Rt Hon the Lord Lilley writes to Sir David Norgrove, Chair of the UK Statistics Authority.
Dear Sir David,
I am writing to ask you to investigate a very serious misrepresentation in the White Paper on The future relationship between the United Kingdom and the European Union, Cmnd 9593.
That paper claims in paragraph 16b that under the proposed Trade Facilitation Agreement:
“where a good reaches the UK border and the destination cannot be robustly demonstrated at the point of import, it will pay the higher of the UK or EU tariff. Where the good’s destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs. This is most likely to be relevant to intermediate goods. Under the UK’s proposals, it is estimated up to 96 per cent of UK goods trade would be most likely to be able to pay the correct or no tariff upfront, with the remainder most likely to use the repayment mechanism.”
The key figure is “96 per cent of UK goods trade“. This has been taken, perfectly reasonably, to mean that only some 4% of goods imported from outside the EU would be likely to need to use the repayment mechanism. However, it has emerged that in fact 16% of goods imported from outside the EU are intermediate goods liable to non-zero EU tariffs and would be likely to use the repayment mechanism. Moreover, over 40% of goods imported from outside the EU which are subject to EU tariffs would be likely to use the repayment mechanism.
The most egregious deception lies in the use of the term “UK goods trade”. The ‘repayment mechanism’ under the Facilitated Customs Arrangement will apply only to UK imports from outside the EU. So every one, perfectly reasonably, assumes that UK goods trade in this context means goods imported from outside the EU. However, a Treasury memo has revealed that they also include in the term “UK goods trade” all imports from the rest of the EU and, even more bizarrely, all UK exports to both the EU and the rest of the world.
Since our imports from outside the EU are about half of all our total imports and exports are roughly equal to imports, the meaningful figure – the proportion of UK trade from outside the EU liable to the repayment mechanism is 16% i.e. 4 times the 4% suggested by the White Paper.
Furthermore, the repayment mechanism can only come into play in respect of goods where the UK could reduce tariffs (either unilaterally or in a Free Trade Agreement with a third country) below the tariff charge by the EU. So the only relevant goods are those on which the EU levies a no-zero Most Favoured Nation tariff since the UK could not reduce its tariffs below zero. In calculating its 4% figure the White Paper takes only imports of intermediate goods from third countries which are liable to a no-zero EU tariff. It should show that as a proportion of all imports from third countries which are liable to a positive tariff. That proportion is over 40% (see Addendum below).
This figure is extremely important. You will recall that an earlier proposal considered by the government involved the UK collecting the EU external tariff on all imports from outside the EU. Importers would then have to track the course of their goods and prove that they were consumed, or were remaining permanently, in the UK before they could reclaim the EU tariff if it was higher than the UK tariff. The Cabinet sub-committee voted to reject this proposal both because ti would have involved an unacceptable bureaucratic process and, even more important, because it would have ruled out free trade agreements with partners outside Europe. We could not seriously ask other countries to abolish their tariffs on UK exports if, in return, all their exports to us would incur the EU external tariff which could only be reclaimed by this cumbersome procedure.
The proposal in the White Paper was presented as largely eliminating this problem: only 4% would be “likely to use the repayment mechanism”. Doubtless Cabinet Ministers at Chequers, like most commentators, were reassured that such a low figure would not inhibit free trade agreements. Had they realised that over 40% of goods on which tariffs might be removed would be subject to the repayment mechanism they would have realised that the Facilitated Customs Arrangement would effectively rule out any new free trade agreements.
Furthermore, even the figure of ‘over 40%’ is an understatement. It assumes that the final destination of all finished goods can be “robustly demonstrated”. It is extremely unlikely that the EU would believe that. Imagine that the UK agreed a free trade deal with Australia which abolished the UK tariff on Australian wine – a finished good. The EU would have legitimate concerns that – if as the FCA assumes there are no customs procedures between the UK and the EU – some of this wine might enter the EU avoiding the high EU external tariff. They would insist that the UK levy their tariff at the UK border and only repay it if the importer could prove the wine had been consumed in the UK.
I do not recall such a flagrant statistical deception in my time in government. I appreciate the issue is complex and unfamiliar even to those involved with the Brexit negotiations. But it is equivalent to the following situation:
‘Imagine a drug company claiming the clinical test of its new drug showed that “only 4% of participants experienced any side-effects”. Yet in fact, of those who actually took the drug, four times that proportion – 16% – suffered side effects. Worse still, of those who took the drug and had the condition the drug was designed to treat, over 40% suffered side effects. The company fabricated the 4% figure by dividing the number experiencing side effects, not just by those who took the drug (including those who did not need it), but also those who took the harmless placebo and, for good measure, a sample who took neither. There would be outrage. The company’s boss would probably go to jail.’
I would be grateful if you would look into it.
Best regards
Peter Lilley
The Rt Hon the Lord Lilley
Addendum
Oliver Wright of the Times, who uncovered this statistical sleight of hand, received this memo from Treasury officials (who I suspect were embarrassed by it and commendably wished to put the true facts into the public domain).
Summary
- We estimate around 4% of UK goods trade in 2017 was of imports of intermediate/unfinished products for which tariff differentials with the EU could arise as a result of the UK’s independent trade policy.
- We believe it is this trade that will be most likely to have to pay the EU tariff at the UK border if tariff differentials arise. The remaining 96% is either: (i) trade with the EU; (ii) exports; (iii) imports which are unlikely to see tariff differentials with the EU, since it is imported under zero MFN tariffs, from existing EU FTA partners or from LDCs; or (iv) imports of finished goods which we assume will pay the correct tariff at the border.
- These estimates are static and based on an international classification of products that are finished or intermediate/unfinished.
Calculation
- 74% of our goods trade in 2017 was with the EU, or exports to non-EU countries, for which tariff differentials at the UK border are not relevant under the FCA.
- Of the remaining 26% of UK goods trade that is imports from non-EU countries, 13% of the total currently faces zero EU MFN tariffs and 4% comes from EU FTA partners or from less developed countries. Tariff differentials with the EU are unlikely to arise in the future on these imports.
- Of the remaining 9% of UK goods trade where tariff differentials are more likely to arise, 5% of the total is in finished products, which we assume are likely to pay the correct tariff at the UK border, as they have shorter, less complex supply chains.
Sources
- UN COMTRADEand Trade Maps(trade data)
- World Integrated Trade Solution (WITS)and MacMaps(EU tariffs)
- BEC classification concordance tablefrom UN Stats (used to determine whether an HS-6 product is an intermediate or finished good)
- EU Customsand Taxation Union website(industrial tariff suspension data)
Related Links:
Ed Humpherson to Philip Rycroft (November 2018)
Sir David Norgrove to Rt Hon the Lord Lilley (November 2018)