Brexit: What’s really happening to the price of soy – and why does it matter?

The confusion over soy reflects a lingering broader confusion about the economic impact of Brexit and the revolutions in UK trade arrangements it is creating and threatening, says Ben Chu

Is the soy sauce fiasco emblematic of something bigger and more relevant to people’s livelihoods? (Creative Tools)

Good news! Soy sauce will be getting cheaper next year.  

Actually, scratch that, it won’t, but it also won’t be getting any more expensive.

Um, hold on, it turns out it might actually be getting more expensive after all.

Anyone scrolling through Twitter on Tuesday evening could have been forgiven for feeling a bit bewildered about what’s happening to the price of the condiment in British shops because of Brexit.

The confusion over soy reflects a lingering broader confusion about the economic impact of Brexit and the revolutions in UK trade arrangements it is creating and threatening.

It all started with a tweet from the Department for International Trade on Tuesday, which suggested to the public that, as a result of the newly-signed UK-Japan trade deal, which will kick in from 1 January, soy sauce would be “made cheaper” in Britain.

Trade experts quickly pointed out that soy sauce actually already faces zero tariffs when it’s imported to the UK from Japan under the terms of the existing EU-Japan trade deal, from which the UK currently benefits.

Given the reality of zero import charges, it’s difficult to see how zero tariffs under the UK-Japan trade deal would prompt a fall in price.

The trade department later issued a clarification tweet which suggested that its “made cheaper” claim was referring to what might have happened to the price of soy sauce if the UK had failed to conclude a trade deal with Japan and had thereby been forced to trade on World Trade Organisation (WTO) terms with Japan from 1 January.

The UK’s tariffs for countries with which we do not have trade deals, which were lodged by the UK at the WTO in May, do indeed specify a 6 per cent tariff on all soy sauce imports. All other things being equal, that tariff would have pushed up the price of soy sauce imported from Japan.

So the Trade department’s “made cheaper” tweet only makes sense relative to a future hypothetical world in which the UK has failed to conclude a trade deal with Japan. 

Most people would probably consider “made cheaper” to mean relative to the status quo today, which raises the question of whether these tweets breached the Civil Service code, which requires public officials to “set out the facts and relevant issues truthfully”.

Yet some experts identified a further twist, making the department’s tweet arguably even more misleading.  

For it turns out that much of the soy sauce that the UK imports does not, in fact, come from Asia, but from the European Union, where well-known supermarket-sold brands are actually manufactured.

Trade data from the United Nations shows that the UK imports most soy sauce, by value, from the Netherlands.

That means that if the UK fails to conclude a free trade deal with the EU in the coming months the 6 per cent WTO tariff would apply to those Dutch imports and the price of soy sauce would be likely to rise in the shops relative to its price today.

Soy sauce is not in itself, of course, a big deal from an economic point of view.  Total imports of the condiment were worth around $36m last year according to the UN data. This is in the context of around $640bn of total UK goods imports.  

But is it perhaps emblematic of something bigger and more relevant to people’s livelihoods?

Supporters of Brexit often cite the potential for new tariff-reducing post-Brexit trade deals to reduce the cost of living for families, in the manner of that trade department tweet.  

Yet, first of all, it’s important to remember that we source more than half of our goods imports from the European Union.  

So even tariff-free trade deals successfully concluded with every other country in the world (a big ask) would be swamped by the impact of failing to agree zero tariffs with the 27 nations of the EU.

Second, the potential benefit to the British consumer from tariff reduction tends to be exaggerated because tariffs on goods are not, in most cases, particularly high.  

0.7 to 1.2%

Estimated reduction in consumer prices from abolishing all UK import tariffs

The Institute for Fiscal Studies calculated in 2018 than even zero tariffs on all imports after Brexit (whether through bilateral deals or unilaterally) would reduce the prices faced by UK households by only 0.7 to 1.2 per cent.  

This was less than the increase in consumer prices, the IFS noted, that resulted from the pound’s sudden devaluation on the night of the Brexit vote in 2016, which pushed up import prices in sterling terms.

Researchers from the UK Trade Policy Observatory found similarly small impacts on prices from scrapping all import tariffs.

The bottom line is that when it comes to the economics of Brexit, the cost of living impact of tariffs is rather trivial.  

Post-Brexit goods tariffs do matter a great for particular industries and firms.  

UK car manufacturers, for instance, would face 10 per cent tariffs on vehicle exports to the EU if there isn’t a Brexit free trade deal. That could make the cost of producing cars for the EU market in the UK for a foreign company such as Nissan or Ford unviable.

Conversely, some UK food manufacturers might get a boost to their profitability if they could import agricultural commodities, such as sugar, from developing countries at cheaper prices than permitted under the EU’s Common External Tariff.

The impacts, both positive and negative, of goods trade policy could be geographically concentrated, or felt by particular sections of society.

Other work by the IFS this year found that blue-collar workers are the most exposed to negative consequences of higher trade costs, because they are more likely to be employed in industries that face increases in trade costs.

Yet it’s also vital to recognise that the economic importance of goods tariffs in the UK’s trade for many businesses is dwarfed by the importance of non-tariff barriers. 

These are things such as differing regulations, licencing requirements and standards in other countries, which particularly affect our services exporters like banks, asset managers and law firms.

It’s factors such as these – rather than goods tariffs - which trade economists judge will be the major determinants of the extent to which trade policy in the wake of Brexit affects the long term growth potential of the British economy and, flowing from that, our living standards. 

And it’s the non-tariff barriers which will be erected between the UK and the EU as a result of Britain leaving the EU’s single market which leads most economic modellers to project large long-term harm to the UK economy.

The price of soy sauce can barely be even described as a drop in the ocean.