Britain’s tariff confusion

A reporter in the Trump-Starmer press conference asked President Trump if he understood that tariffs were paid by American consumers. Trump responded by reminding the reporter that other nations have been treating America unfairly in trade while avoiding the question of who pays for tariffs. However, I wondered if the reporter had ever asked his own government the same question. Journalists who appear to be outraged by Trump’s threats to increase America’s low tariffs on UK goods, never question the UK’s high tariffs on American goods. 

Yes, tariffs are eventually passed on to, and paid by, consumers, but only by the consumers of imported goods. The point of tariffs is to make imported goods more expensive than domestically produced goods, therefore advantaging domestic producers. Although I suspect the point of Trump’s tariff threats is to bring protectionist governments, like the UK, to the negotiating table and this has certainly been the outcome so far.

In theory, tariffs should increase domestic production, which would benefit the domestic economy by increasing employment and keeping more money circulating in the domestic economy. In practice, this would only work if a country can make everything it needs as well as all of the input materials required. The United States is probably in this happy position. Unfortunately, the UK is not. And as the UK’s energy costs increase, encouraging more companies to move their production facilities to countries with cheaper energy, lower taxes, less regulation and greater demand, the UK will be in even greater need of trade deals with the countries that can supply us with the goods we used to make, such as petrochemicals, plastics and pharmaceuticals.

Why is the UK growing crops to burn, while preventing further development of North Sea oil and gas?

Unfortunately, the UK learnt everything it knows about tariffs from the EU. Not only does the UK have incredibly high agricultural tariffs on goods that would compete with UK products, we also have incredibly high tariffs on goods that the UK can’t produce. 

Now the Defra Minister, Steve Reed, has announced a policy of public sector food procurement. This is another trade barrier in the form of preferential treatment for domestic producers in government procurement and is probably against WTO rules, but no one seems to worry about them anymore. It is probably also against the EU UK CTA — but unlike the WTO, we should expect some level of rebuke by litigious Brussels. 

The public sector, which includes hospitals, prisons, schools and the armed forces, consumes £5 billion of food each year and the government wants 50 per cent of this to come from UK farms. There is a caveat to this announcement — “or [foods] certified to higher environmental standards’ but it isn’t explained if this means higher environmental standards than the UK’s or if it refers to organic food from any origin. 

In the same announcement, Reed also promised to protect farmers in trade deals. I do hope the journalist in the Washington press conference will be on hand to ask Steve Reed if he realises that the procurement policy will increase costs for taxpayers and that protecting farmers in trade deals will push up food prices for consumers.

But if Reed was referring to protecting farmers in a trade deal with the US, it looks like he need not worry. Bloomberg is reporting that it will only be a deal on AI, tech, science and space rather than a “full fat” trade deal. If this is true, it would be a mistake for the UK to negotiate such a limited trade deal, that only covers the things the US wants, to remove the UK’s 2 per cent Digital Services Tax, but misses out all of the US products that the UK desperately needs.

About a third of the UK’s imports from the US are energy related, not just oil and gas, but also wood chips for biomass electricity production and ethyl alcohol, which incredibly has an average applied UK tariff of 24 per cent added to its price, as well as VAT and excise duty. Ethyl alcohol (ethanol) is added to petrol to produce “environmentally sound” E5 and E10 petrol. Ethanol is produced from corn in the US, so is technically an agricultural import and suffers from eye-watering tariff protection like all other agricultural imports and excise duties like all other alcohols. It would appear that the tariff is to protect the 2.2 per cent of UK farmland used to produce bioenergy crops used for biomass, biofuel and anaerobic digestion. However, the UK only has 4.1 million hectares of land suitable for arable crops, while Nebraska has 8.3 million hectares of crop land, Iowa has just over 10 million hectares, and Kansas has 10.3 million hectares. And these aren’t even the largest US agricultural states, they are just three of the large flat agrarian ones that grow crops that can be used as biofuels. 

Why is the UK growing crops to burn as fuel, while also preventing further development of North Sea oil and gas or fracking, and at the same time demanding that the public service buy more UK-produced food? Where will this food come from? The UK is only 62 per cent self-sufficient in food now and only 75 per cent self-sufficient in foods that can be grown in the UK’s climate. We could produce more of our own gas and save our crop land for food, but instead the Labour Party plans to increase the tax rate on UK oil and gas companies to 78 per cent in April while importing Liquid Natural Gas from the US — tariff free but with a Climate Change Levy added to the price, and US ethanol with a 24 per cent tariff rate plus VAT and excise duty. 

However, the UK doesn’t just add high tariffs to biofuels, we also add them to US food, clothing, shoes, cars and trucks. So why are journalists worried that US tariffs on UK goods will hurt American consumers? We are hurting our own consumers with our own high tariffs, and we have been doing this for over 50 years. We left the EU five years ago, but we still have their protectionist attitude to trade. The EU’s tariffs are designed to protect EU businesses, not ours. The UK needs a full fat trade deal with the US. And we need it now.