There would be some reductions in consumer prices, but nothing to get too excited about according to new research by the Institute for Fiscal Studies (IFS).
In The Customs Union, Tariff Reductions and Consumer Prices, the IFS estimates the scale of the gains that consumers might expect if the UK were to leave the Customs Union and reduce its tariffs.
Its analysis shows that this would have only a limited impact on the cost of living of the average household because the average tariff rates that the EU charges on the sorts of goods consumed in the UK are not particularly high.
The IFS points out that the average tariff under the World Trade Organization (WTO) most-favoured-nation (MFN) status that would apply to UK imports from countries with which the EU has no trade agreements is 4.6%.
Once the EU’s various trade agreements which waive or reduce tariffs on imports from certain countries are taken into account, the average is 2.8%.
With services dominating the UK economy, just £26 of every £100 spent by UK households is affected, directly or indirectly, by the import prices of goods on which tariffs are charged.
“Simple arithmetic suggests therefore that even cutting all tariffs to zero could only reduce prices overall by 1.2% at most,” report author Peter Levell concludes.
Crucially, any benefits that might accrue to consumers from running an independent tariff policy also need to be set against the inevitable costs to UK trade that would result from leaving the Customs Union, the report warns.
Businesses will probably be affected by customs delays and storage costs that would result from the erection of customs barriers on trade with the EU, while regulatory differences between the EU and the UK are also likely to create various non-tariff barriers to trade.
Such changes are likely to increase costs for consumers and offset the (already rather limited) gains from tariff reductions, the IFS argues.
