The British government is considering a wholesale removal of import tariffs in the case of a “no-deal” Brexit. There is a lot that’s wrong with this idea.
The plan was initially reported by HuffPost on Tuesday. Trade Secretary Liam Fox apparently set out the proposal to business leaders in recent days.
The idea is one of several options on the table, as Fox’s Department for International Trade grapples with what would happen if the U.K. crashes out of the EU in late March, with no transitional period but with the sudden freedom to set its own tariffs.
Removing tariffs on a temporary basis—as is the plan—may counter the inflation that would likely result from a no-deal Brexit, as shortages of goods cause price spikes. However, there are two big problems to consider.
The first is that cutting all tariffs to zero, even for a while, would leave British industry exposed to international rivals that can make and sell goods more cheaply. The second is that it would remove the biggest incentive for other countries—and for the European Union—to negotiate trade deals with the U.K. with any urgency.
After all, if tariffs are already at zero, there is no more attractive bargain to be struck. And the ability to agree to new trade deals is one of the prime motivations behind the “hard” Brexit favored by the British government, under which the U.K. would not remain in a customs union with the EU.
HuffPost reported that the opposition Labour Party called Fox’s plan “sheer lunacy.”
“No decision has been taken and the government is currently considering all options in the event of a no-deal with the EU,” a trade department spokesperson told Fortune
As things stand, the U.K. is heading for a no-deal Brexit, which is the default outcome if both sides fail to agree to a deal by the end of March 29.
The key sticking point is the so-called Irish backstop, which is a mechanism designed to avoid a hard border between the British province of Northern Ireland and the Republic of Ireland, in the case of no U.K.-EU customs deal being struck by the end of next year.
The U.K. previously backed the backstop plan, but now doesn’t want it because, among other things, the backstop would make it hard to sign new trade deals with non-EU countries such as the U.S. Meanwhile, the EU won’t allow the backstop’s removal from the withdrawal agreement unless the U.K. agrees to a permanent customs union—an arrangement that would avoid the need for a hard border with Ireland, but that would again limit the U.K.’s deal-making abilities.
