22 March 2019

Vox EU: EU-UK global value chain trade and the indirect costs of Brexit

This column describes how the effect of tariffs will be magnified due to back-and-forth trade across the Channel. This will increase production costs in the UK and, to a lesser extent, in the EU.

The impact on production costs of tariff magnification along the EU-UK GVCs

To assess the associated trade costs of Brexit, our calculated tariff schedule for both the EU and the UK is fed through the constellation of GVCs described in the WIOD, so that we can gauge the full extent of the magnification due to these deep sectoral/country inter-linkages (Table 1). The analysis – based on the methodology proposed by Miroudot et al. (2013) – estimates that the impact on producers is much higher for the UK, where total (domestic and foreign) manufacturing input costs would increase on average by around 0.9 percentage points. In the EU the increase would be marginal (0.1 percentage points). This result is due to the specific links between the two regions: around one fifth of the total manufacturing inputs used by the UK come from the EU, while only 1.5% of the total EU inputs are imported from the UK. The UK sectors most highly involved in the EU-UK GVCs, such as motor vehicles and chemicals, would experience the largest effect. Finally, the impact on production costs would be high in Ireland due to its proximity and interconnectedness with the UK, and close to, or lower than, the average in other large EU member states.  [...]

Direct and indirect tariffs on EU-UK trade

The indirect tariffs, i.e. tariffs induced by GVCs, are significant for European but not for UK importers. European producers perform processing stages in the UK to a larger ex-tent than the reverse (i.e. UK producers shipping intermediate goods to EU countries and importing them back as final goods). Therefore the magnification of the tariff burden due to products crossing the Channel at different production stages weighs more on EU final exports: in UK exports to the EU the share of value added produced in the EU is around 9%, while for EU exports to the UK the UK value added share is just 2%. [...]

Conversely, the amount of direct tariffs would be larger for UK importers due to the com-position of UK imports, which are skewed towards high-tariff sectors, in particular food products and motor vehicles. 

This latter effect prevails and, as a result, total tariffs, direct and indirect, would be higher on average for UK importers than for EU importers by around 2 percentage points. 

Indirect exports and the introduction of tariffs

As to the export side, we exploit the methodology developed in Muradov (2017) to show that, given the density of intra-EU linkages and the sizeable share of indirect trade between the two regions (approximately one-fifth in either direction), exporters in both the UK and the EU member states would face much higher costs once indirect trade is taken into ac-count. In other words, the trajectory of exports towards their destination matters, and indirect routes entail tariffs not easily assessed by the original exporters (as intra-EU trade is free of tariffs), but account for around 25% of the tariff costs for EU exporters and 22% for UK exporters. Not surprisingly, the share of indirect tariffs and indirect trade between the EU member states and the UK are highly correlated. [...]

Full analysis on VoxEU

 

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