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EU, British Auto Makers Say Free Trade Deal Failure Will Cost $130 billion

EU, British Auto Makers Say Free Trade Deal Failure Will Cost $130 billion.

“ONS data shows WTO might not be a disaster for U.K. Auto”

The European Union (EU) and Britain must urgently seal a free-trade trade deal because failure would cost Europe’s automotive industry about €110 billion ($130 billion) in lost trade over five years and jeopardize jobs in a crucial economic sector, according to leaders of the European automotive industry.

The EU and Britain have 15 weeks before a Brexit transition period expires in their talks to nail down trading and political arrangements. Britain officially left the EU on January 31 without agreeing detailed terms. Unless an agreement is settled before the end of the year, Britain will have to deal with the EU on World Trade Organization (WTO) tariffs, not its current free-trade deal. 

A statement Monday from the European Automobile Manufacturers Association, known by its French acronym ACEA, said new calculations showed a failure to agree terms would result in WTO tariffs putting production of some 3 million EU and UK built cars and vans at risk over the next 5 years. The statement was also signed by European national and British automotive associations, plus supplier’s organizations. The statement said in part –

“‘No deal’ would mean combined EU-U.K. trade losses worth up to €110 billion to 2025, on top of around €100 billion in lost production value so far this year because of coronavirus crisis. To avoid a second economic hit to a sector employing 14.6 million people, the industry calls for negotiators to secure a deal urgently that delivers zero tariffs, modern rules of origin and avoids different regulations across the channel,” ACEA said.

Britain’s leading automotive industry mouthpiece, the Society of Motor Manufacturers and Traders (SMMT), has been vocal since Britain voted in a referendum in 2016 to leave the EU. The British industry operating under WTO terms would be a disaster for its members, the SMMT said.

ACEA armageddon
ACEA in its statement said if the 10% WTO import tariff was imposed it would wipe 3 million vehicles from EU and U.K. factory output of the next 5 years, with losses worth €52.8 billion ($63 billion) to UK plants and €57.7 billion to those based across the EU. Suppliers would also suffer from these changes.

But official British data from the Office of National Statistics (ONS) has shown this might not be the disaster for the country predicted by the industry. ONS data shows over the last 20 years Britain’s auto trade with the EU barely changed in volume, while imports soared. At the same time exports with the rest of the world (roughly similar in scale to EU business) had advanced hugely, despite the tariffs. And many countries, including the U.S., had a more successful record of general trading into the EU over a 20-year period with a 10% tariff than Britain had from inside the free trade zone.

SMMT CEO Mike Hawes doesn’t agree.

“These figures paint a bleak picture of the devastation that would follow a ‘no deal’ Brexit. The shock of tariffs and other trade barriers would compound the damage already dealt by a global pandemic and recession, putting businesses and livelihoods at risk,” Hawes said.

ACEA though sees disaster.

“Such tariffs (including 22% on vans and trucks) (are) far higher than the small margins of most manufacturers – would almost certainly need to be passed on to consumers, making vehicles more expensive, reducing choice, and impacting demand. Furthermore, automotive suppliers and their products will be hit by tariffs. This will make production more expensive or will lead to more imports of parts from other competitive countries,” ACEA said.

“Crucially, businesses need detailed information about the agreed trading conditions they will face from 1 January 2021 to make final preparations. This, combined with targeted support and an appropriate a phase-in period that allows for greater use of foreign materials for a limited period of time, will ensure businesses are able to cope with the end of the transition period,” according to ACEA.

And ACEA director general Eric-Mark Huitema underlined the industry’s exposure to a hit on two fronts.

“The stakes are high for the EU auto industry – we absolutely must have an ambitious EU-UK trade agreement in place by January. Otherwise our sector – already reeling from the COVID crisis – will be hit hard by a double whammy,” Huitema said.

Over the past 20 years, carmakers have deserted Britain, according to French consultancy Inovev.

“Ford has not produced cars in this country since 2012, and Groupe PSA, which took over Vauxhall, maintains symbolic production,” Inovev said.

PSA acquired Vauxhall and Opel when it bought GM Europe in 2017.

Toyota, Nissan and Honda have been the manufacturing auto industry mainstay in Britain, but Honda is closing its factory in 2021.

PSA threatens to close its British plants
“The Tata group (Jaguar Land Rover), and the BMW group (Mini) maintain significant activity in Great Britain, but Brexit could lead these carmakers to take drastic decisions. PSA has threatened to close its British plants in the event of a no-deal with the EU,” Inovev said in a report.

“Among the 10 best selling cars in Britain in 2020, only two are locally assembled. These were the Nissan Qashqai (5th) and the BMW Mini (6th). The biggest sales come from abroad – the Ford Fiesta (1st) comes from Germany, the Volkswagen Golf (2nd) comes from Germany, the Ford Focus (3rd) from Germany, the Opel (Vauxhall,) Corsa (4th) comes from Spain,” Inovev said.

“In total, 87% of cars sold in Britain are imported, compared with 82% in France and 63% in Germany,” Inovev said.

Despite the apparent sharp disagreements in the Brexit talks between the U.K. and the EU, an agreement is still the most likely result, said Fitch Solutions Country Risk & Industry Research.

“We still see this as the most likely outcome as both sides have intensified negotiations, and we believe that the U.K. Internal Market Bill is partly intended as a brinkmanship tactic rather than an effort to collapse the talks,” Fitch Solutions said in a report.

Last week the U.K. government said it found aspects of the original outline Brexit deal to be at fault, and caused international uproar when it expressed a wish to change it.   

Even a deal might be complicated
Fitch said though that even if there was a free trade deal, there might still be problems initially with border delays.

“A U.K.-EU trade deal would still lead to significant obstacles to trade, as exporters could face delays at the U.K.-EU border and additional administrative burdens of customs declarations. The length of potential delays would depend on potential last-minute mitigating measures adopted by the EU and U.K.; for example, the UK already approved plans to unilaterally implement a temporary ‘light-touch’ customs control regime. However, businesses would still face higher administrative costs, which the U.K. government previously estimated at 3-15% of the cost of the good being exported,” Fitch Solutions said.

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