Automotive brief: September 2017 - UK and Brexit
- Investor Services
Automotive sector left in limbo despite initial positive signs from UK government after Brexit vote
In the months following the UK’s vote to leave the EU, the government gave assurances to Nissan that Brexit would not adversely affect its UK operations. This gave hope to the sector that the government was prioritising car manufacturing and that the sector had little to fear. However, nearly a year later, the automotive companies are becoming increasingly frustrated that those assurances have not translated into concrete agreements between the UK and the EU, and they have more questions than answers over the impact of any deal between the EU and the UK on car manufacturers.
Falling production and investment
According to the Society of Motor Manufacturers and Traders, UK car production fell by 13.7% in June 2017 compared with the same month in 2016. This was the third month in a row in which production fell and the industry body blamed uncertainty over the impact of Brexit for the contraction. The same organisation also said that investment in the UK car sector had fallen significantly since the referendum on leaving the EU and warned that, if that decline continued at the same pace, the UK’s automotive industry in 2017 would receive only around one-quarter of the level of investment that it saw in 2015.
The government’s October 2016 promise to Nissan indicated that the government recognised the importance of the automotive industry to the UK economy, but its failure to clarify its stance since then shows that it has not worked out how to reconcile the needs of industry with political exigencies. The nature of the car manufacturing sector, whereby parts are often made in one EU country and assembled in another, means that the imposition of trade barriers or customs regulations would slow down the manufacturing process and increase the costs of operating in the UK.. As a result, the sector has made it clear that it wants to maintain access to the single market and avoid burdensome customs requirements.
The UK will not be able to cherry-pick
Precise details about the future relationship between the UK and the EU are hard to come by. However, the government has indicated that the UK will – at least initially – continue to apply the same standards for the automotive sector as those used on the continent once it leaves the EU. Meanwhile, the biggest unknown quantity for the automotive industry is the shape of the UK’s future customs relationship with the EU. The government in the first half of 2017 made it clear that the UK would leave the single market and the customs union. However, what seems like a basic principle is less than clear cut. While the UK will have to leave the single market if it is to end its commitment to EU freedom of movement laws, the government appears to want to maintain as many of the benefits of single market membership as it can. In her keynote speech at Lancaster House in January, Prime Minister Theresa May specifically stated that the future free trade agreement between the UK and the EU ‘may take in elements of current single market arrangements in certain areas – on the export of cars and lorries for example’. However, the EU has made it clear that the UK cannot simply pick and choose the parts of membership that it likes and discard those that are inconvenient. As a result, the finer details of such an agreement are likely to remain elusive for at least several months and will be hard fought. The UK and the EU have not yet completed the initial ‘divorce’ part of the UK’s exit talks, and the EU has insisted that no discussion of the future relationship can begin until sufficient progress has been made on negotiating the terms on which the UK will leave.
What is clear though is that the UK will probably lose access to the EU’s trade deals with third countries, such as Canada, and will have to negotiate its own free trade agreements. However, under EU law, a member state cannot begin to negotiate such deals while still a member of the bloc and so, while the UK can engage in informal dialogue with third parties on their future relationships, the reality is that formal deals might be years away.
The threat of no deal
In all likelihood, UK threats that the country will walk away from the EU without finalising a deal by the end of March 2019 will remain threats. But they are threats that strike fear into business leaders. To walk away without a deal would leave the UK without favourable access to the European single market and with no customs provision, causing significant disruption to both UK and EU importers and exporters. It is therefore in neither side’s interests to walk away from the negotiating table without some form of agreement on the shape of relations post-Brexit.
The EU is renowned for making deals at the eleventh hour and, while no previous set of negotiations has been as complex as those on Brexit, the UK and the EU are likely to reach some form of deal on their future relationship in time for the deadline, even if it is merely a deal giving them more time to negotiate. A transitional period would then allow for more time to flesh out the details of the deal. Although this means that the status quo is likely to remain in place for at least a year after the March 2019 deadline, this will only prolong uncertainty for the automotive sector.