Speaker:- Ashley Weaver - Brexit

Tue, Aug 21st 2018 at 12:45 pm - 2:00 pm

Desk:- John Fishburne
2nd Steward:- Rod Stokes (Speaker's Report)
Raffle:- Keith Ward


 Ashley Weaver spoke to the Club about Brexit:-

Why Free Trade is Important – The theory of comparative advantage

Classic example used - Guns v Butter

Two countries utilise all their resources - each produces 50 guns and 50 tonnes of butter – total world production 100 guns and 100 tonnes of butter

But if one country is better at producing butter – say New Zealand it should concentrate entirely on producing butter and if another country say Germany is better at producing guns it should produce only guns. If both countries play to their strengths and produce only what they are best at they will produce more. Germany might produce 200 guns and New Zealand 200 tonnes of butter – they trade their surplus guns and butter and both end up better off

So far so good with the theory but if New Zealand fell out with Germany there could be severe consequences. Either the Germans would starve through lack of food (butter) but the New Zealanders would not be able to fight off an invasion by the Germans not having any guns (armaments)

So the real world cuts across the economic theory – in particular many countries wanting to protect their domestic food supplies

Why?

Food security (i.e. producing the majority of one’s own food means country is not reliant on imports

To protect the farming industry. Whilst the lobby is not strong as it was the rural vote is still important

To preserve the traditional landscape through retaining current broad types of farming

How do countries protect their own farming industry? Either through subsidies to the industry or tariffs on imports

Important point here -Tariffs Charged on imports not exports

Let’s take the position in the EU at present

An agreed system of subsidies are paid to farmers in the UK through the Single Farm Payment

Goods are traded freely throughout the EU without any tariffs being imposed but if you want to bring agricultural products into the EU from the outside world there are large tariffs in place

Not generally charged as a percentage – charged as a fixed amount per tonne

For example Cheddar cheese is €1670

The following examples are based on converting to a percentage based on 2015 prices

Fresh Beef - 65%

Fresh pork -43%

Milk – 74%

Butter -63%

Cheddar – 42%

Wheat – 53%

Maize -49%

There some exceptions to the above – some limited import quotas from overseas allowed without tariffs

So if we want to import butter from Ireland a member of the EU then can do so tariff free.

However if we want to import from New Zealand import tariffs would be paid at 63%

As a result of the current position the UK imports huge amounts of cheddar cheese from Ireland. However as tariffs of 42% would be paid on imports of cheddar cheese from New Zealand this would never be imported except under limited EU quotas available

So what will happen post Brexit

Britain is currently the second highest importer of dairy products in the world behind China

In 2015 UK imported approximately £2 billion of dairy products 99% of which came from the EU

In 2015 UK exported approximately £1 billion of dairy products of which 80% went to the EU

The key factor is that there is a net deficit in dairy products of £1 billion Euros

So how will Brexit affect this?

The first thing to understand is that Brexit is not an issue for which there are only two outcomes. People talk about a hard or soft Brexit but there are a multitude of possibilities. Today I will talk about what many consider the main three possibilities

Soft Brexit

Hard Brexit with Tariffs

Hard Brexit with the UK government unilaterally waiving tariffs

Soft Brexitis as outlined in the recent government White Paper – Boris Johnson referred to the trade solution as resembling a Heath Robinson construction which is perhaps a little unfair but it will give rise to numerous complications

Main driver in respect of trade has actually been the treatment of Northern Ireland.

All geared toward not having a hard border between the north and south

Basic principle is that UK would remain in a trade free zone with the rest of the EU working with common standards –all goods moving in the EU would remain tariff free. The UK however would reserve the right to enter trade agreements with third countries to import certain goods tariff free in the UK. It is recognised that this mean good coming into the UK at a lower tariff level than into the rest of Europe which could place us at an unfair competitive advantage. So as the goods were imported into the UK they would be placed into one of three categories

1 – Domestic consumption – no tariff charged

2- For onward export to Europe – Tariffs charged on import into UK and remitted to Europe

3-end use not known tariffs charged at the higher level and then reclaimed if good subsequently used in domestic production

Hard Brexit

In the event of hard Brexit often quoted that we would rely on WTO rules – however these are very broad in nature – generally deal with maximum tariffs that can be charged on good

General principles

Band tariffs– the highest level a tariff a country can charge –there is no minimum

Whilst no minimum there is a concept of Most Favoured Nation Status which says if you reduce tariffs below the band level for imports from one country – the most favoured nation - you must reduce them on imports from all countries. This is an important concept and one with many repercussions

There is a get out to most favoured nation status if you enter a negotiated free trade zone – where you can reduce tariffs for other members of that zone but not for the rest of the world. This is the mechanism by which the EU has no tariffs between members but charges them on imports from other countries. If there was no agreed free trade zone as European countries charge each other 0% tariffs on goods they would have to let imports in from all other countries at 0% also under Most Favoured Nation Status

When the UK leaves the EU basic EU/WTO rules would mean that all the exports we make to Europe would be subject to import duty in the EU. Europe would pay 42% on all cheddar cheese it imports from the UK.

Many think the most likely scenario is that we will mirror the European position and the level of tariffs they charge. So all European cheddar cheese coming into the UK would suffer a 42% tariff

Tariffs vary wildly on different products but if import tariffs are charged on our deficit in dairy products of £1,000,000 into the UK they will become a very expensive item

Hard Brexit with UK government unilaterally reducing tariffs

With the UK government unlikely to want to see considerable food inflation they may decide to unilaterally reduce import tariffs on goods coming into the UK. However most favoured nation status under WTO rules means they cannot do this on a selective basis. If they reduce the tariffs on butter from New Zealand to nil then they would have to reduce tariffs of butter from the EU, Canada, Australia, and the USA to nil as well

This would mean a huge influx of cheap dairy products – which could have potentially devastating effects of the UK farming industry

Other Implications

If food coming in and out of the EU is subject to same checks as rest of the world then 372% increase in the workload for Vets

An extra 250 million customs declarations a year

Another whole area not touched on is how changes in the free movement of people might affect the workforce

In the event of a hard Brexit changes could come into force as early as 31 March 2019

Government is in the process of issuing 84 technical papers on how to deal with a hard Brexit which businesses will be expected to absorb and act upon if necessary (first 25 to be issued on 23 August)

President Michael thanked Ashley for an interesting talk on  a subject on which no one knows what the outcome will be!

 

 

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