Changing Lanes: The impact of different post-Brexit trading policies on the cost of living

Published on Public Finances and the Economy

The issue of trade has returned to the frontline of British policy making and politics for the first time in 40 years, but little has been said about what the impact of changes in the UK’s trade regime could be on living standards. This paper aims to fill that gap by looking at what impact two “no deal” Brexit scenarios could have on prices and living standards.

  • If the UK reverts to most-favoured-nation (MFN) tariffs with the EU under a “no deal” Brexit scenario, then tariffs on clothing, footwear, beverages and tobacco will rise by 10 per cent. Tariffs on dairy products will rise by 45 per cent and by 37 per cent for meat products.
  • Tariff changes will feed through into consumer prices. As a result of reverting to MFN tariffs with the EU we estimate the price of clothing will rise by 2.4 per cent, and the price of transport vehicles will rise by 5.5 per cent. Prices will rise even more for food products. The prices of dairy goods will rise by an average of 8.1 per cent and by 5.8 per cent for meat products.
  • Overall such price rises will have a significant impact on consumer spending. annual spending for the average family could rise by around £260. However this is just an average effect. Some households would experience more significant price rises; 3.2 million households would see price rises of £500 or more. There is also evidence that poorer households and less affluent parts of the country will be harder hit.
  • If we leave the EU without a free trade agreement some have argued that the UK should unilaterally reduce all tariffs to zero. Our analysis indicates that should the country do this the benefits to consumers would be low. Across those goods affected by the tariff cuts prices would fall by just 1 per cent. Aside from the fact that unilateral tariff elimination would give up the UK’s best leverage in future trade negotiations, it is also likely that some sectors and parts of the country would struggle to adjust to a sharp increase in competitive pressure. While, business and industries should not necessarily be shielded from such competition, it is important that the government is aware of where job losses may occur. The evidence suggests that 1.4 million people are employed across all the sectors that could be affected by trade liberalisation and that the majority of these are in rural areas and in the Midlands and the North.

The Appendix for the report is available here.