Big Auto Makers Risk Disruption From “No-deal” Brexit.
“In the longer term, an extended period of trading on WTO terms would act as a drag on corporate performance due to the impact of tariffs and non-tariff barriers”
Auto makers with long supply chains are at risk from short-term disruption if Britain leaves the European Union (EU) without a deal, Fitch Ratings said in a report.
Britain is scheduled to leave the EU on October 31, and negotiations between the British government and EU are increasing in intensity, but U.K. Prime Minister Boris Johnson has said if an agreement is not made by the deadline, Britain will leave anyway.
British politics has been in uproar lately as the governing Conservative party, which no longer has the votes to control Parliament, has been trying to make sure the result of the referendum in 2016, which voted Leave, is upheld. Opposition parties recently forced a law through Parliament which ordered the government to ask the EU for an extension of the deadline and said the “no deal” option must be withdrawn.
Fitch Ratings, in the report, said a “no-deal” Brexit would put big short-term pressure on British manufacturers, particularly those with complex supply chains like carmakers, and were particularly exposed to near-term disruption. A “no-deal” withdrawal would push the country into recession, weaken the pound, lower consumer confidence and demand, and disrupt border traffic.
“In the longer term, an extended period of trading on World Trade Organization (WTO) terms would act as a drag on corporate performance due to the impact of tariffs and non-tariff barriers,” the report said.
The British government says it has made big investments in making sure that disruption from “no-deal” will be as small as possible, but it can’t rule out some problems emerging in the short-term.
Short lived disruption
Politicians supporting the Leave position say any disruption would likely be short-lived because if Britain finally left the EU, there would no incentive for an aggressive negotiation on trade terms. Both sides would quickly decide they both had an interest in negotiating a mutually beneficial deal.
Some experts say that given just over half of Britain’s exports are now conducted under WTO rules, it wouldn’t be too difficult to switch to that scenario for all exports.
“The current end-October exit date also creates fresh challenges. Auto manufacturers that shut down for annual maintenance in April 2019 – around the previous exit date – will not be able to easily repeat this planning, exposing them to greater risks of supply-chain disruption. Stockpiling also will be trickier for all industries as warehouse capacity will be low ahead of Christmas,” the report said.
Last week Jaguar Land Rover said it will close its U.K. plants for a week in November to try and reduce disruption to its supply chain if Britain leaves on schedule.
“We will have to close. We cannot switch off and on again,” JLR CEO Ralf Speth told the Financial Times.
Speth was speaking as JLR unveiled a $615 million new design and engineering center.
Last week, Europe’s carmakers published a joint statement demanding that the EU and Britain forsake a ‘no-deal’ Brexit because the consequences would be catastrophic.
Organizations representing the European auto industry including those from Germany, Britain, the European Automakers Association, known by its French acronym ACEA, and supplier organisations, joined forces to underline the impact a ‘no-deal’ Brexit would have on what it called one of Europe’s most valuable economic assets. Barrier-free trade was crucial for the continued success of the highly integrated European auto sector. The application of WTO tariffs would cost industry and consumers $6.3 billion, although it didn’t say over what period.
The European auto industry has become increasingly shrill lately in voicing its opposition to a ‘no-deal’ Brexit, using words like catastrophic.
PSA Group CEO Carlos Tavares said failure to agree a deal would destroy the lives of the next generation of people in the U.K. That was a week after Tavares told the BBC failure to agree would be like a train-wreck.
Roger Bootle, chairman of Capital Economics, said use of the phrase ‘no-deal’ distorts reality.
“What leaving without a deal means is simply leaving without an overarching agreement as laid down in Article 50 of the Lisbon Treaty (under which countries can leave the EU). It does not mean a breakdown of relations, nor a cessation of trade. Nor does it necessarily mean the absence of a trade agreement in due course,” Bootle said.
If there was ‘no-deal’, Britain and the EU could continue to trade without tariffs by mutually agreeing to do so under the General Agreement on Tariffs and Trade’s Article 24, pending the conclusion of a Free Trade agreement, Bootle said.