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IF Insights: Will Brexit bring doom for the UK automobile sector?

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Before Brexit, the UK was part of the EU's single market and customs union, allowing the free movement of goods, services, and capital

The United Kingdom departed the European Union three years ago. That was followed by the COVID outbreak and an energy catastrophe as the Ukraine war broke out in 2022. Add the double-digit inflation, the resultant cost-of-living crisis and a disastrous brief stint of Liz Truss, things are getting precarious for the European country with every passing day.

And now, the most recent figures point to another economic knock but in surprising ways, as the authorities finally start gauging Brexit’s impact on the British economy. Automobiles, which is one of the UK’s number-one export, has taken a serious hit, if developments in the first few months of 2023 are to be believed.

The Auto Market

Brexit has significantly impacted the UK’s trade policy and economic conditions, including the automobile market. While the full effects of Brexit are still unfolding, it is evident that changes in trade policies and market dynamics have led to a decline in investments in the UK automobile market.

One of the primary reasons for the decrease in investments is the uncertainty surrounding the post-Brexit trade relationship between the UK and the European Union. Before Brexit, the UK was part of the EU’s single market and customs union, allowing the free movement of goods, services, and capital. However, with Brexit, the UK has left these arrangements, introducing new trade barriers and regulatory complexities.

The UK and the EU have negotiated a trade agreement known as the Trade and Cooperation Agreement (TCA), which came into effect on January 1, 2021. While the TCA provides tariff-free and quota-free trade for most goods between the United Kingdom and the EU, it still introduces new non-tariff barriers and additional administrative burdens, particularly in the automotive sector.

Three of the biggest automakers in the world have urged the British government to renegotiate its Brexit agreement with the EU and intend rules that they believe endanger the manufacturing of electric vehicles in the UK.

Ford referred to the revisions as a “pointless cost.” At the same time, Stellantis, the manufacturer of Vauxhall, warned that it would only be able to fulfil its goal of producing electric vehicles in Britain with them. The largest automotive employer in the UK, Jaguar Land Rover, also referred to the timing of the new regulations as “unrealistic.”

What’s The Issue?

One critical aspect impacting the automobile market is the rules of origin requirements under the TCA. To benefit from tariff-free trade, automakers must meet specific rules of origin, which require a certain percentage of the vehicle’s value to originate from the UK or the EU. Meeting these requirements can be challenging, considering the integrated supply chains in the automotive industry, where components often cross borders multiple times during production.

The uncertainty and increased bureaucracy associated with Brexit has caused concerns for automakers. Many companies in the automobile industry rely on just-in-time production methods, where components are delivered as needed to minimize inventory costs. Introducing customs checks and delays at the border disrupts this efficient production process and adds costs to the supply chain.

Stellantis claims it is having difficulty complying with the TCA’s “rules of origin,” which mandate that 40% of an electric vehicle’s value-added parts must originate in the UK or EU for it to be eligible for tariff-free trade.

In 2024, this bar will grow to 45%; in 2027, it will rise to 55%, and the battery pack will then be required to originate in the UK or the EU.

Automobile manufacturers who do not comply risk incurring 10% tariffs when they sell their final products on the other side of the English Channel, making it more challenging to compete with less expensive rival models from Asia.

Stellantis claims that these requirements make UK production unfeasible and urges the government to reach a new agreement with the EU to maintain current regulations until 2027. Stellantis employs more than 5,000 people in the UK, including 1,000 at its electric van factory in Ellesmere Port, Cheshire, and 1,200 at its Luton plant.

Ford, which has spent £380 million expanding its e-motor capacity at its Halewood, Merseyside, facility, also released a statement supporting the regulation change’s three-year postponement. At the same time, the UK and EU increase their capacity for battery manufacture.

Moreover, Brexit has affected the free movement of skilled labour. The automobile industry heavily relies on talent from the EU, both for manufacturing and research and development activities. The end of the freedom of movement has created additional challenges in recruiting and retaining skilled workers, which can impact the competitiveness of the UK automotive sector.

These factors, combined with the uncertainty surrounding the future trade relationship between the UK and the EU, have contributed to a decline in investments in the UK automobile market.

According to industry data, investment in the UK automotive sector has decreased since the Brexit referendum. The Society of Motor Manufacturers and Traders (SMMT) reported that preliminary data showed a 2% decline in British new car registrations to 1.61 million units last year, or around 700,000 units less than the amount before the COVID.

Professor of business economics at the Birmingham Business School David Bailey describes the issue as an “existential threat to the UK auto industry” and claims that the present Brexit agreement’s provisions “place the UK at a competitive disadvantage.”

According to Andy Palmer, the chair of European battery maker InoBat, 800,000 jobs in the UK related to the auto industry were in danger. The automakers would relocate to continental Europe, he said, if they can’t comply with the local content requirements or lack the necessary battery capacity in the UK.

Conclusion

Overall, the changes in trade policies and market dynamics resulting from Brexit, including introducing new trade barriers and increased uncertainty, have played a role in the decline of investments in the UK automobile market. However, whether the situation will improve or degrade further, will depend on how swiftly the Rishi Sunak government assesses the ground situation and performs the course correction, as the sector is trying its best to adapt to the new trading environment.

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