Amidst the perplexing debate around how hard or soft we want Brexit to be, British car manufacturers are facing a far more tangible dilemma. Can they remain part of a broader European automotive industry or must they strike out alone?
Britain is one cog in a complex automotive supply chain that spans Europe. As part of the EU, the success of Britain’s car makers has been tightly tied to that of the whole European automotive sector. Crucial to the functioning of this machine are the EU’s “rules of origin”. Under these rules, manufacturers are required to source around 55% of their products from the EU to qualify for free trade deals. The theory is that a rising tide lifts all boats. As demand for European cars increases so do orders for British-made exhaust systems or air conditioning units and vice versa.
With the UK set to leave the EU, however, this arrangement is under threat. The Dutch Government has recently advised manufacturers in the Netherlands to avoid British components amidst fears that working with UK companies after Brexit would see their products drop below that crucial 55%. If this were to happen, EU car manufacturers relying on UK businesses would fail to qualify for free trade deals and incur significant additional costs.
The problem runs both ways, however. The cars exported by Britain rely on plethora of specialist European suppliers, far less than 55% of their components are made in the UK. Even if the UK can replicate EU trade agreements with other countries, therefore, British cars are unlikely to qualify for them being so far under the threshold.
The stakes are high. The automotive industry accounts for more than £77.5bn in turnover according to the SMMT. It is therefore crucial that an agreement on the rules of origin is reached as part of Brexit negotiations. Unless the UK’s products are accepted as an “EU origin”, the UK automotive industry will suffer and maybe cease to exist. In fact, more than two fifths of our members in a variety of sectors and based in the EU are looking to move parts of their supply chains out of the UK as they look to reduce their risk and find European alternatives.
This is why the rules of origin must be on the table at the Brexit negotiations. To address this issue and keep international trade as frictionless as possible post-Brexit, there are two options.
The first is to strike a deal where the UK remains in the customs union. This can ensure the UK counts as ‘EU origin’, bypassing the problem in the simplest possible way. The second is for the EU to remove or amend the rules of origin clause from Free Trade Agreements it has with non-EU countries. This would pose an enormously difficult challenge. It would require the agreement of all EU member states and the renegotiation of trade agreements around the world in a short space of time to save automotive manufacturing, along with other industries.
The needs of the UK automotive industry must be addressed in Brexit negotiations, and an agreement on the rules of origin must be reached as soon as possible. The automotive industry relies on frictionless trade, with various stages of the car production process taking place in different countries.
The clock is ticking. European car manufacturers are hardly excited by the prospect of losing trusted British suppliers, but their hands may be forced unless both sides in the negotiations can provide a solution. Contingency plans are being prepared now and they will be implemented not just in automotive but in other significant industries as well.
Duncan Brock is Group Director at the Chartered Institute of Procurement & Supply (CIPS).
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