Global Business and Economic Context

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The UK will leave EU as Brexit is expected to be finalized on 29th March 2019. One of the
major concerns over the Brexit has been its probable impacts on different industries. Industry
reports from various sources such as World Finance, Financial Times, Finsmes etc present data-
based forecasts showing that the sectors to be the most affected by Brexit are the financial
service sector, health sector, accommodation and food services sector, automotive sector,
agriculture sector and production sector. The impacts of Brexit will be different from sector to
sector. Experts suggest that some sectors would require government interventions to address the
arising market inefficiencies (Bbc.co.uk, 2019). But to understand whether or not the
government should intervene, the economic circumstances need to be understood first. For
instance, a closer look into the current and forecasted state of the automotive trade sector will
provide a clearer understanding.

Some key figures in the motor trades sector have recently spoken out against Brexit, more
specifically, a no-deal Brexit. Previously, it was assumed that the UK will leave the EU with
some deals. These deals would have secured some trade and commercial interests of the British
manufacturers and traders with the EU countries. But if the Prime Minister Theresa May does
not gain support from the MPs for her withdrawal deal with the EU, then the Brexit would be a
no-deal Brexit, meaning that no agreements would be in place about the future relationships
between the UK and the EU countries. However, the EU has offered the UK a free trade
agreement, along the lines of Ceta deal (current EU-Canada deal) (Bbc.co.uk, 2019). But the PM
and her government have been determined in leaving the customs union, which means that the
businesses in the UK will no longer enjoy a non-Tariff trade benefit as they trade with businesses
in the EU.

The trade body of the automotive sector has recently warned that in case of a no-deal Brexit, the
car industry of the UK would severely destroy. In 2017, the motor trades sector contributed
£15.2 billion to the British economy, which is 0.8% of the total economy. 80% of automotive
manufacturing in the UK was exported, mostly within the EU region (The Independent, 2019).
The sector also imports a huge quantity of automotive and automotive parts from the EU
countries. For instance, around 78% of the engine and other motor parts come from EU
countries. Thus, the UK’s trade relations with the EU have very significant implications on the
motor trades sector of the UK.
Up until 2017, the motor trades sector of the UK has had a significant growth trend from 2007.
But in 2018, the sector experienced a decline in performance (Partington, 2019). The percentage
of growth experienced by the sector was down by 0.2% compared to the performance achieved
in 2017. SMMT boss Mike Hawes blames it on Brexit and argues that the likely no-deal Brexit
will create immediate shortages, uncertainty and additional costs. Some major brands such as
Land Rover had a major job cut of 4500 employees as its preparation for the Brexit.
Furthermore, a major trend has been noticed among customers putting off the purchases. New
car registrations in the UK have also slumped by 7% last year. Now the question arises that how
does Brexit or a no-deal Brexit impact the motor trades sector in the UK. This can be answered
through several economic explanations.

The “supply and demand theory” is that for the price and quantity to be in equilibrium, the
supply and demand needs to be in balance (McTaggart, Findlay and Parkin, 2013). Applying this
theory to the motor trade sector of the UK, the car manufacturers here export 80% of their
products to the EU and other regions. There is a demand for British made cars in the EU market
because cars are relatively cheaper than those made in other EU countries. However, at the post-
Brexit stage, the prices of cars would increase for the EU buyers, as the costs of making or
assembling and marketing these cars in the EU countries will increase by tariffs, higher labour
costs, and higher production costs (increased prices of engines and parts).

D1

D2
If the supply-demand curve is observed, then the price of the cars at post-Brexit stage would go
from P2 point to P1 point, which will shift the demand from D2 point to D1 point.

Taking the increased tariff into account, there is an 11% tariff on all outside automotive imported
to EU. Leaving the customs union, the UK will have its car traders to pay this tariff to EU
countries for exporting their vehicles there. The car prices will increase and the competitiveness
of these car traders will worsen. This will lead to a major decline in car sales in the UK and the
number of job cuts will be drastic.

Figure: increased prices and lower supply of UK cars in EU

The proponents of Brexit reference the decline in sterling that took place in 2016. After Brexit
memorandum was declared in 2016, the UK experienced an immediate sharp decline in the value
of sterling. While for other businesses, the exports became cheaper and the imports became
expensive; but for the car traders in the UK, both exports and imports had increased since these
traders do both exports and imports (Ft.com, 2019). The external value of sterling against the
major business partners of the UK has a significant macro-economic influence on the cost
competitiveness. Since 80% of the cars assembled or manufactured in the UK are exported,
therefore, the value of the pound against the Euro, US dollar and other major currencies will
have a noteworthy effect. After the decline in sterling value by nearly 20% on a trade-weighted
basis, the car exporters in the UK became more price competitive, since there had been a drop in
the foreign price of the British cars (McTaggart, Findlay and Parkin, 2013). For foreign buyers,
purchasing British cars became better options due to the competitive price, since the relative
changes in price led to expenditure switching effects. Thus, some argue that if the sterling value
declines after Brexit, then it would benefit the British car manufacturers as they can benefit from
increased exports.

But this argument was opposed by several SMMT heads. In their opinion, if the sterling value
declines after Brexit, it would not have a positive effect on the British car traders either. The UK
car manufacturers export a large quantity of car engine and motor parts from EU countries (in
2017, the amount of engine and parts import was of 16 billion GBP). Lower exchange rates will
push up the prices of these parts. Then there would be tariffs to be paid, which would also
increase the prices (Woodford Investment Management Ltd, 2019). The higher labour costs will
also be a major push for a price increase. Also, considering that most car traders in the UK
follow Just in time approach to inventory, so the overall costs of inventories will also increase.
Thus, the competitive gains from an “unlikely” weaker currency would off-set against the other
factors (The Conversation, 2019).

One of the main reasons that the motor trades sector in the UK have been attractive for
companies is because of the higher labour productivity. Labour productivity is “the hourly output
of a country’s economy” (Mankiw and Taylor, 2018). Labour productivity is influenced by
various factors. Level of investments, in the long run, skills of the employees, availability and
affordability of the workforce, nature of employment etc influence the labour of productivity. As
of the recent data available thee level of labour productivity had dropped by 0.4% in the first
quarter while rising 0.7% in the final quarter of 2017 (Statista, 2019). But concerns have been
expressed by SMMT as they state, “Brexit will further damage the efficiency growth required for
boosting wages” (Ft.com, 2019).
Figure: Labour productivity in the UK (Partington, 2019)

Brexit’s impact on the level of labour productivity is critical. After joining the EU, the UK has
been creating more and more low-paid jobs and continued to hire more people, without
increasing the level of economic output (The Conversation, 2019). No major efforts were given
in creating more higher-paid jobs by investing in skills and technologies. Brexit is likely to make
the matters worse, as the automotive companies will halt their investments. Fewer investments
on machinery and skills, will reduce the levels of productivity in the car trade sector, and thus,
leading to some significant damages to the future performance of the company (Partington,
2019).

Another perspective for explaining the Brexit effect on car traders is the market efficiency theory
of economics. Whether the UK remains in the single market or conducts trade under WTO terms,
the UK based car manufacturers will face more trade barriers. This will damage the market
efficiency for them. Increased trade costs reduce economic welfare (Tregarthen and Rittenberg,
2000). The trader in the UK will have to pay higher import prices and will less able to specialize
because of higher prices of engines and parts. Eventually, both the output and production
efficiency will decline (Partington, 2019).

Another way that the higher costs would affect welfare is by reducing the raising markups and
product varieties (Fischer, Dornbusch and Schmalensee, 1988). Thus, all factors imply lower
welfare in the sector due to higher trade barriers. The Brexit deal will affect both the EU and the
UK car traders, but it is the UK car traders who will suffer more consequences. Comparatively,
the effects faced by EU traders are less significant as they have the opportunities to trade
diversion.
Given the circumstances, the British car trading body demands necessary government
interventions to protect the sector from the effects of Brexit. The industry leaders and the key
figures expect that the government will consider a soft Brexit with useful terms and deals made
effective with the EU. This would help the industry from higher tariff and import-export costs.
The industry is also mapping its strategies to gain labour productivity to offset the effects of
Brexit. The government should also impose policies that would allow the adequate flow of
labour in the industry so that the labour costs can be maintained. Import of technologies and
machinery need to be less expensive to maintain a decent level of labour productivity.

Whether or not Brexit will have any serious long-term impacts on the industry is argumentative
at this point. However, significant insight can be gained on the issue, from relevant economic
data analysis. It can be seen that the automotive industry is more likely to experience a major hit
after the Brexit. In this case, government intervention is needed. The government needs to come
into some deals with the EU so that the British businesses can continue to compete in the
European market as well as outside. Decisions should also be taken regarding the customs union.
The government should reconsider its decision of leaving the customs union. Soft Brexit can
save the automotive industry from experiencing any major loss. New legislation should also be
passed to fill up the gaps as the country loses its legal force of EU regulations.

References
BBC News. (2019). Reality Check: What does Made in Britain mean for Brexit?. [online]
Available at: https://www.bbc.com/news/uk-politics-43516496 [Accessed 23 Feb. 2019].

Bbc.co.uk. (2019). [online] Available at: https://www.bbc.co.uk/newsround/46607260 [Accessed

23 Feb. 2019].

Fischer, S., Dornbusch, R. and Schmalensee, R. (1988). Economics. New York: McGraw-Hill.

Ft.com. (2019). What are the economic consequences of Brexit? | Financial Times. [online]
Available at: https://www.ft.com/content/70d0bfd8-d1b3-11e5-831d-09f7778e7377
[Accessed 23 Feb. 2019].

Mankiw, N. and Taylor, M. (2018). Economics.

McTaggart, D., Findlay, C. and Parkin, M. (2013). Economics. Frenchs Forest, N.S.W.: Pearson.

Partington, R. (2019). UK worker productivity falls as Brexit concerns intensify. [online] the
Guardian. Available at: https://www.theguardian.com/business/2018/jul/06/uk-worker-
productivity-falls-as-brexit-concerns-intensify [Accessed 23 Feb. 2019].

Statista. (2019). UK trade in motor vehicles, 2017-2017 | Statistics. [online] Available at:
https://www.statista.com/statistics/299359/motor-vehicle-imports-and-exports-in-the-united-
kingdom/ [Accessed 23 Feb. 2019].

The Conversation. (2019). Why hard Brexit could cost UK car industry £4.5 billion in tariffs
annually. [online] Available at: https://theconversation.com/why-hard-brexit-could-cost-uk-
car-industry-4-5-billion-in-tariffs-annually-89552 [Accessed 23 Feb. 2019].

The Independent. (2019). No-deal Brexit risks ‘destroying’ UK car industry, trade body warns.
[online] Available at: https://www.independent.co.uk/news/business/news/brexit-no-deal-
latest-risks-destroy-uk-car-industry-effect-house-of-commons-vote-a8728661.html
[Accessed 23 Feb. 2019].

Tregarthen, T. and Rittenberg, L. (2000). Economics. New York: Worth Publishers.

Waud, R. (1996). Economics. South Melbourne: Longman.

Woodford Investment Management Ltd. (2019). The economic impact of 'Brexit' - Woodford

Investment Management Ltd. [online] Available at: https://woodfordfunds.com/economic-
impact-brexit-report/ [Accessed 23 Feb. 2019].