Will British technology outperform America

Hard Brexit: £ 7.9 billion slump in EU exports for UK auto industry?

A hard Brexit could cost the UK auto, technology, healthcare and consumer goods sectors nearly £ 17 billion a year. That's the result of a new study by global law firm Baker McKenzie. The report "The realities of trade after Brexit" examines these four industries, which account for 42% of the UK's gross domestic product (GDP) in manufacturing and 45% of the goods exported to the EU.

The key question of the study, which the firm conducted with Oxford Economics, is: To what extent could cost increases for exports from the UK lead EU consumers to switch to a domestically manufactured alternative or another export country?

The report also shows which exporting countries outside the EU offer the best conditions to offset potential losses resulting from the departure of the internal market.

The consequences of a “hard Brexit” will hit the automotive sector the hardest, with a forecast loss of 7.9 billion pounds sterling (GBP) per year in EU export revenues.

Ulrich Ellinghaus, director of Baker McKenzie's global automotive practice, says:

“The British automotive industry is heavily involved in the European value chains, but will feel the effects of Brexit much more strongly than its EU counterparts. Without the UK as a trading partner, EU exports in the automotive industry could decline by 4.3% worldwide, but adjusted for increased cross-border trade between EU countries, this is a manageable 0.8%. In contrast, the UK automotive sector is losing more than 22% of its export earnings as a result of reduced exports to the EU. "

Tariff and non-tariff barriers to trade cost £ 3.8 billion annually

The study highlights that the cost of tariff and non-tariff barriers to a hard Brexit could amount to £ 3.8 billion annually for the automotive, consumer, technology and healthcare industries. The cost of non-tariff barriers, including new formalities and administrative requirements, in some sectors can not only match, but exceed, the financial impact of new tariffs.

Of the four sectors, the automotive industry is likely to be the hardest hit as the cost of tariff and non-tariff barriers to trade will increase by an additional £ 2.1 billion annually. This is shown in the following graphic:

Despite the obvious impact of the non-tariff trade barriers, the model assumptions do not even reflect the full picture. Companies could face further costs if they have to deal with different technical standards and other regulations.

The risk of relocation

In addition to the impact on export earnings, there is a significant risk that companies operating in the automotive sector will relocate.

Many of the industries modeled in the report are owned by non-European companies. If they have settled in Great Britain in order to gain access to the EU internal market, the elimination of EU market access could cause them to relocate to an EU country.

Nikolaus Reinhuber, Global Chair Industrials, Manufacturing and Transport at Baker McKenzie, says:

“Over half of the automotive sector is owned by non-EU companies. In addition, companies face additional costs from tariff and non-tariff trade barriers, which could amount to 3.8 billion euros annually in the automotive, healthcare, consumer and technology sectors. Relocation is therefore a clear alternative. "

Businesses will only be able to stay in place if the UK government is ready to incentivize industry, particularly to offset new tariffs. In the short term, however, these incentives should at least be brought into line with European state aid rules.

UK production exports would have to be increased by 60% in five key markets to offset the EU export losses in the event of a "hard Brexit".

The study also examines the post-Brexit trade opportunities with non-EU countries in various branches of industry. They are based on the size of global imports in these markets - now and in the next decade. It turns out that the USA offers the greatest opportunities for these areas and accounts for around half of the total market in each of the individual branches of industry. China is now the second largest option with a comparatively high proportion of variation between the remaining areas.

In these countries and industries, the UK's import share was 2.1% in 2016. In order to offset the export losses in connection with Brexit, the import share might have to increase by more than 60%. In particular, the consumer goods sector could be hit harder than the other sectors to make up for the loss of EU trade. Exports to the markets of these countries would have to increase by up to 150%.

However, domestic markets can also be an important factor in cushioning the impact of falling exports

“The UK is in a difficult position with Brexit. Our data show that this state has to start a very lengthy process of negotiating free trade agreements with other third countries in order to be able to cushion sudden losses in the event of a Brexit without an EU agreement. However, that is not possible as long as the British are in the EU and have the security of an EU transition period. This is a real dilemma and the UK government will have to make difficult choices, ”concludes Samantha Mobley, Head of Practice for EU, Competition and Trade in London.

In addition to these concerns, Baker McKenzie states that antitrust law will add additional uncertainty. "Antitrust law is a core area that automotive companies are currently concerned about," says Dr. Nicolas Kredel, antitrust partner and specialist for the automotive industry.

“Will the UK open national proceedings against original equipment manufacturers (OEMs) and suppliers despite EU enforcement activities? How closely will UK decision making follow EU decision making, for example with regard to export restrictions for EU traders? A hard Brexit would leave companies alone with these questions - on both sides of the channel. "


Oxford Economics used the GTAP (Global Trade Analysis Project) model, which is the benchmark database and model for analyzing international trade policy. The GTAP provides a consistent framework for making the consequences of changes in international trade policy understandable. The model simulates the extent to which increases in import costs can lead consumers to switch to a domestically manufactured alternative or to another export country. It also captures any resulting changes in labor and capital allocation.

For the purposes of this study, the model is based on a “hard Brexit” scenario in which the UK leaves the EU customs union and bilateral tariffs for all trade between the UK and the EU are at WTO most favored nation level. That could be a worst-case scenario that the UK wants to avoid.

The study focused on four sectors that are central to UK manufacturing: the automotive, technology, healthcare and consumer goods industries. We also look at the telecommunications industry for comparison.


You can download the entire study here.

Author: Barbara Gruber