Great British Cars: Getting Nowhere in Europe
The Single Market is supposed to attract investment, turning UK into a springboard for exports to Europe. One glance at the UK vehicle industry shows the reverse. Today, EU supplies 85% of your accelerating vehicles imports, while exports to EU are stationary.
In 2015, the UK trade deficit in vehicles with EU hit a record £28.5 billion
Today, your three top-selling cars are imported from EU
UK motor vehicle exports outside the EU have grown 12% per year since 1998
Brexit would stimulate higher investment in UK auto production
The UK’s trade with EU in vehicles and vehicle parts is easily your most valuable, worth £58 billion in 2015. In theory, membership of the Single Market should be a fabulous asset, giving resurgent UK vehicle makers a clear run at the biggest automotive market in the world. With zero tariffs and a level playing field, the Single Market should be powering investment and creating jobs.
But it hasn’t worked out like that. Since 1998, UK exports to EU have dawdled in first gear, while imports of cars and parts from EU into UK have accelerated dramatically. Today, UK is a massive net importer of vehicles from EU. Last year, you sold £14.6 billion worth of vehicles and parts to EU, but they sold you three times as much — £43.2 billion.
With imports surging, and exports stalled, your EU deficit in vehicles hit £28.5 billion in 2015. This deficit is bigger than the surplus earned by your entire services industry – including finance. So what’s going on? With the rest of the world your vehicle exports are doing great, earning you a surplus of £10.6 billion. Inside the EU, the Single Market is working steadily against you.
Fasten your seat belts
If you want to see how the EU Single Market actually impacts UK industry, the UK’s vehicle industry is the natural place to look. With EU, you trade more in vehicles and vehicle parts than anything else, and the auto industry accounts for approximately 8% of UK manufacturing. Trends in your auto trade also mirror trends in your other export trades: your exports outside the EU have grown well in last 10 years, and now outstrip exports inside the EU.
Brexit is important to UK vehicle industry because car-making is set to be a big part of your future. In the past ten years, premium British marques led by Jaguar-Rover have roared back onto world markets. The deep pockets of India-based Tata, the dedication of Dr Ralf Speth and his partly-German executive team, plus the design genius of Ian Callum have seen Jaguar-Land Rover double sales since 2009.
Add in BMW’s Mini and Rolls-Royce brands and VW’s Bentley, and today UK has a formidable, world-class, line up at the shiny end of the automotive stage. The UK’s industry body, the Society of Motor Manufacturers & Traders (SMMT) predicts UK car production will reach an all-time record of 2 million by 2020. The ghosts of Longbridge are finally exorcised – thanks to overseas champions.
The orthodox view is that Brexit would be bad news for these companies. The UK is reckoned to provide a springboard for exports to Europe, and leaving the Single Market would mean UK exporters having to pay tariffs on exports to EU, probably in the region of 10%.
Brexit might hit investment, as well as exports. Almost the entire UK car industry is foreign owned – Honda in Swindon; Toyota in Derby; Nissan in Sunderland; and Jaguar-Land Rover in West Midlands and Liverpool. The risk is that overseas saviours will spurn awkward-squad UK, and expand plants in friendly Europe instead. The UK motor-manufacturing renaissance would be over just as it got going.
So it is that BMW has non-too-delicately warned its UK employees in Oxford and Goodwood of the risks to costs and skills transfer of Brexit, while the SMMT – which includes the traders who sell imported cars – says membership of EU is vital. The threat seems clear: vote Brexit, and vehicle production will shift to Europe.
It’s already a bumpy ride
The only problem is: a shift in auto production from Britain to Europe is precisely what the EU Single Market has already achieved. According to your Office for National Statistics (ONS), between 1998 and 2014 motor vehicle imports from EU rocketed from, £14.3 billion to £31.3 billion. Add in all vehicle components, and the number reached £43 billion last year, according to customs data.
Meanwhile, exports of motor vehicles from the UK ‘springboard’ to EU have crept up, from £8 billion to just £11.9 billion in 16 years. Include vehicle components, and you still only reach £14.6 billion of exports to EU; a rise of just £0.8 billion since 2011. Regardless of what the Single Market is supposed to achieve, its actual effect since 1998 has been to fill expanding demand in UK with EU imports, whilst offering virtually zero growth for UK exports.
If this wild imbalance sounds unlikely, take a look on your roads. Currently the three top-selling motor vehicles in UK are all made in continental Europe: Ford Fiestas in Cologne, Germany, and Almussafes in Spain; Vauxhall’s Corsa, which is made under licence by Opel at Eisenach in Germany and Zaragosa, Spain; and the Ford Focus which is built in Saarlouis, Germany. Of the top five, only the Mini is built in UK, although BMW also makes some models in Austria.
Inside the Single Market, your EU vehicle trade is becoming a one-way street. The EU dominates your imports: ONS estimates that since 1998, EU has supplied a steady average of 85% of UK import market in motor vehicles. Meanwhile, even your premium-quality products are struggling in the other direction. According to Jaguar-Land Rover, which has overtaken Nissan as UK’s biggest auto maker, Europe took just 19% of production in 2014–15.
The result is a booming trade deficit in vehicles with EU. If you consult ONS quarterly trade data, you’ll see that motor vehicles typically report a monthly deficit of £1.5 to £2 billion per month, and we can trust that data because it tallies almost exactly with customs data that reports an annual £28 billion deficit in vehicles and parts in 2015.
This deficit tells you which way investment is really playing in the EU Single Market. Because, whatever else is happening, the net effect is not companies expanding production in UK in order to export to the EU: that would be delivering a trade surplus, or at least a declining deficit. On the contrary, investment is going to continental Europe, so that European companies can export freely to UK. Your £28 billion EU deficit is the result.
UK car exports: Doing far better outside EU than in
The UK’s dire auto export performance inside the EU is unnerving, because outside the Single Market you are doing spectacularly well. According to long-term ONS analysis, UK motor car exports to non-EU countries have rocketed from £2.9 billion in 1998 to £17.9 billion in 2014, powering past EU exports in the process.
Today, Land Rover, Jaguar, Rolls-Royce, Mini, and Bentley have revved up global appetite for UK cars. UK exports outside the EU now generate a £10.6 billion surplus for UK economy. So, in terms of investment, overseas car companies are investing in UK and using you as a springboard for exports … but exports outside the EU.
The effect on export market share is a damning indictment of the Single Market. In 1998, the EU purchased 73% of your automotive exports, but in Euro terms, exports have barely grown since 2004, and the EU now takes just 40% of your exports. The Single Market has engineered for itself a dramatically smaller share of UK vehicle exports, while hogging your fast-expanding imports.
Conversely, the EU Single Market has proved an El Dorado for the German vehicle industry. Since 1994, German industry has held its share of the overall EU motor vehicle market at 26%, an almost unique achievement for any national industry as EU expanded from 12 to 28 members. During this period, the value of Germany’s EU motor vehicle trade has tripled, to a phenomenal €166 billion in 2013.
The Single Market is not delivering the goods
The history of UK’s trade in vehicles with EU mirrors what’s happened to other big UK trading sectors, most especially electrical machinery, general machinery and pharmaceuticals, where UK is also now in severe deficit. Given the relevance of UK motor vehicle industry to UK trade and economic growth, Brexit voters are entitled to draw three conclusions:
First, your area of greatest export success is outside the EU, and doesn’t benefit from EU membership. If you take Jaguar-Land Rover as representative, then that company’s two biggest export markets are China and USA. Since the EU has no trade agreement with either country, the UK derives no benefited from EU ‘clout’. UK export success is happening despite the fact UK exporters pay WTO-agreed tariffs.
For UK car industry, the EU Single Market has failed to achieve its intended purpose. The EU Single Market has been sold to UK voters as a vital asset that underpins investment, jobs and exports. For UK vehicle industry, it has had the opposite effect: diverting investment to the continent, so that jobs are exported to car plants in Germany, Spain and Portugal, thereby powering imports from EU. This is a net loss to the UK economy.
The Single Market benefits some countries far more than others. Whether by good luck, design, congenial regulation, or sheer industriousness, German motor-vehicle makers are doing far better out of the Single Market than you – and so, incidentally, are their chemical industries, computer and electronic businesses, and machinery manufacturers.
Brexit would accelerate investment in UK vehicle industry
So if the Single Market is a problem rather than a solution, would pulling out make a positive difference? If you take the base-case scenario – UK pulls out completely from the Single Market, joins the WTO and puts an EU trade deal on the back-burner – then UK car and parts manufacturers will likely face an average 10% tariff rate on exports to EU. So far, so bad.
The first point to note, however, is that approximately 60% of your vehicle exports would be unaffected. And you can expect this 60% to move briskly towards 70% because your top markets are growing faster than EU economies. The only sizeable non-EU export markets that may become trickier for vehicle exporters are South Korea and South Africa, if those countries abrogate their existing trade deals, negotiated with EU.
Now for your EU trade. The fact that UK has a £28 billion deficit with EU in vehicles and vehicle parts means there is a much bigger picture to consider than just added export costs. Post Brexit, the global auto industry will be looking at a giant, fast-growing UK consumer market which it is now 10% more expensive to sell to from European factories. Building in Europe and exporting to UK will no longer be free – and remember, 85% of UK’s £51 billion’s worth of vehicle and parts imports come from EU.
This means the global auto industry will re-do their sums on the value of UK manufacturing. In practical terms, Honda and Toyota would confidently expand production in UK, since their vehicles would now enjoy a 10% price advantage over cars imported from EU. Meanwhile, Ford and Vauxhall would have to look again at their decisions to close production at Dagenham (in 2002) and Southampton (in 2013), or risk losing market share.
The same calculation would ripple through the entire car parts value chain. And with a current imbalance of 3:1 in imports–exports, the balance of auto industry investment would inevitably switch back to UK; because that is where profits can more easily be made. What’s more, this re-investment won’t be propping up dud brands and dysfunctional car plants, like government bail-outs in the 1970s and 1980s. It will supercharge an industry that is enjoying huge success in global markets.
Of course, UK car makers will say Brexit is not what they want. But then again, their ideal world is to have no trade barriers at all. They will be far more worried about the added costs of exporting to UK, than the other way around. Meanwhile, Brexit will give UK the freedom to negotiate lower tariffs on vehicle exports from UK to countries outside EU. Whatever happens, auto makers will invest where they find the best prospects for profit.
Brexit: The vehicle industry’s best friend
While your Brexiteers are generally a free-trading bunch, more eager to lower tariffs than raise them, this analysis shows that exiting the Single Market will increase long-term investment. In those industries like automotive where the UK has become a mass importer from EU, tariffs will mean UK attracts more investment. If you want to re-balance your EU trade and reduce your deficits, then Brexit is your ally.
What’s more, trading with EU on WTO terms will give you the breathing space to figure out the really big question: why hasn’t Single Market worked for you? From the outside, one of the biggest oddities of your Brexit debate is the absence of any political or economic analysis on why the Single Market has led to gigantic trade deficits with the EU.
Understanding the reason is critical. It would be folly for a UK government to negotiate any post-Brexit trade treaty with EU before you are certain you know why the Single Market has worked for some countries – like Germany – and not for you.
The popular gripe – that Continental Europe is less scrupulous in observing EU regulations than UK – is hard to credit. At least it would be, if Volkswagen hadn’t just provided the most glaring example of regulation cheating imaginable. When the last Land-Rover Defender rolled off the Solihull production line in January 2016, it was precisely because Land-Rover chose to obey those EU emissions regulations that Volkswagen helped to draft, and then chose to flout.
Who knows whether that sour-tasting event is symptomatic? More likely, continental Europe is just a culturally poor market for UK goods, a trend made worse by the Euro-area’s prolongued economic blight. But if it does turn out that differing levels of rules-compliance is systemic across EU, then a free trade deal between UK and EU will never work to UK’s advantage.
Whatever the explanation, the raw fact remains: a deficit of £28 billion is what the Single Market has done to your vehicle trade with EU; and a deficit of £85 billion is what the EU Single Market has done to your EU trade in total. These deficits are the best proof there is that overall, the Single Market encourages companies to invest in Europe, and then sell goods back to UK – not the other way around.
For the UK automotive industry, the Single Market isn’t a springboard into Europe. It’s a fast-flowing sluice that terminates in Felixstowe and Southampton Docks.
© Phil Radford
 Her Majesty’s Revenue & Customers (HMRC) data on cars (line 87 in their monthly trade releases) is included in the category ‘Vehicles other than trains/trams, and parts thereof’). Unless otherwise stated, ‘vehicles’ here will be used to mean vehicles and parts in line with the HMRC categorisation.
 In 2015. HMRC data, February 9th 2016 release. The next most valuable two-way trade sectors are: machinery & mechanical appliances (including reactors), £40.2 billion; electrical machinery, £29.2 billion; and pharmaceuticals, £26.5 billion.
 HMRC. The original data tables are available here.
 The deficit in vehicles and vehicle parts has risen by £10 billion in just five years: from £18.3 billion in 2011; to £19.2 billion in 2012; £22.7 billion in 2013; and £24.5 billion in 2014. HMRC Archive, compiled year end data.
 £14.6 billion to EU; £18.6 billion to the rest of the world. HMRC 2015 data, February 9th 2016 release.
 A tariff is an import tax levied on foreign goods. The EU Single Market is a tariff-free zone, so exports within EU are tax free. However, the EU levies tariffs on imports from outside the EU. The current average EU tariff on cars is approximately 10% of value.
 Negotiating tariff rateS on cars and auto parts would be a delicate exercise since over 50% of the value UK-made cars derive from imported parts, almost entirely from continental Europe. This 10% figure is the UK Treasury’s estimate of the average EU tariff. (Page 94).
 In this report, the ONS uses a tight definition of vehicles as compared to HMRC. For the expert and interested, this is ‘Product by Activity Group 29.1: Manufacture of motor vehicles.’
 The far higher number - £39.3 billion – reported by HMRC reflects the inclusion of automotive parts and accessories, as well as vehicles not classed as motor vehicles.
 The corresponding number from HMRC which includes all vehicle parts is £14.6 billion. This includes motor vehicle engines, of which UK is a major exporter.
 HMRC. 2015 Data. February 9th 2016 Release.
 The line item in HMRC data is ‘Vehicles other than railway or tramway rolling stock, and accessories and parts thereof’, thus it includes cars, car engines, other car parts and commercial motor vehicles.
 The deficits for 2015 were: Electrical Machinery, -£10.2 billion; Machinery and Mechanical Appliances (HMRC Line 84), -£10.5 billion; and Pharmaceuticals, -£6.5 billion. HMRC December 2015, February 9th 2016 release.
 These tables, from Eurostat, tell an astonishing tale for the period 1994 to 2013. During this period, Germany has held, or increased its overall market share in a vastly expanded EU in both chemicals and computers & electronics. Its market share in machinery equipment has fallen substantially since 1995, but still more than doubled in € value. No other country comes close to Germany’s ability to hold EU market share over this 19-year period, with the sole exception of Netherlands, which, since 1994 has slightly increased its portion of intra-EU trade in food products.
 The £21 billion surplus in services trade with EU, brings the approximate 2015 EU deficit down to £65 billion. The deficit in goods trade with EU is rising by approximately £10 billion per year, far faster than the growth in your surplus in services. Hence this EU trade gap will grow.