The impact of Brexit on the automotive sector Contents

2Impact of tariff barriers

A “no deal” and WTO tariff scenario

8.The UK automotive industry is largely export-led, with Europe as the primary market. The UK exports just under 80 per cent of the cars produced here; some 56 per cent of which go to the rest of the EU.18 Around 86 per cent of vehicles that are sold in the UK are imported; around 70 per cent of these from the rest of the EU.19 Total turnover in the UK industry was £77.5bn in 2016;20 the balance of trade deficit with the EU was around £25bn in the first quarter of 2017.21 We were told by the Society of Motor Manufacturers and Traders (SMMT) that the single market, with its shared standards, tariff-free internal trade and seamless transportation across Europe, had enabled the UK to remain competitive in a highly competitive industry.22

9.Whilst the successful conclusion of phase 1 negotiations appears to make the prospect of a final agreement on withdrawal more likely, the Prime Minister has consistently asserted that “no deal for Britain is better than a bad deal for Britain”.23 As this remains a possibility, automotive businesses, like other companies, are obliged to prepare for this scenario and are doing so. The Government has committed to leaving the customs union and single market. On departure, in the absence of an agreement on trade, this would mean a reversion to World Trade Organisation (WTO) tariffs. These are 10 per cent for cars and, on average, 4.5 per cent for vehicle components.24 At present, consumers benefit from the fact that 95 per cent of cars imported to the UK are not subject to a tariff.25 Industry representatives told us that the additional costs of any tariffs imposed on imported cars would be likely to be passed on to consumers.26

10.We explored with witnesses whether the post-referendum depreciation of sterling could compensate for any imposition of tariffs and help to boost exports. Both Aston Martin and Honda were sceptical about this prospect. The picture is complicated by companies’ financial hedging strategies, Government support programmes (for Aston Martin) and the fact that companies would be paying more for imported components, which comprise 60 per cent of many models.27 The multi-national supplier GKN, for example, had noted a “small mitigating effect” of sterling’s depreciation.28 We heard that there may be short term gains from currency fluctuations, but these would be used to help offset the long term adverse impact of tariffs.29 The CFO of Aston Martin, Mark Wilson, told us “I do not think we ought to be looking to rely on weak sterling as a way of feeling good about WTO.”30

11.The monthly value of exports has not departed significantly from its seasonal pattern since the fall in sterling; but the value of exports for the second half of the year increased from £15.5bn in 2016 to £18.7bn in 2017.31 If the depreciation of sterling has been a net benefit for exporters, the impact of tariffs is negative for importers and consumers alike. If the full costs of WTO are reflected in the retail price, an average £15,000 vehicle would cost around £16,500.32 This scenario would present what the SMMT has described an “incredible challenge”,33 and “devastating”,34 and would make UK manufactured vehicles “uncompetitive”.35 Given current low profit margins and high levels of efficiency, we heard that it would be difficult for manufacturers to absorb these costs.36

12.Unless these additional costs were to be passed on to consumers, the current profit margin of around £450 on a £15,000 car would be comfortably wiped out. Such an increase would inevitably have an impact on sales. One study has estimated that a 15 per cent price impact would result in 550,000 fewer sales in EU countries per year, a fall of around 19 per cent.37 Another study estimated the introduction of trade barriers to result in a £7.9bn decline in exports to the EU.38 The SMMT has put the figure at £4.5bn.39 Professor David Bailey has noted that there is no guarantee of future production in the UK.40 The Japanese Ambassador to the UK, after meeting the Prime Minister with representatives of Japanese manufacturers, was very blunt: “If there is no profitability of continuing operations in the UK – not Japanese only – no private company can continue operations. So it is as simple as that.”41 In simple terms, it is difficult to see how it would make economic sense for multinational volume manufacturers—the bulk of the UK automotive sector—to base production in the UK in a no deal or WTO tariff scenario. The shift of manufacturing to countries within the customs union and single market would be inevitable; the cost in UK jobs could be in the hundreds of thousands, and inward investment in the hundreds of millions. For the automotive sector, no deal would undoubtedly be hugely damaging. The Government should not seriously contemplate this outcome.

The negotiations

13.It has been argued that the damage to the German car industry of a no deal scenario would be so great as to make this scenario unacceptable from the EU perspective, and the UK’s negotiating position is therefore strong.42 The UK is the largest European market for cars manufactured in Germany. Around 20 per cent of new cars manufactured there go to the UK – some 950,000 per year. One study has estimated that on WTO tariffs, German vehicle exports to the UK would decline by 32 per cent, endangering some 18,000 jobs there.43 It predicted that a hard Brexit would have a negative impact on the sales and profitability of automotive sales in Germany.44

14.There is little doubt that in a no deal scenario, the German car industry, as the largest manufacturer, would be hardest hit of all remaining EU Member States, but Italy, France and Spain are also net exporters to the UK. Other states would be less affected. So far at least, the EU 27 have adopted a united position on the negotiations, which has placed the preservation of the single market and customs union ahead of individual national interests. The President of the German Association of the Automotive Industry, Matthias Wissmann, said in June 2017

In the view of the German automotive industry, everything must be done to maintain the free movement of goods and services between Britain and the other EU countries in the future. But there is a clear priority: the cohesion and the integrity of the EU are both a foundation and precondition for reaching a reasonable understanding.45

Around 56 per cent of UK vehicle exports go to Europe; only about 7 per cent of European vehicle exports come to the UK.46 In a no deal scenario, German manufacturers would still be able to export to the rest of the EU, tariff free; those in the UK would not. The unilateral removal of all tariffs, as suggested by some, would retain the competitiveness of imported vehicles for UK consumers but undermine the UK as a manufacturing base. This would run contrary to the Government’s own Industrial Strategy and we do not consider this a realistic choice. The option of securing a partial customs union for certain products, such as vehicles, would not be consistent with GATT and WTO rules and would therefore be liable to legal challenge if included in a withdrawal agreement.47 The Government is not seeking a sectoral deal “in any normal sense”.48 Whilst a “no deal” scenario would certainly be damaging to the automotive sector in many EU countries, especially Germany, the impact on the UK automotive sector would be far greater than that on each of the remaining EU Member States. We recommend that the Government should not contemplate this outcome in its approach to negotiations and that it should prioritise securing a customs arrangement which removes the risks of tariffs being imposed on vehicles produced in the UK.

18 SMMT (BRA0005). Figures relate to 2016.

19 Q16, National Franchised Dealers Association (BRA0010)

20 SMMT website, 20 June 2017

21 EIPA website 15 June 2017

22 Q14 [Hawes]

23 Prime Minister, Lancaster House speech, 17 January 2017

24 Department for Business, Energy and Industrial Strategy, (BRA0012)

25 National Franchised Dealers Association (BRA0010)

26 Q30 [Hawes]

27 Qs48–50, Enterprise RentACar (BRA0002). See also, KPMG, Brexit: the impact on sectors, February 2017

28 Q115; see also Q114

29 Q50 [Wilson & Keating]

31 Figures from HMRC export statistics

32 Honda Motor Europe (BRA0008)

33 Q45 [Hawes]

34 Tony Walker, President of the SMMT, quoted in the Financial Times, Car industry faces £4.5bn bill without Brexit deal, 28 November 2017

35 Honda Motor Europe (BRA0008)

36 Qs45–6; Qs112–3

37 Deloitte Brexit briefing, Brake Block Brexit: How a hard Brexit would impact the German automotive industry, June 2017

38 Baker McKenzie, The realities of trade after Brexit, December 2017

39 Financial Times, Car industry faces £4.5bn bill without Brexit deal, 28 November 2017

40 Financial Times, Chart that tells a story: UK car production, 27 October 2017

41 BBC news website, 8 February 2018,

42 Truth on the market blog, A Pro-Free Market Approach to Brexit Negotiations Is Key, 15 December 2017

43 Deloitte Brexit briefing, Brake Block Brexit: How a hard Brexit would impact the German automotive industry, June 2017

44 A further study by Deloitte estimated a sales loss to Germany resulting from the UK leaving the single market/customs union of £3.4bn.

45 VDA, Press release, 29 March 2017

46 Q19 [Hawes]

47 Special Trade Commission, Brexit, movement of goods and the supply chain, February 2017, Appendix 1. Any free trade agreement must, according to GATT/WTO rules, cover “substantially all trade” in goods. The flexibility of this definition is open to question and is discussed in a report by the Institute of Directors, Customising Brexit: A hybrid option for a UK-EU trade framework

48 Rt Hon David Davis MP, oral evidence to the DExEU select committee, 24 January 2018, Q757

28 February 2018