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Would the UK car industry suffer from a ‘no-deal’ scenario?

    The news that oiling the jammed Brexit negotiations with the European Union could cost the UK nearly £60bn has presented the government with a fresh reason to reconsider walking away from the negotiating table.

    When one sees talk of a no-deal situation in the media, however, it is rarely discussed in a positive light; one is more likely to see terms such as ‘crisis’, ‘catastrophe’ and ‘utter desolation’.

    Many of the negative forecasts of a no-deal come from firms within the UK car industry, whose direct employment of 170,000 people give its warnings considerable weight. The British automotive industry therefore makes a good case study when considering the impact that a no-deal would have on the UK.

    The first thing to consider is whether these predictions are coming from reliable sources.

    Proposals to move factories out of the UK, as Ford has suggested it might do, are not new. Indeed we heard this rhetoric fifteen years ago when in 2002 the car industry was similarly threatening to move to the Continent if the UK didn’t join the euro.

    But the UK kept the pound and the continued foreign direct investment (FDI) it received from some of the world’s largest automotive companies saw it experience a boom in car manufacturing. Between 2008 and 2016 Britain’s annual output of cars rose from £36.7bn to £54.8bn – a near-50% increase

    When it comes to current concerns about a no-deal scenario, many are in fact short-term teething problems.

    For example, Honda, which employs a ‘just in time’ manufacturing system that involves holding only an hour’s worth of parts, fears that increased customs waiting times would disrupt the process. However, it is already looking into solutions, such as warehouses to build up larger supplies.

    The biggest long-term impact that a no-deal would have on British-based car makers would be the 10% tariff the EU would impose on UK-made cars imported into the bloc.

    The tariff would present firms using Britain as a manufacturing hub with the stark choice of fewer sales on the Continent, or, if they were to drop their prices to counter the tariff’s impact, reduced profits. It is easy to see why such a development would tempt firms to shift their operations across the Channel.

    But the UK government could implement a range of policies to negate the impact to these companies.

    It has been predicted that one of the government’s first moves in a no-deal scenario would be to commit itself to a reduced corporation tax rate of 10%.

    The UK already has the lowest corporation tax of any G20 state and lowering it from 21% to its present rate of 19% has been associated with a 13% rise in corporation tax revenues. Dropping the corporation tax rate to 10% would not only help to cancel out the newly imposed tariffs for existing firms in the Britain but it would also make the country a far more attractive location for further FDI.

    In such a situation it may in fact be EU countries like Germany that suffered, not the UK.

    The trade association The Society of Motor Manufacturers and Traders has this month warned that the average price of a German car in the UK would rise by £1,500 if a 10% tariff were to be imposed. Unlike the UK though, Germany would be constrained in its ability to drop corporate tax rates. A weakened Merkel, reliant on a Left-wing coalition, would be in no place to pursue corporate tax cuts. In consequence, Germany would most likely see a decline in sales to Britain, a country that buys one fifth of its cars.

    The UK, however, would have the ability to forge new bilateral trade deals with countries outside the Union, which would result in increased car exports to non-EU markets as well as reduced car prices for UK consumers. This is especially important at a time when the EU’s share of the world economy is in a position of seemingly terminal decline.

    Furthermore, the British government would have an enormous war chest of cash it could use to provide subsidies to firms that were struggling during the transition. This would come from the £13bn it would save annually in membership fees, as well as the €55bn it wouldn’t have to pay in a divorce bill.

    Finally, contrary to the majority of reporting, the UK would actually win in a tariff war with the EU. A recent report by the Institute of Economic Affairs shows that a tax on the £260bn the UK spends on EU imports would raise an extra £13bn annually, whilst a 5% levy on its £162bn worth of exports to the EU would only cost £8bn.

    It is therefore possible, by looking at one of the UK’s most important industries, to see that a no-deal situation could, rather than be the catastrophe that many car companies have prophesised, actually benefit both Britain’s producers and its consumers.

    DISCLAIMER: The views set out in this intern blog are those of the individual author(s) only and should not be taken to represent a corporate view of the Centre for Policy Studies

    Daniel Burgon is a CPS Economic Research Intern. He holds a BA in History from Royal Holloway, University of London and an MA in Modern History from King’s College London.

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    Roy Kimberley - About 103 days ago

    Aside from the above, the fall in sterling will initially more than compensate for any tariff charged on European car imports from the UK.

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