Why hard Brexit could cost UK car industry £4.5 billion in tariffs annually

Britain’s car industry has been the exception to the rule that UK manufacturing has declined precipitously since the 1980s. More than 1.7m vehicles roll off its production lines annually, it employs 814,000 workers and boasts an annual turnover of £71.6 billion.

Nissan in Sunderland is arguably the most spectacular success story among many. The Japanese giant has invested £4 billion in the UK since 1986. Its Wearside plant in the north-east of England is one of the world’s most advanced manufacturing sites and among the most successful.

In 2016 the plant produced more than half a million vehicles and has been rewarded with promises of further heavy investment to make the company’s Qashqai model, as well as a next generation of electric vehicles. It, seemingly, underlines the company’s commitment to the UK as part of its global strategy.

But the lack of clarity over the UK’s post-Brexit trade relationship with the EU is casting doubts on the industry’s future. The president of the SMMT car trade body, Tony Walker, has demanded clarity on the issue. Yet it seems impossible to get this while negotiations continue with deep uncertainty around core issues, including access to the EU’s single market.

The government has still not made clear what its end goal is – beyond vague ideas of “regulatory alignment”. It is not a phrase that inspires confidence.

Nissan chief Carlos Ghosn said the Qashqai model will still be made in the UK. David Parry/PA Archive/PA Images

Meanwhile, European leaders continue to press for details on what the UK wants from Brexit. They make clear that access to the single market is impossible if the UK leaves not only the European Union but also the customs union.

The commitment to the “red lines” of ending the jurisdiction of the European Court of Justice over UK laws and halting freedom of movement make the government’s call for “frictionless” access to the single market impossible.

Stalling profits

According to the SMMT, 1,100 lorry loads of automotive components arrive daily from the EU, without customs checks or tariffs. More than half of the £34.3 billion worth of cars exported from the UK go to Europe. So falling back on WTO rules could cost the industry £4.5 billion in tariffs annually.

Another cause for alarm for the car industry in the UK is falling consumer confidence, affecting domestic sales – which have recently taken a plunge. Then there is also sterling’s decline in value against the euro since the EU referendum. This raises costs for car companies, which import many of their components from the EU.

Honda and Toyota produced more than 300,000 cars in the UK in 2015 but between them the three Japanese giants depend on the UK for just 10% of global profits. So the technology, and even entire production sites, can be moved elsewhere if market conditions dictate such a radical step.

Nissan and other Japanese car makers need European customers and supply chains, as well as easy access to skilled researchers and other experts from the continent, so they are just as keen to retain free movement of labour.

The offer of sweeteners

Business secretary, Greg Clark, optimistically referred to government support for the domestic component supply chain to Nissan, presumably believing this can eventually take over from imported parts. He also promised the most mutually beneficial trade deal between the UK and the EU post-Brexit – a consistent government line throughout the Brexit process.

Meanwhile, Theresa May recently met Japanese business leaders in Downing Street and stressed the potential for a post-Brexit free trade deal with Japan.

Yet the UK government’s lack of clarity in its Brexit negotiations must be alarming to Japanese auto makers and politicians alike. Japan’s ambassador to the UK, Koji Tsuruoka, warned that a botched Brexit could lead his country’s manufacturers to quit the UK if staying was no longer profitable.

So, what can we expect of Nissan as the Brexit process continues? Despite assurances, the long-term prospects are far from certain. Supporters of a hard Brexit, like the industrialist James Dyson, point to the EU’s declining proportion of world trade as a sign of its diminishing importance to the UK.

It is doubtful that auto makers in the UK see things in the same way. Most trade is more regional than global, so European markets of high spending consumers are critical to UK auto manufacturers.

Nissan made a swift promise after the June 2016 referendum of major investment in the UK. But the public are not party to what the UK government offered in return to secure this. Its letter of reassurances to Nissan is still deemed too sensitive to release, despite parliamentary opposition and media demands to know what “sweeteners” may have been involved.

Critics suggest that any support offered to Nissan would need to be replicated for other manufacturers, and indeed other industries – and would come at a significant cost to taxpayers.

Not so long ago, Ford produced one in every three cars made in Britain. It ceased vehicle production in 2002 (though it still makes engines in Bridgend and Wolverhampton). The car industry is global and has proved highly agile in the past. Whatever was promised to Nissan, nothing about the company’s future in the UK should be taken for granted.

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