yesterday by MPs that rejected a proposed UK-EU agreement for the terms of the UK’s planned departure from the EU on March 29.

The vote leaves trade arrangements applying on goods traded between Britain and the EU still to be decided, with political disarray in London continuing and multiple Brexit scenarios possible.

In a published statement, the government said the temporary tariffs, if applied, are ‘designed to minimise costs to business and consumers while protecting vulnerable industries’. Import tariffs would be removed from a host of imported products but imposed on others to protect vulnerable sectors such as agriculture and automotive.

The government said it is publishing this approach ahead of the vote in Parliament on ‘No Deal’ (due this evening) to ‘ensure MPs are fully informed’.

It said the regime is temporary, and the government would closely monitor the effects of these tariffs on the UK economy. It would apply for up to 12 months while a full consultation and review on a permanent approach to tariffs is undertaken.

‘British businesses would not pay customs duties on the majority of goods when importing into the UK if we leave the European Union without an agreement’, the statement said.

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Under the temporary (12 months) tariff, 87% of total imports to the UK by value would be eligible for tariff free access.

Tariffs on imported finished vehicles

The government said tariffs would still apply to 13% of goods imported into the UK. This includes automotive products. The statement said the UK would ‘retain a number of tariffs on finished vehicles in order to support the automotive sector and in light of broader challenging market conditions’. However, it also said carmakers relying on EU supply chains ‘would not face additional tariffs on car parts imported from the EU to prevent disruption to supply chains’.

The import tariff applying to built-up cars would be set at 10%.

Trade Policy Minister George Hollingbery said: “Our priority is securing a deal with the European Union as this will avoid disruption to our global trading relationships. However, we must prepare for all eventualities.

“If we leave without a deal, we will set the majority of our import tariffs to zero, whilst maintaining tariffs for the most sensitive industries. . This balanced approach will help to support British jobs and avoid potential price spikes that would hit the poorest households the hardest.

“It represents a modest liberalisation of tariffs and we will be monitoring the economy closely, as well as consulting with businesses, to decide what our tariffs should be after this transitional period.”

The government has also confirmed today that it will take a temporary approach to avoid new checks and controls on goods at the Northern Ireland land border if the UK leaves the EU without a deal. The UK’s temporary import tariffs will therefore not apply to goods crossing from Ireland into Northern Ireland.

The temporary tariffs would apply equally to all other trading partners, ‘except for those where we have a free trade agreement in place and around 70 developing countries that will benefit from preferential access to our market’.

The UK government also noted:

  • ‘It is not possible to leave things as they are’
  • ‘If we maintained our current external tariff regime and applied it to the EU, this would impose new tariffs on EU imports, driving up prices for consumers and disrupting business supply chains.’
  • ‘If we fully maintained zero tariffs with the EU, we would also have to extend this to the rest of the world due to WTO rules. This would minimise disruption to EU trade but would open the UK to competition from other countries including those with unfair trading practices.’

UK business bodies and the SMMT have consistently argued that the UK leaving the EU without a deal would cause economic turmoil and damage competitiveness for export-orientated industries who would face new tariffs on EU shipments (the EU’s common external tariff for new cars imported to the trade bloc is 10%) as well as new administrative and border check requirements.

Mike Hawes, SMMT CEO said in reaction to yesterday’s vote by lawmakers in London: “The vote leaves us perilously close to the ‘cliff edge’. No-deal would be catastrophic for the automotive industry.  It would end frictionless trade, add billions to the cost of manufacturing and cost jobs. UK automotive businesses will be put at immediate risk. Parliament must reject no-deal and take it permanently off the table.”

What happens next?

A vote on whether the UK now pursues a ‘no-deal’ Brexit is due at the House of Commons in London this evening. If that vote is for a ‘no-deal’ then the UK leaves the EU on March 29 and the new tariff arrangements outlined today come into effect. If ‘no-deal’ is rejected by MPs, then an extension to Article 50 would likely be sought after another vote – the UK’s departure from the EU would be delayed, in theory. Such an extension would also have to be approved by the EU’s member states, but political analysts suggest it would likely be approved if the UK government’s reasoning for delay – ie as part of a credible roadmap to an agreed departure deal – made an agreement and orderly UK departure more likely. Any extension would likely be a matter of two months or so (EU elections in May are another complicating factor). Brussels’ terms for such an extension could also, in themselves, be a contentious issue in London, no-deal exit an ever-present threat in the background. 

UK prime minister Mrs May is still faced with the headache of finding a consensus in the UK’s parliament. She may seek a cross-party compromise (a ‘softer’ Brexit, possibly a move to the European Economic Area – with UK-EU free trade and possible customs alignment for a period of time) but that would also be difficult to arrive at in London. Few politicians  – in London or Brussels – actually want a no-deal Brexit, but that default scenario has become more likely after last night’s vote – even if MPs in London vote today against it. Mrs May could seek to continue negotiating with Brussels in the hope of gaining further concessions on the contentious ‘backstop’ (which concerns Irish Republic, Northern Ireland, rest of UK, border arrangements) that might mean she could get an amended version of the current Brexit deal through in the House of Commons over the next few weeks. Time, though, is short and the economic risks are becoming more immediate. 

Other possibilities that can’t be ruled out include another General Election or an additional national referendum on departure options (which could also include the option of the UK staying in the EU). Brexit, it seems, is proving as divisive as ever in Britain with a consensus or compromise settlement somewhat elusive. Businesses will be disappointed and inevitably ramping up ‘no-deal’ preparations.

One crumb of comfort for automotive companies is that imported parts to the UK from the EU would not attract no-deal temporary tariffs. That means they can at least look to juggle supply chains and stock planning to accommodate that – even if new tariffs are applied on parts shipments heading in the other direction.

However, a 10% tariff on finished vehicles that just got more likely means that vehicle import companies may well want to get even busier building stock over the next few weeks.