Concerns over trade conditions under 'hard Brexit' raised at automotive industry conference

Those concerns were aired at an automotive industry conference in Stuttgart last week, where the potential effect of Brexit was the central issue of discussion. Many of the major original equipment manufacturers (OEMs) were present, including BMW, Opel Group, Volkswagen and Daimler.

The event highlighted the preparations being undertaken within the automotive industry ahead of Brexit. According to the evidence from the discussions at the conference, OEMs are all calculating similar Brexit scenarios for their business and all functional units within their business at the moment.

The worst case scenario those businesses envisage is a hard Brexit, where the outcome of the UK and EU's negotiations on the terms of the UK's exit from the trading bloc is that trade between the UK and remaining EU countries is carried out on the basis of World Trade Organisation (WTO) rules, and where there might be a move away from a customs union and common market approach within the EU more generally.

The main concerns expressed at the conference fall broadly into four categories:

Tariffs between the UK and the EU

Should UK-EU trade be governed by WTO rules, tariffs would apply on goods imported to the UK from the remaining EU countries, and vice versa.

With the complexity of supply chains, this is a problem both on the UK and on the ‘rest of Europe’ side. Most car manufacturers work on the basis of margins which cannot accommodate additional tariffs easily, meaning price rises could be necessitated.

Rules of origin in preferential trading/free trade agreements with third countries 

The UK and EU could agree their own trade agreement to eliminate or reduce the tariffs that would apply for certain goods imported and exported between the two jurisdictions post-Brexit. However, according to the research conducted by some OEMs into this fairly complex topic, most agreements of this kind made between developed economies seem to require automotive products to be on average at least 55% locally made in order to benefit from lower rates or no customs duties at all. The objective of these rules of origin is to avoid products of a third country indirectly benefiting from a free trade agreement made between two countries. It is very unlikely that the UK would be able to negotiate lower thresholds.

With the comparatively weak UK part of the automotive supply chain, speakers stated that UK-built cars achieve a maximum of 40% local content. So, a Mini built in the Netherlands, or a Land Rover built in Slovakia, would likely benefit from a treaty in place between the EU and a third country as it is then mostly EU-sourced. If the vehicle is built in the UK it might not.

The UK could take steps to attract investments in UK-based plants to increase the UK contribution to vehicle production to ensure eligibility for the lower tariffs. However, such a move would only likely be effective in the long-term and would require significant industry investment by both OEMs and their suppliers, as well as incentives from the UK government.

However, speakers at the conference said it was unlikely that the UK government would incentivise car manufacturing substantially. They believe the UK government's priority in Brexit negotiations with their EU counterparts will be securing favourable trading conditions for the UK's financial services industry. Manufacturers may therefore be more likely to move production away from the UK than move it towards the UK, which they would need to do in order to achieve higher local content and meet the negotiated rules of origin thresholds.

Freedom of movement for employees  

Another concern raised at the conference was the ease with which UK nationals would be able to work in the EU, and EU nationals work in the UK, if the terms of Brexit do not enshrine the free movement of workers which applies in the EU at the moment.

This is a pressing issue for car manufacturers based in the UK and elsewhere in Europe as it could limit their options for basing production operations. UK manufacturers may wish to pursue production in continental Europe and send British engineers over to help with the work. Similarly, manufacturers in Germany or France, for example, may wish to use a UK plant to produce a new model and involve European engineers in the UK operations.  

EU passport

Financial services passporting is not an issue that you would automatically associate as a concern of the automotive industry. However, all the main OEMs have banking licences and operate banks.

Passporting is where financial firms licensed to operate in one country can operate in another country under a streamlined authorisation process. There are different types of 'passport' depending on what services are being provided. OEMs are concerned that there may be restrictions on their banking services if passporting between the UK and remaining EU countries is not guaranteed, or an equivalent arrangement put in place.

Eike Fietz is a specialist in corporate transactions in the automotive sector at Pinsent Masons, the law firm behind Out-Law.com. Experts at Pinsent Masons will be discussing legal challenges for autonomous vehicles at the Financial Times Future of the Car 2017 event in May.