Brexit and the implications for UK business: Automotive inquiry

This report is intended to inform public and parliamentary debate and to influence the Government’s objectives as it begins phase 2 of the negotiations on leaving the European Union.

The automotive sector is one of the most productive and successful in the UK, employing, directly or indirectly, over 900,000 people and generating almost one tenth of the country’s manufacturing output. The automotive sector in Europe is heavily integrated, with highly complex and efficient supply chains relying on the friction-free transfer of components across the continent. The sector is highly competitive, with high volumes and low profit margins. UK manufacturing plants have in recent years proved successful in winning competitions for the construction of cars for the European market, where the majority of our exports go. The single market and customs union has been instrumental in forming the regulatory and trading environment which has produced a diverse market with competitive prices for UK consumers.

We conclude that leaving the EU without a deal would undoubtedly be hugely damaging to the UK automotive sector, more so than to other European countries. It would involve the introduction of a 10 per cent tariff on cars and, because of the competitive nature of the business, the shift of volume manufacturing to countries remaining in the EU.

Because mass-produced cars in the UK are less than a quarter “British” for trade deal purposes, we recommend that the Government should prioritise securing the roll-over of existing EU Free Trade Agreements with the necessary amendments to allow UK content to count as EU for rules of origin purposes. New trade deals will also need to accommodate the largely European content of cars built in the UK.

Non-tariff barriers, in the form of border delays and increased bureaucracy, will also affect UK competitiveness. We recommend that the Government should, in its negotiations, place a high premium on securing frictionless trade for the automotive sector.

On the key issue of the future regulatory regime, we have not identified any potential benefits from divergence from the EU, only costs. We recommend that the Government seeks in the negotiations to preserve existing arrangements for the certification of vehicles throughout the EU, whether as part of a Mutual Recognition Agreement or some alternative arrangement. In order to maximise our trade opportunities with our biggest trading partner, and to provide certainty to global manufacturers, the Government should also aim to retain regulatory alignment with the EU regulatory framework for the short to medium term.

We looked hard at potential opportunities arising from Brexit. We found that it is unrealistic to expect an expansion of trade overseas to outweigh the loss of trade to Europe arising from a hard Brexit. Furthermore, any new bilateral trade deals secured by the Government are unlikely to lead directly to a significant increase in investment and jobs in the UK automotive sector. Trade deals are helpful, but not a pre-requisite for improving exports in the automotive sector. Retaining good access to the single market is more important than securing the freedom to secure new trade deals with third countries.