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Trade implications of a hard Brexit

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The United Kingdom thus faces the prospect of a “hard Brexit”, departing the European Union in 2019 without a Free Trade Agreement in place. In that scenario, trade relations between the EU and UK would revert to their mutual membership in the World Trade Organisation, bound by the MFN (Most Favoured Nation) tariff schedules and dispute resolution procedures of that multilateral organisation.

The UK is less dependent on intra-regional trade than other EU member states, reflecting (1) the country’s central position in transatlantic commerce (particularly trade with the United States), and (2) the country’s extensive involvement in rest of world commerce (including trade with Commonwealth nations). 

But the UK's exposure to intra-EU trade is significant. In 2015, 46 per cent of British exports went to the European Union, while 55 per cent of UK imports came from the EU. A sudden transition from zero tariffs to WTO-bound tariffs would thus have major impact on the UK's foreign trade sector. British dairy farmers (72 per cent of whose exports go to the EU) would face a 36 per cent tariff in a post-Brexit environment. Cereal producers (69 per cent whose exports are destined for the EU) would encounter a 16 per cent tariff. Plastics manufacturers (66 per cent of whose exports go to the EU) would face a 7 per cent tariff. (Financial Times, “Brexit: Empire State of Denial”, 29 March 2017)

The UK automotive industry is particularly vulnerable to changes in the foreign trade environment following Brexit. Automotive companies would face a 10 per cent tariff on British-manufactured cars entering the European Union. On the import side, U.K.-based car manufacturers would face increased costs of components and other intermediate goods sourced from the EU. 

These Brexit-related trade effects are of special concern to Toyota and Nissan, whose British operations are deeply integrated in pan-European sourcing and distribution. Nissan produces 500,000 cars annually in the UK, 55 per cent of which are exported to the EU. Toyota’s British factories manufacture 180,000 cars yearly, 75 per cent of which are exported to the EU. In addition to heightened tariffs on both ends of their European supply chains, these transnational car manufacturers would face increased logistical costs and border delays as the UK exits the duty-free EU zone. 

Equally significant, post-Brexit UK's exclusion from the EU’s free labour market would restrict the movement of managers and engineers of Japanese automotive transplants long anchored to cross-border operations in Europe. These concerns prompted Nissan chief Carlos Ghosn publicly to warn that a hard Brexit would compel the company to reevaluate its planned expansion of UK production capacity. (Financial Times, “Toyota and Nissan Take Different Roads to Brexit”, 16 March 2017)

Read the full article in the European Financial Review

This article was written by David Bartlett. David Bartlett is an Economic Adviser and Writer for RSM. He is Executive in Residence and MBA Director at the Kogod School of Business, American University in Washington, DC. Bartlett’s research, teaching, and consulting focus on International Corporate Strategy with special attention to emerging markets and emerging technologies. He has published widely on these topics while leading interdisciplinary research projects on the global economy.

 

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