The UK car industry's approach to frictionless trade is an enigma. Its principal industry body - the Society of Motor Manufacturers and Traders - argues that any trade barriers would be detrimental to the UK car manufacturing. Yet, seamless trade with the EU delivers a massive £28 billion trade deficit. To see the impact of the Customs Union on the UK car industry, analysts should lift the bonnet on the industry's track record since 1998 – inside and outside the EU.
Fortunately, this isn’t overtly taxing. In September 2018, the Office for National Statistics (ONS) updated its records to provide a two-decade profile of UK’s auto trade, inside and outside the EU. Average the end values, adjust for inflation, then sit back and smell the burning rubber: because, what the data reveals is the Customs Union acting like a gigantic brake on UK exports.
First, some metrics. The annual growth rate for UK exports of motor vehicles and parts to the EU from 1998 to 2017 is just 0.38% per year, or 6.7% over 20 years. To put this into perspective, the UK’s low-grade productivity growth rate is three time faster, at 1.19%. year. Which means it is virtually statistically impossible for EU trade to have added a single job to the UK auto labour force in 20 years.
Plot the data (see below) and the skid marks are plain to see. The spluttering growth emitted from UK factories hit reverse in 2007, and exports to EU have never recovered. Insidiously, the average annual value of UK exports to EU in 2008 ̶ 2017 is actually lower than 1998 ̶ 2007. All of which means inside the Customs Union, UK auto exports to EU are being ever-so-gently throttled.
Not so with imports. Accelerating at 3.6% per year, imports from EU have more than doubled since 1998, reaching £48.1 bn in 2017. So, instead of providing that valuable springboard for UK exporters to sell seamlessly into continental Europe, what the Customs Union actually does is carve out a giant one-way street, with car makers investing in continental Europe then importing freely back into the UK – on a gigantic scale.
Sceptical? Luckily, the ONS data provides the evidence. Back in 1998, UK had a £7.9 bn deficit in its auto trade with the EU. Bad, but not awful. And back then, UK-EU trade was roughly in balance, so it didn't matter, unless you were committed to a career in the UK car industry. By last year, however, this deficit had tripled to £28 billion. In trade terms, this is a massive number; and almost sufficient to write off the entire £36 billion surplus UK earns on its trade in services with EU in 2017. Converted into wages, this expanded deficit is the equivalent, very roughly, of 44,000 jobs . It is irrefutable proof of where car companies have really been putting their money since 1998.
Fortunately, the UK auto industry does have some champagne to shake: in the non-seamless, non-frictionless world of non-EU trade. Since 1998, exports to markets outside the EU have accelerated at a scorching 7.9% per year. For car makers, world markets overtook preferential EU markets back in 2012, and are now worth £5 billion more each year (see below). So, for UK auto makers, the Customs Union already sits firmly in the rear-view mirror. And thanks to the iron laws the mathematics, the lead now enjoyed by UK's global exports will accelerate away ̶ at least, as long as production of UK marques stays mostly in UK.
What’s more, the UK has World Trade Organisation (WTO) terms to thank for this performance. Flick through the relevant annual reports and you see UK’s premium marques roaring into markets where UK has no trade agreements – China, North America, the Gulf. As a proportion of UK’s non-EU trade, UK auto exports almost certainly exceed the 73% average conducted on WTO terms . And once you directly compare how UK trades with EU and the rest of the world, a painful questions arises: how can trading on WTO terms be suboptimal, when the results are obviously superb; and how can trading within the Customs Union be considered beneficial, when the result is next-to-zero growth over 20 years?
So why is the British motor industry cutting up rough over Brexit? The reason is because it consists of importers as well as exporters, and their goal is to maximise profits within the EU's Single Market. If the European and global car companies involved believe they can do this by moving production out of UK, and then importing vehicles back into UK for free, then that is what they will do. If other EU governments give them cash to off-shore production, or if labour costs are lower in Spain or Eastern Europe, then they have an economic interest in doing so. This is the freedom the car lobby is fighting to preserve.
The problem for the UK is that in market terms, the EU has proved not to be a level playing field. Stuck inside the EU's protective,10% tariff wall UK consumers are obliged to buy EU-made cars or pay more for cars built outside Europe. But sadly, European consumers don't share global enthusiasm for British-made motors. More particularly, the mass-market models produced by Nissan, Toyota and Honda, are simply out-competed on the continent by VW, Fiat and Peugeot. Meanwhile, UK consumers lap up EU-made cars. The end result is that UK's appetite for European cars is simply not reciprocated within the Customs Union.
This discrepancy in demand – whether through discriminatory tariffs, competitive disadvantage or simply a divergence in taste – has entrenched UK as a captive market for motor cars. Since 1998, the EU has retained a vice-like 84-85% share of UK motor imports, even as the EU’s share of UK exports plummeted from 74.5% to 45.4%. This is the precise reverse of what the Customs Union and Single Market were meant to achieve.
To put it another way, for the Customs Union to be seen to be working to UK's advantage, Honda, Nissan and Toyota would need to be selling at least an additional £30 bn of vehicles to EU customers each year. Of that prospect, there is no indication whatsoever. So the question to put to UK's auto's executives is a simple one: "If seamless tariff-free trade is so beneficial for UK motor manufacturing, how come you have barely increased exports to EU in 20 years, while your counterparts in the EU have doubled sales to UK."
MPs need the intellectual courage to face the data because this pattern of stagnant exports and fast-growing imports repeats like a recurring nightmare across UK’s industrial sectors. The average growth rate for all UK goods exports to EU since 1998 is even slower than for the auto sector – 0.22% per year. And the average rate of growth for imports from the EU for all UK goods is almost exactly the same as the auto sector – 3.2% per year.
The strange and costly differential between export and import growth rates applies to each and every one of the ten biggest UK manufacturing-export industries, by an average margin of over 3%. The details are set out in successive tabs in this spreadsheet, and what they shows is that what's happened to UK-EU trade in autos since 1998 is not an isolated accident.
What's more, you can appreciate the scale of failure if you compare the track record of all UK goods exports inside the EU with every other core metric for UK trade. Goods exports to the EU – the one sector that the Customs Union is supposed to benefit – is a catastrophic underperformer. Clearly, there is something malignant in the way UK trades with the EU. Now is the time to face the historical facts, which no strain of economics modelling can ever theorise away.
Of course, radical, ‘No Deal’ change carries risks. But so does the status quo. Ominously, the cross-channel drift in auto investment is already tugging at UK’s luxury models. BMW now makes over one-third of its 350,000 plus Minis at a plant run by Magna-Steyr in Graz, Austria. Meanwhile, Jaguar-Land Rover has just turned the ignition on its £1 bn factory in Slovakia. But the crucial point is that this investment decision was made before the Brexit vote, in late 2015. And it was built with €125 million of Slovak state aid, which was subsequently approved by the EU.
And if that doesn't terrify MPs, consider this: Jaguar's new electric-powered vehicles, the I-Pace and E-Pace have also begun production; not in Coventry, but at that same Magna-Steyr plant in Austria where BMW now churns out Minis. This isn't because of Brexit, it's because the car industry believes the UK can be bullied into maintaining 'seamless' trade with the EU. As the long-gestating trend to offshore UK vehicle production penetrates into the next generation of luxury marques, UK's strategic industrial interests are directly exposed.
So the warning signs are flashing crimson. Whatever industry experts or economic models forecast, the data from the past 20 years could not be more clear. Perpetuating current EU trade arrangements and remaining within some form of customs union will see UK's EU exports stagnate, and investment and jobs move abroad, and we can be confident of that because the trends of the last 20 years are obvious. They are irrefutable.
What's worse, remaining in a customs union will also prevent UK from enhancing global trade relationships that have already quadrupled auto exports in 20 years, and delivered a thumping, £15 bn surplus to UK trade. In any case, the ground is shifting under parliamentarians' feet faster - not that any appeared to notice. The EU-Japan Economic Partnership Agreement has already negotiated away the commercial advantage enjoyed by Nissan, Honda and Toyota, and removed the fundamental raison d'etre for building those plants in UK. Clinging on to seamless free trade post-Brexit won't of itself save those plants. Perversely, it will probably seal their doom.
MPs will shortly be subjected to huge pressure to avoid taking UK out of the EU without a trade deal. For many, change inspires fear. Too few have worked in business, where change is an opportunity, and the skill of managing risk and disruption is a necessary part of leadership. More worryingly, many MPs fail to appreciate the profound changes already underway in UK's car industry. And it seems all too few MPs want to place UK governments in a position of control.
But for those MPs who believe that avoiding disruption is, in itself, a necessary objective, a difficult calculation follows. A zero-change, or BRINO Brexit carries the certainty of a bad outcome. If UK auto exports to EU were growing aven at a modest 2.5 or 3% per year, it would be a different story. If the UK had a surplus in auto trade, or even just a declining deficit, it would be different story. If UK trade inside the Customs Union was growing faster than with the rest of the world, or even at a similar pace, it would be different story. And if the EU had not just traded tariff-free access to EU auto markets in return for greater access to Japans food markets for EU producers – it would be all be a different story.
Sadly, none of these things is true. There is no successful trade relationship to protect. In UK’s auto industry, the threat predictions of the big car-makers have already come to pass. Investment has already swerved across the Channel, taking the approximate equivalent of over 40,000 jobs with it. Carry on with a re-labelled Customs Union and worse will follow, this time in UK's globally successful premium sector. And what applies to UK's auto industry applies in varying degrees right across UK's industrial landscape.
So, it’s time for MPs to face the most basic fact of all – that preserving the status quo is not a safe option, nor is it an economically sensible option. It is simply fear of change.
Auto-related data for this article is derived from ONS, September 2018 Release, and formulated and presented in Tab 2 of this spreadsheet: UK's Top 10 Sectors. The remainder is available in UK Trade: Goods & Services.
The methodology for calculating growth rates is as follows. All trade data is lifted from ONS Publications Table CPA (08) Series released on 14th September 2018. The data is in current prices (as in, current in the year in which they report). To adjust for inflation, the data is then subject to a deflator. The author has used a deflator provided by ONS specifically for trade, which differentiates between imports and exports. To calculate growth rates, the author has averaged values at the beginning and the end of the 20-year reporting period. The author has used a three-year average, because UK exports accelerated in 2017 and partially in 2016 when Sterling fell in response to the Brexit referendum. In addition, the general trend for UK goods exports to EU was to grow moderately from 1998 to 2006, then fall substantially, and then fluctuate between 2008 and 2006 values until today. Calculating growth between average values in 1998 to 2001 and from 2015 to 2017 using a standard Compound Annual Growth Rate equation gives a truer impression of values, than simply using the values of 1998 and 2017. The same methodology is applied to all CAGR calculations, including for US trade data. All calculations are accessible within each worksheet of the relevant tab.
1. This calculation is approximate. It is made from the observation that UK's trade deficit with the EU has widened by £17.32 billion (in 2015 prices) from 1998 to 2017. The average salary of a UK car worker (according to Auto Express) is £39,000. Thus, the value lost to UK is the former divided by the later. The proportion of the value of each motor vehicle as expressed in wages is problematic, since they are likely to contribute a lower proportion of luxury cars. Then again, the add-ons and electronics of a higher-value car will form a higher proportion of its overall value. In the US, the NBC estimates that wages contribute 10-15% of the cost of the average motor vehicle.Using the lower figure, gives a value equivalent of 44,410 jobs.
2. I am indebted to Michael Burrage's work for this figure (It's Quite OK to Walk Away). Calculations are included in UK Trade: Goods & Services, Tab 1, Section 2.