Wednesday 21st May 2014, Averages are helpful in portraying a bigger picture, but we often forget that they also mask variations that may be very significant. In the context of the Transatlantic Trade and Investment Partnership negotiations there is broad agreement that the elimination of tariffs on manufactured goods and agricultural products is a goal. Yet many tend to think of the removal of the tariffs, which average between 3-4%, as a minor contribution to removing barriers to Transatlantic trade. There are two reasons the removal of tariffs will provide a major contribution to improving trade between the EU and the US.
Firstly, the average tariff rate on both sides of the Atlantic masks that there are significant tariff peaks in several sectors that in practice prohibit trade in some products. An average tariff rate of 3-4% does not mean all products have a 3-4 % tariff. For example UK textiles and clothing and footwear face up to 37% tariff rates in the United States. These high rates not only limit the attractiveness of European products to US importers, but also significantly raise prices for US consumers. The same practice of high tariffs increases the cost of for example US denim to UK consumers.
Another example can be found in the dairy sector where EU cheeses – in addition to the regulatory hurdles – face tariff rates of more than 100% – a doubling of the original cost when exported to the United States.
Secondly, in addition to the potentially misleading averages, the relatively low tariffs on a number of products still increase costs for businesses. This is due to the enormous volumes in Transatlantic trade – where a tariff of 3% for a company still represents significant extra costs. These costs are magnified when one takes into account the supply chain production processes which means that tariffs albeit low – are paid numerous times as a product moves back and forth across the Atlantic.
It is worth reviewing studies that have estimated the benefits of removing tariffs in Transatlantic trade. ECIPE – produced one such study in 2010 that concluded that exports from both the US and the EU would potentially increase by 17% with the removal of tariffs (click here).