Free trade agreement won’t necessarily help the UK car industry, argues expert

Time 12 months ago

A free trade agreement wouldn’t benefit much of the UK’s automotive industry after the Brexit transition period ends.

That’s according to David Bailey, professor of business economics at the University of Birmingham, who has detailed the challenges facing the industry over rules of origin as well as a free trade agreement between the UK and EU.

His online commentary – entitled ‘Rules of origin rule, OK’ – follows the news that car manufacturers in the UK face paying higher export tariffs whether or not there’s a Brexit deal, as reported by Car Dealer.

An anticipated deal is expected to allow any components obtained from EU countries to count as British, which is known as ‘cumulation’.

But the European Commission threw out proposals to extend cumulation to other partners of the UK and EU, including Turkey and Japan, which export huge numbers of parts for vehicle assembly here.

Bailey says that between them the EU and Turkey supply some 75 per cent of imported parts for most of the UK car manufacturing industry.

Rules of origin determine if a product made in a particular country with parts from abroad should be regarded as a product of that country or an import.

But it was reported that the car industry had been sent a letter from chief Brexit negotiator Lord Frost telling them the EU had denied a request to extend cumulation to include other partners of the UK and EU, including Turkey and Japan.

Bailey says that if the UK and the EU were to sign a free trade agreement allowing UK goods to be exported to the EU without a tariff, the goods would have to have a certain percentage of ‘local content’, which in many trade deals is between 55 and 60 per cent.

As such, a lot of the UK car industry wouldn’t gain anything, because the rules of origin requirements wouldn’t have been met.

Although this could theoretically act as an incentive for UK car manufacturers to get more parts from suppliers here, they can’t always be found easily, as a lot of imported parts come from specialist producers abroad.

Nor could they get their hands on them quickly, which is vital for the vehicle manufacturing process.

Bailey says a national cumulation model, with UK and EU components considered as one to meet rules on local content, would mean cars could qualify for free trade status.

As far as parts from Japan for Nissan, Honda and Toyota is concerned, he says Nissan should be OK as it will be able to get parts from the EU via its Renault alliance partner.

Honda is withdrawing from the UK in 2021 ‘so won’t be too bothered’, says Bailey, but Toyota could ‘come a cropper’ as some of its models rely on hybrid technology, much of which comes from Japan.

That means it could face having a 10 per cent tariff slapped on exports to the EU.

Bailey also highlights a report by the online publication Nikkei Asia that Toyota and Nissan seem to be seeking a reimbursement for tariffs from the UK government if a trade deal isn’t reached or maybe if they don’t qualify for the deal.

And because profit margins for Nissan and Toyota are understood to be only a few percentage points, they’d find it next to impossible to cover any rise in tariffs by cutting costs,.

That would make them less competitive in the EU, as well as making it difficult for them to carry on doing business here.

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Bailey concludes by saying: ‘No trade deal is seen as very damaging by the industry, but isn’t the industry’s only concern.

‘It is worried also about the implications of the sort of deal [Boris] Johnson envisages on the sustainability of their operations in the UK.’

That could lead to demands for support, which would mean a governmental policy reset, he said.

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Car Dealer has been covering the motor trade since 2008 as both a print and digital publication. In 2020 the title went fully digital and now provides daily motoring updates on this website for the car industry. A digital magazine is published once a month.

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