Catastrophe For Autos Predicted If No UK-EU Free Trade Agreement Reached By Deadline

 The United Kingdom left the European Union last January more than four years after its citizens voted for what became known as the Brexit. The breakup hasn’t been amicable. The two sides are still bickering over a free trade agreement and if they don’t get it done by midnight Brussels time on New Year’s Eve, there’s likely to be economic pain on both sides of the English Channel.

For the UK auto industry in particular, failure to reach an agreement before the deadline could be so harmful, the head of the organization representing the industry there automakers says it should not even be a consideration.

“No deal would be nothing less than catastrophic for the automotive sector, its workers and their families and represent a stunning failure of statecraft. Quite simply, it has to be ruled out,” said Mike Hawes, Chief Executive of The Society of Motor Manufacturers and Traders (SMMT) in a Dec. 13 post on the organization’s website.

The organization representing the European auto industry also used the word “catastrophic” in describing the consequences of failure the UK and EU to reach a free trade agreement by the deadline, posting on its website, “There is no other industry that is more tightly integrated than the European automotive industry, with highly complex supply chains stretching across Europe and production relying on ‘just-in-time’ delivery.” 

What it really gets down to, explained Mimi Song, Chief Economist at Cross Border Solutions, an international company specializing in technology-driven business tax management, are steep economic barriers to the economic health of automakers and suppliers as well as pricing stability for consumers.

“The bottom line is, if there’s a no- deal Brexit situation. the whole entire industry could be weakened by the collapse of the EU exports,” said Song in an interview. “If you don’t come to a free trade agreement you’re going to have a situation where there’s going to be increased tariffs on both the import and export side. Both sides having a tariff imposed is going to have an impact on the underlying price, going to disrupt the entire supply chain and the actual profitability of these businesses.”

The SMMT warns without a deal, vehicle production in the UK would be reduced by two million units over the next five years and tariffs would mean a £55.4 billion hit to the UK auto industry by 2025 with annual production falling below one million vehicles.

The pain would be inflicted both ways. According to the European Automobile Manufacturers Association (ACEA) 51% of all exported UK-built cars were bought by customers living in European Union countries. On the other hand, 38.3% of vehicles built in EU countries are exported but 85% of vehicles imported to the UK are built on the Continent. 

Several automakers have already either made plans or have taken actions. Last year Nissan said it would shut down its facilities in the UK, Jaguar Land Rover said it will boost production in Slovakia rather than in the UK, according to Mimi Song. Forbes.com previously reported Honda will close its factory next year while BMW’s Mini and Groupe PSA have also threatened to pull out if no deal is reached.

Another sticking point is determining exactly where a vehicle is built, known as point of origin. That’s important because the point of origin can affect whether or not a tariff is imposed when the vehicle is exported. The difficulty is the thousands of parts that go into a car or truck can actually be built at supplier plants in many corners of the globe before reaching final assembly plants. Can a vehicle built in the UK with globally sourced parts claim that nation as a point of origin for trade purposes? No. Under terms of the proposed deal any components made in EU countries could count as British, qualifying those vehicles to avoid import tariffs. But the UK wants parts sourced from anywhere considered “British” as well—a provision the EU has so far resisted. 

Without that provision, the UK would be forced to forge free trade agreements with individual countries in order to avoid tariffs. Outside the EU, the UK has already begun the process signing trade pacts with Japan, Singapore and Vietnam, according to Song.  But, she points out, the need to reach those agreements goes beyond tariffs.

“Even non-tariff related barriers can be imposed if you don’t have certain agreements in place,” she said. “It’s going to have a downstream effect, especially to the auto consumer.” 

For U.S. automakers the issue is slightly different and carries a more extended deadline but will also have an impact on the UK, said Damon Pike, Customs & International Trade leader at global financial services company BDO.

“The election changed a few things,” he said in an interview. “In order to finally finish negotiating the proposed U.S.-U.K. free trade agreement the incoming administration has to have trade promotion authority from Congress, which it has right now, but it expires in July and has to be renewed by Congress.” By then the UK-EU situation should be long resolved, one way or the other. 

Meanwhile, Cross Border Solutions’s Mimi Song says ironically, the Covid-19 pandemic has actually contributed to improving some companies’ preparedness for disruption, pointing out, “The pandemic has probably been helpful in that regard. At the end of the day companies realized they need a more diversified supply chain so if one step in it breaks down it doesn’t have a dramatic downstream impact. 

Even so, BDO’s Damon Pike adds, “this would be a good time for a health check. A lot of companies, things go on auto pilot for awhile, people get lulled into a false sense of security. It’s a good time for companies to take a step back and take a look at their . qualification processes and calculations. Get a fresh set of eyes on it.” 

For sure, those eyes will be watching developments and the clock as the deadline nears. It all leaves Mimi Song with a simple question since the failure to reach an agreement would seem so harmful to both sides: “Why can’t they reach an agreement?”