Now that negotiations with the EU appear truly to be at an impasse, the President of Toyota, Mr Akio Toyoda, produced yet another Project Fear blast in last Saturday’s Telegraph with lots of conditional ‘ifs’ and ‘maybes’ aimed at scaring us from daring to consider leaving the EU without a trade deal. Of course, the particular trade deal to which he refers is Mrs May’s plan to keep us in a customs union and, through the ‘common rulebook,’ effectively in the Single Market.
As evidence mounts that the auto industry secretly has long been promised such a deal by the Government, Mr Toyoda (who also is head of the Japanese auto manufacturers’ trade association) naturally does not like this – he sees the promised prize slipping from his grasp.
In any case, Mr Toyoda is wrong on every point he makes.
Mr Toyoda claims there will be “price rises for motorists if trade tariffs kick in”. He is comprehensively wrong about this – the reverse is true. When the UK leaves the EU with a Clean Brexit, trade barriers currently facing non-EU countries will be eliminated or substantially reduced via the UK agreeing either FTAs or taking unilateral actions to reduce such trade barriers. Doing so will open up our market so we can trade with the rest of the world at world market prices, which are significantly lower than those in the protectionist EU.
Economists for Free Trade estimate that consumer prices inside the protectionist wall of the EU average about 20 per cent higher than prices in the rest of the world. In the case of autos, the EU imposes a 10 percent tariff on cars imported from the rest of the world before taking into account the additional price impact of non-tariff barriers and quotas imposed by the EU.
Thus post-Brexit auto prices will drop sharply in the UK and consumers will likely be offered an increased variety of cars from places like the US and Asia. This is what worries Mr Toyoda.
Even if the UK imposes tariffs against the EU (which it might not), his claim that higher prices will follow is vacuous. Because there will be international competition in the UK auto market, auto prices will reflect (lower) international market prices. Consequently, EU-based auto manufacturers will not be able to sell their cars at higher prices and will have to swallow the UK tariff. This is the whole point of free trade and why it is so important that the UK be out of any customs union following Brexit.
He worries about “declines in revenue” and “the spectre of job losses”. He is quite right to be worried about potential declines in revenue as consumers will be paying lower prices, as explained above. However, the fact that unit revenues will be lower does not necessarily translate into total revenues being lower, as demand could be stimulated by lower product price points and by increased export volume.
Following Brexit, there will be many factors potentially affecting auto industry profitability – some negatively, some positively. Economists for Free Trade has analysed the combined impacts of these factors, assuming that there is no change in volume as mooted above. This analysis shows that industry profitability is unlikely to decline and potentially could increase, driven by lower component costs as a result of eliminating/reducing import tariffs, new opportunities to source components from more competitive suppliers in the UK and Asia, enhanced productivity opportunities once outside of the more restrictive EU regulatory environment, and continuing benefits of a lower currency. This is before taking into account the enhanced export opportunities afforded by new FTAs.
It probably is fair to say that the advent of new technologies – such as electric and driverless cars – will have a much greater impact on the industry’s sustainability than Brexit. An example of this is the announcement by Dyson that they will build their electric car in Singapore, even though the design and engineering will remain in the UK. Leaving the protectionist and highly regulated EU that is suspicious of new technologies places UK auto manufacturers in a much better position to capitalise upon them.
He predicts “production line stoppages if imports are held up at borders by the imposition of customs checks”. Note the ‘if’! For starters, a report from Boston Consulting Group shows that a representative UK auto manufacturer imports only 36 per cent of its components from the EU – 21 per cent are imported from non-EU countries and the largest proportion (43 per cent up from 36 per cent in 2011) are sourced from the UK. Post-Brexit, the proportion of components sourced from the EU is likely to decline sharply – particularly as the new technologies mentioned above take their place in the supply chain.
The 21 per cent currently imported from non-EU countries already undergo customs and other border checks and self-evidently do not create problems with just-in-time supply chains. Such just-in-time supply chains operate globally across customs borders without difficulty – eg, throughout Asia, or amongst South American, North America, Europe, and Asia. What makes these supply chains work are modern computer-based logistics systems and border procedures mandated by WTO rules and procedures that dictate ‘frictionless trade’ – particularly for high volume, regular shipments such as those of the auto industry.
It is often said that delays on the M25 would have a greater impact on just-in-time shipments than any border delays.
This past summer, when extreme temperatures forced cancellations and delays of trains through the Chunnel for several days, did anyone hear a whisper of auto production lines shutting down? Last week, Jon Thompson, Chief Executive of HMRC, was asked before the Brexit Select Committee, “Could just-in-time delivery take place from outside the European Union”. His single word answer was, “Yes”.
Finally, post-Brexit it will be within the power of the UK to eliminate tariffs and border checks on auto components and such moves are being discussed.
Aside from being wrong on all his assertions, Mr Toyoda – in his protectionist zeal – demonstrates a breath-taking lack of perspective. The UK auto manufacturing industry – based on his own estimate of industry employees – accounts for only about 0.5 per cent of all UK employees (that is less than half the number of farmers). Its gross value added to the UK economy is just 0.8 per cent of GDP.
The Government’s supine attitude to this protectionist, rent-seeking industry lobby played a big part in spawning the Northern Ireland border issue onto which EU negotiators were only too pleased to anchor the Northern Ireland backstop requirement. Without this, there would be more enthusiasm to explore a SuperCanada FTA or to embrace a World Trade Deal – the two outcomes Mr Toyoda and his cronies in Germany fear.
Why should this small, largely foreign-owned, industry be allowed to dictate the terms of Brexit to the rest of us?
To read the piece in full, click here.