The car industry has told Theresa May that the introduction of tariffs after Britain leaves the EU is a “red line” issue that would lead to a fall in sales and potentially result in job losses.
In a severe warning about the consequences of a hard Brexit, Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders, said tariffs would make UK car plants uncompetitive and it was critical that any trade deal with the EU contained some of the benefits of the single market and customs union.
His comments came as the SMMT announced on Thursday that car manufacturing in Britain reached a 17-year-high in 2016. A total of 1.72m cars were produced last year, up by 8.5% on 2015 and the highest figure since 1999.
He said the rise was the result of “investment over many years”, rather than a “post-Brexit bounce”.
The number of cars exported was 1.25m, 79% of the total and an all-time record. In a sign of how important Europe is to the UK car industry, 57% of the exported cars went to the EU.
Hawes said there was evidence that carmakers were delaying investment in the UK due to the uncertainty around Brexit. Although Nissan announced in October that it would expand its plant in Sunderland, the SMMT found that the amount of investment committed to Britain by carmakers fell by more than one-third in 2016 on the year before, from £2.5bn to £1.66bn.
Hawes said this was slightly worrying. “Looking at the figures and anecdotal evidence, we do see companies delaying investment decisions until there is greater certainty,” he said.
The warning on tariffs came just over a week after the prime minister said in a landmark speech that Britain will leave the single market as part of Brexit and revert to World Trade Organisation rules if it cannot strike a good deal with the EU.
The car industry has calculated that WTO rules, which would mean 10% tariffs on exports and imports, could add £1,500 to the cost of every car sold in the UK.
Hawes said: “You well know that we would rather remain within the single market, [but] clearly that is not compatible with controlling borders and the change in respect of ECJ [European court of justice]. So we are leaving, but we want to try to safeguard as much of the benefits that we have.
“We don’t want tariffs, that is an absolute red line for the industry. Undoubtedly [if WTO rules are applied], despite the elasticity of demand that does exist, there would be an impact in terms of demand and potentially jobs as well. We want to avoid that. That is the cliff edge we want to avoid.”
Even if WTO rules were only applied for three, four or five years, it would be “very hard to overcome that level of additional cost, given that plants operate on pretty wafer thin margins,” he said.
Asked whether a tariff of less than 10% would damage the industry and lead to the closure of plants, Hawes said: “I wouldn’t jump to that conclusion, but it underscores the pressure that they [factories] would be under to deliver further productivity improvements to remain competitive with other plants in Europe and elsewhere.”
Another area of concern for the industry is rules around the origin of products. Existing free trade deals involving Europe and other markets include stipulations that a certain proportion of the parts of a car must be made on the continent to qualify for free trade. For example, in the trade agreement with South Korea, 55% of the components in a car exported from Europe must be made there to avoid tariffs.
However, on average, 41% of the components in cars exported from Britain are made in the UK, with the rest imported. This means that carmakers are pushing for components made in Europe to count as home-sourced as part of any trade agreement.
Hawes said the government needed to prioritise this in negotiations. “In the future, we need to make sure that European parts count towards UK content and UK content counts towards Europe. That way there is a benefit in a good deal for the UK and Europe,” he said.
