Briefing Note (BN225)

The Customs Union, tariff reductions and consumer prices

Date: 20 March 2018
Authors:
ISBN: 978-1-911102-82-3
DOI: 10.1920/BN.IFS.2018.BN0225

Once again, a rancorous debate has flared over whether the UK should remain within ‘a’ or ‘the’ customs union with the EU following Brexit. Leaving the EU Customs Union would likely create additional costs for UK firms trading with the EU. However, it would also give the UK greater freedom to adjust tariffs on imported goods, and to strike new trade agreements with other countries. Advocates of the unilateral removal of tariffs see it as an opportunity to lower prices for UK consumers and to reduce the cost of living. This briefing note provides an estimate of the scale of the gains consumers might expect if the UK were to leave the Customs Union and reduce its tariffs.

Currently, the average tariff applied on the sorts of goods the UK imports is not particularly high – at around 2.8% if we account for the EU’s various agreements with other countries. Under some quite optimistic assumptions about the price changes that are likely to follow tariff reductions, we estimate that complete abolition of all tariffs would reduce prices faced by households by about 0.7–1.2%. This could have additional positive economic benefits in the long run but could also be very damaging for some UK industries in the short run. That is why some have suggested focusing tariff reductions on goods that the UK does not produce itself. This would result in much smaller gains, reducing the total cost of the basket of goods purchased by the typical household by less than 0.4%. This compares with the estimated 2% increase in prices that followed the depreciation in sterling in the wake of the referendum result.