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Geneva Auto Show: Will WTO Mitigate Brexit “Crash-out”?

Geneva Auto Show: Will WTO Mitigate Brexit “Crash-out”?

“It looks like English Prime Minister Theresa May is the grave-digger of the English auto industry”

As Britain’s Brexit deadline looms, the auto industry predicts disaster for the UK and European industry if no orderly European Union (EU) withdrawal is agreed, but a fall back arrangement with the World Trade Organization (WTO) could provide a quick insurance policy against a general meltdown.

Much of the argument about Brexit, as the industry prepares for the annual auto show in Geneva, has become a dialogue of the deaf as participants swap theories about the unknowable. The automotive industry has led an excitable chorus predicting crisis if Britain leaves the EU without a deal. Failure to agree means a damaging “crash-out”. Life-saving drugs will suddenly become unavailable. Food imports will stop. Planes will be grounded. It’s all reminiscent of the Year 2000 Millennium Bug crisis, when predictions of catastrophe were met on the day by embarrassed looks as the crisis failed to show.

There are some measurable facts. As the political controversy echoes around the seemingly deadlocked talks, the lack of certainty about the future has taken its toll on investment and production.

Britain’s auto trade lobby group, the Society of Motor Manufacturers and Traders (SMMT), said the uncertainty has led to a big fall in decisions to upgrade machinery and factories, and spending plunged 46% to 589 million pounds ($783 million) in 2018. British car factories produced 120,649 vehicles in January, 18.2% down on the previous year and the eighth month in a row of declines, the SMMT said.

And many commentators assume there will be no agreement between Britain and the European Union (EU) by the March 29 deadline, and this will lead to huge short-term damage to intricate European auto industry supply lines, massive traffic jams at Channel ports, and crippling tariffs which would destroy finely tuned profitability. In the medium to long-term, big auto factories in Britain run by companies like Nissan and Toyota of Japan could be forced out. Honda has already announced it is shutting its British factory in 2021, but says this has nothing to do with Brexit.

The hope is because both sides in the negotiations have so much to lose in terms of trade and wealth, sanity will prevail and an agreement will emerge as the deadline appears at 2300 hours on March 29.

Brexit impact feared
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany said industry fears the impact of Brexit.

Dudenhoeffer said the overall production in Britain – 2.34 million cars and SUVs in 2018 or 2.8% of the global market – is too small to hurt the overall industry, but many participants will be harmed.

“The Brexit headache will make life difficult for car manufacturers and suppliers with production sites on the island. The worst hit will be (Tata Motors of India owned) Jaguar Land Rover because it is extremely dependent on the production location England, Ford (now only with an engine plant) and (PSA Group of France owned) Vauxhall, which has a plant at Ellesmere Port, Liverpool whose future is in doubt. BMW may slow production at its Mini plant,” Dudenhoeffer said.

“It looks like English Prime Minister Theresa May is the grave-digger of the English auto industry,” Dudenhoeffer said.

And it’s not just industry in Britain that could be harmed by a failure of Brexit negotiations. Earlier this month the German economic institute Halle IWH said in the chaos of Britain leaving the EU without a deal, 100,000 jobs in Germany, mostly in the auto industry, would be jeopardized. Worldwide, a no-deal Brexit could hit 612,000 jobs, with 179,000 in the EU, the institute said.

But this negative reaction to the possibilities of a no-deal Brexit isn’t held by everyone. Politicians and experts who support the idea of Brexit expect a free trade deal to be arranged, possibly helped by invoking the WTO’s Article 24, which allows nations declaring their intention of negotiating free trade to continue using current arrangements for two years. As an EU member, Britain currently has free trade with the EU.

Seamless WTO
If Britain and the EU fail to agree a deal, this would mean trade would be subject to WTO rules. The fact that 55% of Britain’s foreign trade is currently performed seamlessly under WTO rules means this needn’t be a problem.

Economist Roger Bootle, chairman of Capital Economics, said the reaction by the auto industry worried about its supply chains being interrupted is a gross exaggeration. Bootle points out that intricate supply chains exist successfully all over the world straddling all kinds of tariff regimes without problems.

Ruth Lea, economic advisor to the Arbuthnot Banking Group, said the WTO’s rules allow friction-free passage across tariff barriers.

And the European auto industry has form when it comes to protecting its privileges. In the 1990s, when Britain resisted joining the Euro single currency, the auto industry complained loudly that if Britain stayed outside, its business would face ruin. The reverse happened as Britain refused to join.

Nevertheless Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany said Brexit is a nagging concern.

“Europe is worried most by Brexit and what will happen – hard, soft or a new election for a British government – we don’t know. Brexit is the biggest threat for this year,” Bratzel said.

Turmoil
“This turmoil will involve a lot of costs for companies like BMW and Ford which exchange a lot of components and employees between mainland Europe and Britain. And Britain is a big market; we’ll see falling sales in Europe. The European car network of components and engines is so intertwined, and I’m concerned about the impact on Britain’s economy if there’s a hard Brexit,” Bratzel said.

A “hard” Brexit assumes the negotiations fail to agree and Britain leaves the EU without a free trade deal, and has to fall back on WTO terms. 

The Geneva Auto Show opens to the public March 7 through 17 at the Palexpo center.


 

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