Will Auto Makers Retain European Free Trade After Brexit?

Will Auto Makers Retain European Free Trade After Brexit?

“The key is to nail this down as quickly as possible so we can continue free trade in goods and services”

    Financial and currency markets were shaken up after Britain’s surprise decision to leave the European Union, but auto manufacturers with factories in the U.K. face more long-term problems as they seek to retain free-trade arrangements.

    Toyota, Honda, Nissan and BMW’s Mini and Rolls Royce subsidiaries have big plants in Britain, and in the run up to Thursday’s referendum had sought to sway the vote to “Remain” in the E.U. claiming their businesses would suffer if Brexit won.

     After the vote, BMW said its U.K operations faced uncertainty but no immediate changes are planned

    Britain’s membership of the E.U. includes unfettered access to its Single Market of about 500 million people. The industry fears this will cease to be available when Britain leaves the E.U., but some experts reckon free trade can continue after membership is formally concluded with the minimum of harm. Meanwhile, initial damage is predicted as uncertainty leads to the cutting of investment plans.

    Even though Britain has voted to leave the E.U., it is still a full member, and will remain so until it formally declares its intention to end the relationship. This entails invoking Article 50 of the Treaty of Lisbon. When that happens, Britain has 2 years to negotiate a deal. If a deal isn’t forthcoming, the talks can continue if all 27 remaining E.U. members agree.       

    Unfettered mobility
    Professor David Bailey of the Aston Business School in Birmingham said it is essential for the industry’s health in Britain to make sure free trade is continued, with unfettered labour mobility too.

    “All the economic models suggest negative economic impact and I tend to agree with that, but the scale depends on the nature of the trading arrangements we put in place with Europe. The closer the new arrangements are to the ones we currently have – access to single market and the ability to bring in skilled workers – the less the  economic damage. The key is to nail this down as quickly as possible so we can continue free trade in goods and services,” Bailey said in an interview.

    Bailey said it might not be wise to rush into invoking Article 50 to give breathing room for the negotiations. If they fail, Britain would have to fall back on World Trade Organisation rules which would mean 10% tariffs.

    He said the around 10% drop in the value of sterling against the dollar will boost exports, but will also raise the cost of imported components. About 60% of the components used by Britain’s mass car makers are imported.

    Investment bank UBS said Friday that uncertainty is likely to increase for both business generally, and households.

    “Our initial assessment is that (U.K.) growth in the second half of this year will slow further,” UBS said in a report.

    Positive implications
    Investment researcher Evercore ISI, which earlier this week predicted 

the global automotive business will be in big trouble if Brexit wins, conceded Friday that there were some positive implications from a strengthening dollar, which would help German exports profits. This would offset some of the pain from sterling’s weakness and the expected fall in sales in the lucrative British car market. The report said Brexit would cut global auto manufacturers earnings by $9.1 billion, cut British car sales by 14.4% and European car output by 2.5%.

    Evercore ISI said Britain has been one of the most profitable markets in Europe for car makers, and accounts for 23% of high-margin executive car sales in Western Europe. It said in 2015 Britain’s car industry employed about 800,000 and made 1.7 million vehicles, with 57.5% exported to Europe.

    Other experts are more sanguine about the impact of Brexit.

    Garel Rhys, emeritus professor of Motor Industry Economics and director for Automotive Industry Research at the Cardiff Business School, said before the poll result that either way, the future of the British automotive industry looks healthy.

    Nobody’s interest
    “It might not all be sweetness and light, but even if the U.K. is outside the E.U. the powerful hitters in Europe will make sure car industry and car makers and finance will still operate (in Britain). It’s not in anybody’s interest not to do that,” Rhys said.
    BMI Research, also speaking before the vote, said Brexit would be a problem, but might not last too last long.

    “Brexit would lead to a worsening of their (the auto industry’s) sales and balance sheets for up to two years after the June referendum. However the net effects after this short-term dip would be relatively benign,” BMI Research said in a report.

    “Over the longer run, as the UK pound finds its footing and uncertainty over trade and investment arrangements with the E.U. is gradually resolved, we expect the net effects to be balanced,” BMI Research said.

    But BMI Research wanted of short term damage to the supply chain from uncertainty, and the threat of tariff barriers being erected between the E.U. and Britain.

    Aston Business School’s Bailey shared this fear.

    “The pressure on investment (in British factories) comes when at the end of the 6 year model cycle, manufacturers scout around Europe for a better deal seeking help from other countries eager to attract factories and employment. We need to nail down quickly a trading relationship with the E.U. If we don’t get that sorted, it will have an impact on Britain’s ability to attract investment,” Bailey said.