UK’s automobile sector under threat from Brexit

UK’s automobile sector and related services, especially transport and storage, could be severely affected by hard Brexit, according to latest analysis from the think tank Bruegel

The analysis suggests that disruption of the European supply chain will be more harmful for the UK than for the EU

The report says that If the UK continues to be part of the EU single market, we would expect no major changes in UK participation in European supply chains. However, if the current zero-tariff rate for all trade in services and goods is no longer maintained and the mobility of labour and capital is hampered (what is generally described as a hard Brexit), the UK’s participation in European supply chains would undoubtedly be affected. The UK plays an important role in the global supply chain, especially within the EU.

Key points of the study:

• The UK’s Automobile sector and related services, especially transport and storage, could be severely affected. A hard Brexit without a favourable trade agreement between the EU and the UK will affect UK automobile production extensively.
• Two UK sectors to suffer the most would be automobiles and electronics
• There would be less impact on other important sectors, especially chemicals and minerals.
• The Pharmaceuticals sector should suffer less, because the expected increase in tariffs outside a trade agreement with EU would be negligible.
• The UK’s most important service sector within the European production chain, research and development, might also be negatively affected. A hard Brexit could be especially damaging, because company headquarters could move out of the UK.
• The wholesale and retail service sectors and the transportation and storage sector will also confront challenges under such circumstances, but the effects might not necessarily be negative if firms in these sectors are well prepared.

The study made a quantitative assessment of the UK’s engagement in the European supply chain. It used the latest OECD Trade in Value Added dataset to derive indicators for global value chain (GvC) activities for the UK, at aggregate level and for different sectors, looking at indicators of upstream linkages and downstream linkages. The survey looked at intermediate goods for the manufacturing and business service sectors, the share of exported intermediate goods and final goods over GDP, capturing the UK’s provision of goods and business services to trade partners. The analysis focused on the European supply chain and calculates intra-EU exports and intermediate imports for the UK.

The data shows very clearly that the UK’s value chain integration is mainly with the EU. Nearly half of the UK’s intermediate imports and exports are with other EU countries. The EU supply chain also relies on the UK but to a much lesser extent: 10 percent of both EU intermediate exports and EU imports are traded with the UK. This actually compares quite unfavourably with the relative size of the UK economy (about 17 percent of the EU). The asymmetric exposure of the UK’s production chain to the EU points to a larger negative impact from Brexit on the UK’s production chains, compared to those of other EU countries.

See the analysis from the economic think tank Bruegel