Introduction
In the recent past year, the UK announced its intention to exit the European Union (EU). Membership to the EU enabled the UK to enjoy several benefits, including the benefits of barrier-free trade. Therefore, its exit from the organization is definite to have an impact on the UK’s economy. However, the most heavily impacted will be the auto industry will face the worst crisis because of the uncertainty over Brexit. This is because car firms are unsure whether they will face tariff barriers. Moreover, the exit has the potential to make the movement of EU employed workers across the borders to be complicated. Therefore, it is probable that some of the car manufacturers will relocate their production facilities to other countries that are cheaper and provide more stable business environments. This case study analysis aims to identify some of the problems that might arise in the car and vehicle industry due to Brexit.
The Car Manufacturing Industry in the UK
UK’s membership in the EU led to international multinational corporations to use the country as a podium for exporting barrier-free to other markets in the EU. Many firms of different sizes and also targeting various customer niches have established themselves in the region. For instance, Toyota and Honda are large brands targeting the lower niche, and Jaguar, Bentley and BMW, which are also global brands although targeting the higher niche. Additionally, it is essential to note that the production of components and assembling of motor parts mostly occurs in the pan-European region. This is illustrated in the case of BMW manufacturing, whereby the components of the automobile travel long distances, crisscrossing the EU borders before being assembled in the UK. The SWOT analysis table below gives a clear representation of the automobile manufacturing industry in the UK.
Uncertainties Caused by Brexit
Membership of the UK to the EU single market enabled vehicle manufacturing companies to take advantage of barrier-free exports. Therefore, upon leaving the EU the UK will cease to be a party in such benefits, and as such, there is likely to be a significant increase in trade barriers, such as the introduction of tariffs and non-tariff on car exports and imports of components that would increase the production cost. Consequentially, this would result in a reduction in sales and employment. Second, withdrawal from the EU would make it challenging to source employment in the EU and move them across the borders. It is apparent that firms, such as Toyota and Honda that depend on relatively low-profit exports are most probable to leave the UK.
Effect of Tariffs on Imports and Exports
The car manufacturing industry in the UK constitutes a complex supply chain whereby the various components are obtained from different markets in the EU then import back. It is estimated that less than half of the components are manufactured in the UK. Therefore, imposing tariffs on automotive exports and imports would make it more challenging for the already complex supply chains. Tariffs on imports would increase the cost of production as the prices of individual car components will increase. As a result, this would lead to low-profit margins. On the other hand, tariffs on exports will increase the cost of selling new cars, which might discourage potential buyers. Overall, the existence of tariffs on imports and exports will have a significant adverse effect on the car industry.
Effect of Non-Tariff Barriers on Imports and Exports
After Brexit, the UK will cease to enjoy the barrier-free trade brought about by its membership in the EU. Therefore, this will lead to the introduction of NTBs, such as local content requirements in which the car firms in the UK will be mandated to comply with specific standards regulating imported goods. Additionally, goods crossing the border will have to meet the rule of origin requirements to indicate which countries they were produced. Last is the employment law, which would address the topic of staff recruitment in the EU and their movement across the borders.
NTBs will have an adverse impact on car manufacturing firms; for instance, it has the potential to increase border delays due to increased document compliance. Moreover, considering that car manufacturing entails a complex supply chain of movement and assembly of parts in different countries, the issue of border delays would be compounded. The rule of origin might also increase the cost of purchasing raw materials for companies like Toyota and Honda specialized in the production of affordable vehicles. Overall, both factors will lengthen the production time and increase production costs. As a result, the profit margins of the industry would decrease, workers would be laid off, and eventually, UK’s economy would plummet.
UK Government Response
When the UK announced that it was exiting from the EU, prominent automobile Japanese companies, such as Nissan was compelled to reevaluate their investment commitments to the UK. Therefore, the Japanese authorities felt anxious to secure greater clarity from the UK government. The UK government responded to the pressure from Nissan and Japanese authorities by creating a new trade deal with Nissan, although the contents of the deal was not made public. On the other hand, it invested €21.3 million in terms of support for Toyota. Overall, the UK government responded appropriately to pressure from Nissan and Japanese authorities. This is because aside from the car firms, many Japanese firms have established their central operations in the region. Therefore, Japanese firms ceasing their operations would have a significant adverse impact on the UK’s economy as it would affect cash flow. Moreover, a huge component of their workforce was UK employees. Therefore, by responding appropriately the UK government prevented an almost imminent economic collapse.
Conclusion
Brexit holds a high degree of uncertainty for industries in the UK, especially the vehicle and automobile manufacturing industry, which is dominant. The car industry is the largest contributor to UK’s economy and it heavily relies on its complex supply chain supported by the existence of barrier-free trade in the EU. Therefore, impairing the flow of trade by restricting free access to specific regions would cause an increase in production costs and delays that would adversely affect the profitability of the industry. Concurrently, this will have a ripple effect on UK’s economy. Therefore, as much as the UK is trying to exit the EU it should introduce non-tariff trade barriers that might encourage the free movement of goods and workers.