UK: Brexit - The Cars Dilemma

Last Updated: 17 January 2017
Article by Gowling WLG

Professor David Bailey considers what 'Brexit' means for the UK's car industry.

"Death by a thousand cuts" is the risk faced by the UK automotive industry after the Brexit vote, if car firms start investing in other countries rather than the UK. That's what Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said in recent evidence to a Lords' Committee. It's a view I share - if the UK doesn't get things 'right' when it leaves the EU.

Nissan's decision to invest in building the next generation Qashqai model at Sunderland was, of course, great news and reflects the underlying competitiveness of the UK car industry. The Qashqai is the UK's most-produced model, and it's that success that the UK needs to build on.

But bigger battles in securing investment lie ahead - at Honda, Toyota and Vauxhall, all more at risk of switching production to Europe if uncertainties over trading relationships aren't clarified sooner rather than later.

There's particular concern over the possible effects of tariff barriers. With thin margins in the mass volume sector, a 'hard Brexit' that falls back on World Trade Organisation (WTO) rules could see tariffs as high as 10% for cars and 4% for components, which would be hugely damaging. But car-makers and component suppliers also fear non-tariff barriers (things like regulatory differences) as components can cross European borders several times before going into modules like drivelines for final car assembly.

As Hawes noted: "Non-tariff barriers could be as punitive in cost as the tariff barriers. Anything that creates delay creates cost."

All of which brings us back to Nissan and the Qashqai 'assurances' it received. Nissan was going to make its decision in early 2017, but appeared to have pulled this forward to maximise leverage on the government after the Brexit vote and uncertainty over future EU trading relationships.

The government knew it couldn't afford to lose the investment and Nissan effectively held a big gun to its head. So what exactly was offered to Nissan, and what does it tell us about the government's new industrial strategy and, more broadly, its Brexit negotiating stance?
On this we've learned a little from the business secretary Greg Clark. Speaking to Andrew Marr's TV show recently, Clark made it clear that a key UK objective will be avoiding EU tariff barriers.

Clark also made repeated references to industry sectors and their different needs, implying that the UK would seek to negotiate sector-by-sector deals. That could see the UK trying to avoid non-tariff barriers in certain sectors like automotive, effectively giving those sectors something like access to the Single Market.

All of which suggests the government at least sees access to the EU's Single Market as a key negotiating objective. Quite whether Liam Fox, the international trade secretary, agrees with that is another matter, of course.

Clark's revealing interview raised a number of points which the government had previously been pretty vague about. First, Clark seems to be implying that - as a minimum - the UK could remain in a 'customs union' with the EU, which goes a long way to reassuring the automotive industry on tariffs.

Second, if the UK really does want to trade without tariffs and non-tariff barriers, then the EU may well extract a 'price' via a contribution to the EU budget, as made by Norway and Switzerland.

Third, some form of 'referee' may be needed to determine whether the UK's playing by the rules of whatever trade deal is agreed - possibly the WTO or an EU-linked body.

Fourth, despite Nissan wanting 'compensation' if tariffs are imposed, Clark suggested that may not be possible under WTO rules.

Finally, the government appears to have reiterated its support of the car industry through the industrial strategy it's now developing, on issues like skills, innovation and reshoring the supply chain. The latter is welcome, and something of a major U-turn compared with the reign of previous business secretary Sajid Javid, who saw a range of key policy interventions like the Manufacturing Advisory Service axed.

These need to be put back in place - maybe in a more 'place-based' regional approach - if the government's serious about rebuilding fractured supply chains. But let's be clear that staying in the Single Market is still seen as key by many in the automotive industry if the UK's to secure future investment.

That means the Brexit vote still leaves considerable uncertainty over the UK's EU trading relationship, which has the potential to impact on foreign investment in the UK, especially when car firms are replacing models.

Plants and jobs could be at risk if that uncertainty isn't quickly 'nailed down' by clear parameters for a trade deal - preferably one that's as close as possible to existing Single Market arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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