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  • Hard border could result in tariff and non-tariff barriers for UK automotive industry of £2.1 bn per annum;
  • Sector stands to lose more than 22% of its global export revenues owing to reduced EU export losses, compared with 0.8% for the EU
  • Automotive sector vulnerable to relocation and labour supply shortages

A hard Brexit could cost the UK's Automotive, Technology, Healthcare and Consumer Goods sectors a total of almost £17 billion  per year in lost EU export revenues, according to The Realities of Trade after Brexit. The report, launched by global law firm Baker McKenzie, covers four sectors that account for 42% of the UK's manufacturing GDP and 45% of manufactured exports to the EU.

Produced in conjunction with leading economic consultancy Oxford Economics, the report forecasts the extent to which increases in costs to UK exports could lead to EU consumers switching to a domestically produced alternative or to a different exporting country, and the subsequent decline in UK export revenues.

The report also considers the best opportunities for the UK with third country markets outside the EU to offset the potential losses associated with departing the Single Market.

The impact of a hard Brexit  is most notable in the automotive sector, with a predicted £7.9 billion loss in annual UK to EU export revenue.

Ulrich Ellinghaus, Global Chair of Baker McKenzie's Automotive practice said, "The UK's automotive industry is heavily incorporated in European value chains, but it will feel the pinch much more significantly than its EU counterparts. Indeed, in the automotive sector, without the UK as a trade partner, EU exports globally could fall by 4.3%, or just 0.8% adjusting for increased cross-border trade within the zone."

By contrast however, the UK automotive sector stands to lose more than 22% of its export revenue as a result of reduced exports to the EU.

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

The report highlights that the automotive, consumer, technology and healthcare sectors could be hit with new tariff and non-tariff barrier rates as a result of the imposition of a hard border between the UK and the EU, predicted to total £3.8 billion annually. The cost of non-tariff barriers, which include new compliance paperwork and other administrative requirements, can match or even outstrip the tariffs themselves in some sectors.

Of the four sectors, the automotive industry is likely to be hardest hit, with tariff and non-tariff barrier costs set to rise by an additional £2.1 billion annually, as the following chart illustrates:

Despite the obvious impact of the non-tariff barriers, the modelling here still doesn't represent the full picture. A much wider range of additional non-tariff costs could emerge as companies have to cope with divergences in technical standards and other regulations.

The risk of business relocation

In addition to the impact on export revenues, there is a significant risk that companies operating within the automotive sector could relocate.

In many of the industries modelled by the report, there is a sizeable share of non-EU overseas ownership. These companies were likely motivated to base their operations in the UK because of the Single Market access it offered and could seek to relocate if that market access is revoked.

Nikolaus Reinhuber, Global Chair of Baker McKenzie's Industrials, Manufacturing and Transport Group said, "Over half of the automotive sector is owned by non-EU parent companies. This, coupled with the potential costs that businesses face in the form of tariff and non-tariff barriers which could total £3.8 billion annually across the automotive, healthcare, consumer and technology sectors, mean that relocation is a distinct possibility."

Keeping companies in the UK may depend on the willingness of the UK Government to offer incentives to industry, especially where support is needed to offset any new tariffs. For the short term, at least, such incentives will need to be balanced with EU rules governing state aid.

UK manufacturing exports to five key markets need to increase by 60% to offset 'hard Brexit' EU export losses

"The realities of trade after Brexit" report also examines the third country trade opportunities in each sector post-Brexit based on the size of global imports to those markets – now and in the decade ahead. It reveals that, for every sector, the US offers the greatest opportunity, accounting for around half of the entire market in each of the industry sectors. China meanwhile, presents the second largest opportunity, with a fair amount of variation between the remaining sectors.

In these countries and sectors, the UK’s market share of imports was 2.1% in 2016. It could need to increase over 60% to offset Brexit-related export losses. Consumer goods in particular, could need to work harder than the other sectors to compensate for the loss in EU trade, with exports to these third country markets needing to rise by as much as 150%.

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

"The UK is caught between a rock and a hard place on Brexit. Our data shows that the UK needs to begin the very lengthy process of negotiating Free Trade Agreements with third country markets now in order to mitigate the cliff-edge effect of the fall in trade  in case no EU agreement kicks in immediately. But we can't do this while we're in the EU and have the safety net of an EU transitional period. This is a real quandary and the UK Government will need to make some difficult decisions," concludes Samantha Mobley, London Head of EU, Competition and Trade.

In addition to these concerns, Baker McKenzie explains that competition law will lead to extra uncertainty, “Competition law is a core area automotive companies are currently concerned about” says Dr Nicolas Kredel, a partner on the steering committee of Baker McKenzie’s EMEA antitrust and competition practice, and a specialist for the automotive industry. “Will the UK open national proceedings against OEMs and suppliers, despite EU enforcement activity? How close will UK decision practice follow prior EU practice, eg with a view to export restrictions on Continental distributors? A hard Brexit would leave companies alone with these questions - on both sides of the channel.”

 

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