Are there any upsides for the car companies?
A hard Brexit would put barriers up and force businesses to look inward, which could boost the UK parts industry. Currently an average car built in the UK uses 44% of UK parts in terms of value. Post-Brexit, car makers might want to increase that to hit ‘rules of origin’ requirements (see below). The lack of tariffs and border hassle could make a UK part that much more competitive compared with an EU part.
For example, Aston Martin and McLaren both use Italian-made Graziano gearboxes. In the event of a hard Brexit, McLaren Automotive CEO Mike Flewitt said he would try to persuade Graziano to build a UK plant. “If the duties were there and it was harming our competitive position, absolutely we would,” he said.
McLaren currently sources 50% of its parts from the EU (outside the UK), a figure that will go down to 40% once it starts making its carbonfibre tubs in Yorkshire in 2020. That decision to shift production from Austria was made prior to Brexit, but we could see more of this. McLaren and Aston Martin have both said they’ve benefited from the fall in the pound’s value since the 2016 vote.
What do UK auto makers want from Brexit?
“We want free trade, zero tariffs, frictionless trade across borders,” Flewitt said. It’s a common refrain. Essentially, they want what we’ve got now: a customs union, free trade, common rules (and a say in how they’re made) and the freedom to hire staff from across Europe. “We need unrestricted access to the single market of Europe, our largest trading partner,” the SMMT said.
Last year, 54% of UK-built cars were shipped to customers in the EU. The SMMT reckons a no-deal shift to World Trade Organization (WTO) tariffs would add £1.8bn to the cost of exports, forcing price increases. Meanwhile, an extra £2.7bn would be paid collectively for new cars coming from the Continent.
Ford puts the blame squarely on Brexit for its loss-making second quarter in Europe this year. “The biggest issue we face is the UK,” Jim Farley, president of global markets, told investors last week. “Brexit and the continued weak sterling has been a fundamental headwind for our European business.”
So what will happen?
The latest white paper from prime minister Theresa May proposes that we stay in a version of a customs union and single market while maintaining the EU’s rules on goods such as cars. So no tariffs, no border checks and no real change, apart from making it more difficult to hire people from outside the UK.
The SMMT called it a “welcome step” that shows the Government is listening, but the hard Brexit wing of the Tory party hates it for proposing we take EU rules without having a say in how they’re made, and have forced amendments to the White Paper. There’s little evidence to suggest the EU would accept either version.
“There’s a sense of relief among auto makers that there’s a desire to stay in the single market, but they don’t know what they’ll end up with,” said Professor Bailey. “That is deterring investment in a very big way."
What is ROO?
Rules of origin (ROO) are an essential part of a free-trade agreement made with another country to make sure a third country isn’t piggybacking the deal. If you allow a car in tariff-free from country A but 80% of parts in the car come from country C, then you’ve given away a benefit to country C for nothing in return. Trouble is, cars made in the UK are so dependent on EU parts that we would struggle to satisfy ROO when we tried to strike post-Brexit trade deals.