Subsidizing UK Exports via Export Tariff Reimbursement: A Viable Strategy After Brexit?

The question of whether the UK government could reimburse export tariffs to UK businesses, using the revenue from import tariffs, remains a topic of intense debate. This strategy emerged from the Brexit withdrawal agreement’s Northern Ireland protocol, which includes stringent provisions on state aid rules affecting Northern Ireland. Broadly, the idea is to support British manufacturing and encourage exports by offsetting the financial burden of export tariffs.

Examining the Feasibility

Firstly, tariffs are imposed on the importer, not the exporter. Reimbursement of these tariffs could be interpreted as a form of state aid, which may breach EU regulations. According to the EC State Aid Guidelines, such a policy would need to be carefully structured to avoid anticompetitive practices, and clearance from relevant authorities would likely be required.

Moreover, the Northern Ireland protocol specifically stipulates rules on state aid in Northern Ireland, further complicating this approach for the wider UK. The Brexit agreement aims to prevent a hard border in Ireland and preserve the single market in Northern Ireland, which introduces additional regulatory challenges to any scheme involving state aid.

The Big Picture

In a broader sense, such a policy could theoretically work. If the UK importer pays a tariff, the government could then reimburse those tariffs to UK exporters. The net effect would be to maintain the competitiveness of UK exports, potentially even allowing for a reduction in price, which is particularly appealing given the current higher import tariffs from non-EU countries.

However, there are significant logistical and economic challenges. For instance, consider a simple scenario where the UK imports a luxury item from the EU. The importer faces a tariff, which is effectively paid by UK consumers. Subsidizing UK-made products meant to compete in the EU market with those tariffs intact would still make the UK imports more expensive. Hence, the UK customer is effectively subsidizing EU consumers, a concept that would be unpopular in the UK, especially if other countries, particularly the US, could apply similar tariffs.

Impact on the Trade Balance

The trade balance would shift as the UK reduces its imports from EU countries, which could lead to a higher domestic production. Conversely, the EU would likely reduce its imports from the UK, increasing tariffs to maintain competitiveness. Thus, while the UK could keep prices the same or even reduce them, the EU’s actions would still affect the price competitiveness of UK exports.

Furthermore, the strategy would not address the most significant issues posed by customs and tariffs, such as the disruption to supply chains and the loss of passporting for services. Industries like automotive and aerospace, which are not 100% UK-origin, would still face challenges, as their global operations rely on seamless supply chain management.

Conclusion

In conclusion, while the idea of subsidizing UK exports via tariff reimbursement is theoretically appealing, it comes with substantial practical and legal hurdles. The UK government would need to navigate complex state aid rules and likely face resistance from various stakeholders. Moreover, the solution would not address the broader, supply chain-related challenges that exist between the UK and the EU. Therefore, while the concept holds potential, it would require a comprehensive and well-structured approach to be effective.