Brexit: trade in goods Contents

Chapter 9: Investment and business climate

The value of sterling

266.Since the EU referendum in June 2016, the value of sterling has fallen significantly. This is shown in Figure 5.

Figure 5: Value of sterling against the US dollar, February 2016 –February 2017

Line graph

Source: XE, ‘XE Currency Charts: GBP to USD’: [accessed 22 February 2017]

Impact on exports and imports

267.A falling currency benefits exporters, as confirmed by our witnesses. For example, the Food and Drink Federation (FDF) told us that the weaker pound had made UK exports “increasingly competitive in recent months”. It hoped “to see a further upswing in exports in the coming months as companies capitalise on these opportunities”.525 Mr Michael Tholen, Director of Upstream Policy, Oil and Gas UK, said that, for the upstream oil sector, because oil is priced in dollars, devaluation of sterling had had an “improving effect on the UK’s competitiveness and has helped a little from a producer’s point of view”.526

268.Imports were, in turn, more expensive for both sectors,527 and this has had a pervasive impact throughout UK manufacturing because, as shown in Chapters 3, 4 and 5, many UK industries are embedded within wider EU supply chains, with a significant reliance on imports.

269.Thus the Society of Motor Manufacturers and Traders (SMMT) explained that “whilst the logic of a weak pound supporting exports is true, this is countered by the increased costs for supply-chains for raw materials, energy costs and imported semi-finished goods or components”.528 The FDF wrote that devaluation had “increased prices for raw ingredients such as butter or cocoa, or packaging materials and factory equipment”. Its members had “reported increased input costs of up to 20%”.529 Mr Paul Everitt, Chief Executive Officer, ADS Group, agreed that “beyond the immediate few months”, when a lower sterling might help exports, this would also be the case for aerospace and defence. He added: “Our big message is that long-term global competitiveness is not based on exchange-rate fluctuations.” 530

270.Mr Fergus McReynolds, Director of EU Affairs, EEF—The Manufacturers’ Organisation, summed up the issue:

“The nature of modern manufacturing today is not a simple model of one factory in the UK which makes something and then it is exported to one destination. As we add value in the sector, we bring in components from other countries, which would be affected by changes in the exchange rate, and they have to be managed.”531

271.We note that this management challenge confronts companies of all sizes and that SMEs often find themselves particularly exposed. Larger companies are often able to hedge their risks through the currency markets more effectively.

Impact on sectors and prices

272.Our witnesses noted that a prolonged depreciation of sterling would be likely to have structural effects on UK industry, with positive overall benefits for the UK economy. The National Franchised Dealers Association noted that, were sterling to continue to fall in value, UK-made cars would be likely to obtain a larger share of the UK market (because imported models would be more expensive), but the overall UK market might shrink.532

273.We were told the impacts of currency devaluation would be felt by consumers, in the form of higher prices. The SMMT wrote that vehicle price increases for consumers were already being announced, in the form of “tightening … credit conditions”, a point echoed by the National Franchised Dealers Association.533 Norton Rose Fulbright noted that, for the downstream oil sector, “the fall of the pound and the resultant increase in the price of oil imports has meant that consumers are seeing a rise in prices at the pump, which is never going to be popular”.534 We note that the impact of sterling depreciation has also been felt on some food prices since the referendum.535 As a result of this, in the longer term, there was concern that “a significant increase in wage inflation in the UK” would result.536

274.It is also worth noting that movements in sterling/euro exchange rate could well be more significant than any likely level of tariff that might be introduced between the UK and the EU (discussed in Chapter 4).

Certainty and investor confidence

275.As we concluded in our report, Brexit the options for trade, businesses are operating in conditions of considerable uncertainty about the terms of the future trading arrangement with the EU, notwithstanding the Prime Minister’s speech on 17 January 2017 and the ensuing Government’s White Paper. Uncertainty undermines investor confidence and so is, in itself, a significant threat to the UK economy.537

276.A number of the witnesses to this inquiry also highlighted this concern.538 Commenting on the manufacturing technology industry, Mr James Selka, Chief Executive Officer, Manufacturing Technologies Association (MTA), stated that there was “enormous interest and alarm about [Brexit] among overseas-owned members [of the MTA], of which there are many”.539 He commented that “uncertainty is the enemy of investment, and that is what we are dealing in in manufacturing”.540

277.Mr McReynolds agreed that long-term investment decisions for manufacturers would be made “harder” by this “uncertainty”.541 Mr Hawes explained that, in the automotive industry, “most volume models [such as the majority of Toyota and Nissan cars] operate on a four-year product cycle”.542 He continued:

“Where a contract is coming up for a new model in the next three or four months, this is a challenge because you are trying to understand what your future costs will be, but you have to make that decision now in pitching. You are in competition with other suppliers around Europe, or indeed around the world.”543

278.Mr Hawes described the impact of a decrease in investment in the car industry as “more like death from a thousand cuts than just shutting the gates overnight”.544 Mr Everitt said that this was also the case for the aerospace and defence industry. Investment in the long term “will depend on our ability to negotiate a successful new relationship with the EU … The danger is that we see a slow and steady erosion of our competitiveness if we do not address the challenges in front of us.”545

279.Norton Rose Fulbright LLP wrote that “the additional uncertainty of Brexit” was exacerbating the already existing problem of attracting investment to North Sea production, in a period of low oil prices: “There is little investor confidence, and this is likely to remain until it becomes clear what the post-EU UK will look like”.546


280.Japanese Foreign Direct Investment (FDI)547 in the UK is a case in point. Japan is a major investor in the UK automotive and pharmaceuticals sectors, as well as in financial services.548 It was the fourth largest source of FDI in the UK 2014 (after the EU countries combined, the US and Switzerland), worth £38.2 billion.549 Mr Koji Tsuruoka, Ambassador of Japan to the UK, explained that “more than 1,000 Japanese companies [are] investing all over the UK … [which] directly generate employment for 140,000 people”, with many more employed indirectly.550

281.The Ambassador told us that Japanese companies valued the UK as a “stable, predictable and friendly economy”.551 Japanese car manufacturers and pharmaceutical companies hoped to maintain existing trade conditions, such as the harmonised EU system for drug approvals (via the EMA), and current tariff rates and customs clearance procedures.552

282.Ambassador Tsuruoka told us that the large share of Japanese companies’ investment in the EU accounted for by the UK—proportionately more than double that of the rest of the EU—was “linked to the understanding that the UK is the gateway to continental Europe as part of the Single Market”.553 The Japanese government’s open letter of 4 September 2016, Japan’s Message to the United Kingdom and the European Union, stated: “Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to Continental Europe if EU laws cease to be applicable in the UK after its withdrawal.”554

283.Ambassador Tsuruoka accepted that “while the negotiation is under way … the UK’s status as an EU member will not be affected”.555 But businesses needed information from the Government on what the long-term trade arrangements would be, to allow them to plan: “We need consultation with stakeholders and not to be led by the press in understanding what is really going on”.556 He was reassured that “the first message that the UK Government has put to the Japanese public is that the UK is mindful of Japanese interest in Brexit, especially the interest of Japanese industry, and therefore Japanese industry will be heard and there will be consultation”.557

284.Ambassador Tsuruoka told us that there was “an ongoing process of consultation with the UK Government, from the very top to the level of officials”. However, the two sides had “not yet set up an agreed, regular, periodic mechanism of consultation”.558

285.The Japanese car manufacturer Nissan is a key investor in the UK economy, both nationally and, equally importantly, regionally, in the North East of England. Its announcement in October 2016 that it would continue to invest in the UK was a significant boost to the regional economy. The engagement between the Government and Nissan that led to this announcement is described in Box 10.

Box 10: Nissan’s investment in the UK

Nissan’s plant in Sunderland makes almost one in three cars built in Britain. In 2015 it produced 475,000 vehicles. 55% of Nissan’s cars are exported to Europe.559 It employs 7,000 people directly, and there are a further 28,000 employees in the plant and its supply chain.560

In September 2016 Mr Carlos Ghosn, the CEO of Nissan, warned that the company might not invest further in the Sunderland plant unless the Government provided a guarantee to compensate the company for the cost of tariffs on trade between the UK and the EU, should these be introduced.561

In October 2016 the company announced that it would produce both the next-generation Qashqai and the X-Trail at Sunderland.562 Greg Clark MP, Secretary of State for Business, Energy and Industrial Strategy, told the House of Commons that the Sunderland plant would “be expanded through new investment to be a super-plant, manufacturing more than 600,000 cars a year”.563

Considerable uncertainty remains over the undertakings made to Nissan by the Government. Mr Clark told the House of Commons that one of four “reassurances” made to Nissan had been that “in our negotiations to leave the EU, we will emphasise the very strong common ground, especially in the automotive sector, that exists between ourselves and other EU Member States in ensuring that trade between us can be free and unencumbered by impediments”.564 He declined to publish the correspondence between the Government and Nissan, stating that this contained information confidential to Nissan.565

Ambassador Tsuruoka said he did not know “what conditions or assurances the UK Government might have presented Nissan”. He noted:

“Having the Prime Minister deal with the president of Nissan is in itself a remarkable engagement by the UK Government. Therefore, I interpret this as a strong commitment of good will on the part of the host Government for Nissan. You may have seen in the press that there are certain issues that they discussed, most of them, I believe, to the satisfaction of both sides.”566

Mr Hawes told us that “all our members were surprised by the speed of that announcement, given some of the comments that were made in the previous few weeks”.567 He believed that the commitment from the Government was “not just Nissan, it is the sector as a whole”, which was very welcome news to the automotive industry.568

We note that, as discussed in Chapter 4, the GATT stipulates that customs unions or free trade agreements must liberalise “substantially all the trade” in goods, or have “substantial sectoral coverage” for trade in services. This means that sectoral agreements (those covering just the automotive sector, for example) would not be legal under the rules of the WTO.

Some uncertainty over the company’s future investment remains: on 20 January 2017 Mr Ghosn told the World Economic Forum in Davos that when the Brexit “package” was made available, Nissan would “have to re-evaluate the situation” and ask the question, “Is the competitiveness of your plant preserved or not?”569

Conclusions and recommendations

286.Sterling has fallen substantially since the EU referendum. While devaluation has brought some benefits to exporters, it has also raised the cost of imports. Many UK export industries are embedded within wider EU supply chains, with a significant reliance on imports. The effect of sterling’s fall upon UK exports is thus complex and mixed.

287.Larger companies may be able to hedge currency risk, but devaluation has a disproportionate impact upon smaller companies, which are less able to hedge.

288.Uncertainty is the enemy of investment. Lack of clarity on what Brexit will entail has caused concern in the business community, particularly in sectors reliant on international investment. While the Prime Minister’s clarification that the UK will pursue a FTA with the EU is a start in providing greater certainty, the Government must do more to help businesses to plan for the future.

289.The Government’s explicit support for Nissan to remain in the UK was welcome. We are not clear, however, what commitment was made by the Government, and whether any offers to the company apply more broadly to the automotive sector as a whole, or whether similar offers will be made to other sectors.

290.International investment is critical to the UK manufacturing and primary commodities sectors. We urge the Government to engage regularly with the governments of significant non-EU investors, as well as with individual businesses.

291.The Government has limited freedom to offer guarantees to any industry: the UK-EU conditions of trade will require negotiation with the 27 EU Member States, and the UK is obliged to comply with WTO rules on MFN status, subsidies and the coverage of FTAs.

525 Written evidence from FDF (FTG0021)

526 Q 59 (Michael Tholen)

527 Q 59 (Michael Tholen) and written evidence from FDF (FTG0021)

528 Written evidence from SMMT (FTG0009)

529 Written evidence from FDF (FTG0021)

530 Q 87 (Paul Everitt)

532 Written evidence from the National Franchised Dealers Association (FTG0012)

533 Written evidence from SMMT (FTG0009) and the National Franchised Dealers Association (FTG0012)

534 Written evidence from Norton Rose Fulbright LLP (FTG0018)

535 Unilever has raised the price of Marmite, Mondelez has changed the shape of Toblerones to contain less chocolate for the same price, and Weetabix has indicated its intention to raise prices, decisions which the companies attributed to higher commodity prices and the weak sterling. Reuters, ‘Cadbury owner Mondelez raises some prices on weak pound, higher cocoa cost’ (12 January 2017): [accessed 13 February 2017] and ‘Weetabix warns of price rises this year’, BBC News (30 January 2017): [accessed 13 February 2017]

536 Q 87 (Paul Everitt)

537 European Union Committee, Brexit: the options for trade (5th Report, Session 2016–17, HL Paper 72)

538 Q 53 (Michael Tholen) and Q 86 (Paul Everitt)

539 Q 22 (James Selka)

540 Ibid.

541 Q 22 (Fergus McReynolds)

545 Q 86 (Paul Everitt)

546 Written evidence from Norton Rose Fulbright LLP (FTG0018)

547 FDI is defined as cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise, and a significant degree of influence by the direct investor on the management of the enterprise. Ownership of at least 10% of the voting power, representing the influence by the investor, is the basic criterion used. Organisation for Economic Co-operation and Development, ‘OECD Factbook 2013: Economic, Environmental and Social Statistics’:;jsessionid=2owcbu8ik9bbs.x-oecd-live-02?itemId=/content/chapter/factbook-2013–34-en&_csp_=01ed25b0712bc3492f6d2d68d1f16a37 [accessed 13 February 2017]

548 Our report, Brexit: financial services, considers the implications of Brexit for financial services. European Union Committee, Brexit: financial services (9th Report, Session 2016–17, HL Paper 81)

549 ONS, ‘Article: International perspective on UK foreign direct investment (FDI)— 2014’: [accessed 13 February 2017]; The top three sources of FDI in 2014 were the EU countries combined, (£495.8 billion), the USA (£253 billion) and Switzerland (39.9 billion).

551 Ibid.

552 Q 98 and Government of Japan, Japan’s Message to the United Kingdom and the European Union (4 September 2016): [accessed 13 February 2017]

554 Government of Japan, Japan’s Message to the United Kingdom and the European Union (4 September 2016), p 13: [accessed 13 February 2017]

555 102; The Government has stated its intention to trigger Article 50 of the TEU by the end of March 2017. Article 50 specifies a two year period, which can be extended by the unanimous agreement of the EU-27 and the UK.

559 Chris Johnston, ‘Nissan to build new models in Sunderland’, BBC News (27 October 2016): [accessed 13 February 2017]; Tom Bergin, UK support for Nissan may be costly, hard to calculate, Reuters (27 October 2016): [accessed 8 March 2017]

560 HC Deb, 31 October 2016, Col 679

561 Chris Johnston, ‘Nissan to build new models in Sunderland’, BBC News (27 October 2016): [accessed 13 February 2017]

562 Chris Johnston, ‘Nissan to build new models in Sunderland’, BBC News (27 October 2016): [accessed 13 February 2017]

563 HC Deb, 31 October 2016, Col 679

564 HC Deb, 31 October 2016, Col 680

565 HC Deb, 31 October 2016, Col 682

568 Ibid.

569 Ben Chu, ‘Nissan boss Carlos Ghosn says UK investment to be ‘re-evaluated’ if Theresa May delivers poor Brexit deal’, The Independent (20 January 2017): [accessed 13 February 2017]

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