Trade war with EU risks piling further pain on consumers

Prospect of tariffs on goods amid stand-off on Northern Ireland Protocol threatens to exacerbate the cost-of-living crisis, finds Louis Ashworth

Atrade war with the European Union threatens to pile further pressure on UK households, intensifying the cost-of-living crisis. Soaring prices could push even higher if Britain finds itself at loggerheads with the bloc – its largest trading partner. In an extreme situation, consumers could be forced to shoulder 10pc levies on cars from the Continent, as well as higher costs for key goods such as clothing and food.

“Escalating anything with the EU right now would mean massive self-inflicted price pressures at the worst kind of possible moment,” says Sophie Hale, principal economist at the Resolution Foundation.

Liz Truss, the Foreign Secretary, is reportedly set to announce the UK will move to unilaterally alter parts of the Northern Ireland Protocol, which sets the terms of trade in the region. That would mean effectively suspending elements of the Brexit deal.

Brussels has warned the UK of serious consequences in retaliation, with Alexander De Croo, the Belgian prime minister, raising the prospect of the Brexit trade deal being cancelled. European Commission vice-president Maros Sefcovic, the bloc’s trade chief, said on Tuesday that “renegotiation is not an option”.

If talks fall apart, a damaging trade war would be the likely consequence, hitting already strained households and businesses with further cost increases. It threatens to undermine the Queen’s Speech to Parliament, which pledged that easing the cost-of-living crisis was a “priority” for the Government.

Experts say Brussels might choose to ramp up the rigour of checks on goods entering Europe through Calais, potentially smothering British exporters in fresh red tape and delays.

Non-tariff barriers are already causing a pinch: new trade barriers brought in as a result of Brexit added 6pc to food prices between December 2019 and September 2021, according to the London School of Economics’ Centre for Economic Performance.

William Bain, head of trade policy at the British Chambers of Commerce, says: “Businesses already know the pain extra checks and forms can cause. It has moved beyond frustration and disappointment to dismay, and in some cases anger, about the red tape that they’re facing.”

While talks between Britain and the EU were at a similar point late last year, shifting political dynamics have caused issues to once again come to a head.

Northern Ireland’s Sinn Fein secured a landmark victory at last week’s assembly elections, giving the party – which backs a united Ireland – the largest share of seats at Stormont.

The displaced Democratic and Union Party (DUP) is now refusing to enter into a power-sharing arrangement unless the protocol is adjusted. Half a decade after Theresa May was forced into a pact with the party to save her premiership following 2017’s election disaster, the DUP is, once again, in the Brexit driving seat.

The sense of urgency is palpable. Sources close to Truss say talks have nearly run out of road, and she has called for Brussels to change Sefcovic’s objectives to allow talks to progress.

An escalation by Brussels may include tariffs on UK exports, in a significant blow for British businesses already facing a cost-of-living crisis.

While tariffs are borne by the buyers, EU importers would probably demand that British companies cut prices to ease the higher costs. “UK firms that export to the European Union would suffer,” says Sam Lowe, a trade adviser at Flint Global Partners.

Machinery and transport equipment, predominantly cars, are Britain’s biggest exports to the EU, followed by chemicals. Broad swathes of manufactured goods and food are two other major categories.

Just over a third of Britain’s £23.5bn car exports last year went to the region. In a trade war, these would likely face a tariff of 10pc. Carmakers have warned of devastating impacts, with BMW saying this could cause it to stop production of Minis in the UK. If the

‘Escalating anything with the EU would mean massive self-inflicted price pressures at the worst possible time’

UK Government reciprocated with levies on EU goods, importers would face the pain of additional fees, likely to spill on to consumers.

The UK shipped in £25.6bn worth of cars during 2021, about four fifths from the EU. Tariffs on these would be a substantial sting for would-be buyers and manufacturers, with the Society of Motor Manufacturers and Traders warning in 2016 that a levy would cost the industry billions, “reducing the UK’S competitiveness and increasing costs for consumers”.

Medicines and pharmaceutical products are close behind – just over 70pc of the UK’S £21.3bn of imports last year came from within the EU – but broader World Trade Organisation agreements mean they are unlikely to be subject to tariffs. Another crucial area is food. Almost a third of Britain’s food comes from the EU.

Even if it does not enforce its own tariffs, Britain’s exporters would remain comparatively disadvantaged. Already they face greater barriers to trade than EU rivals, because the UK has not yet implemented full customs checks.

Lowe warns this could create a “vicious cycle” in which Britain’s unwillingness to inflict extra costs on consumers means giving up leverage in talks of enforcing tariffs.

Symmetrical tariff measures would hurt the UK more than the EU, simply because it is more reliant. The UK imported £223bn worth of goods from the EU in 2021, and exported £153bn worth, according to the ONS.

While it is hard to quantify the hit, recent research suggested the Donald Trump trade war with China added a percentage point to US inflation. Here, the impact would be stronger: “China is a much smaller partner for the US than the EU is for the UK,” says Hale.

Mutually assured price pain may be enough to cool heads for now. “The motivations just aren’t there for either the EU or the UK, when they’re grappling with these massive price increases already, to go further down this road,” she adds.

‘Businesses already know the pain extra checks and forms can cause. It has moved beyond frustration’