We live and work in a global marketplace, taking for granted the ability to trade across borders to get the things we want for a price which is competitive. More than any sector, the automotive industry operates on an international scale, with its supply chains routinely crossing borders. And yet despite this very global outlook, we find ourselves in the middle of a political whirlwind which may have the effect of removing this ease of access due to a more protectionist approach to trade.
Brexit and the Trump administration
The challenges of Brexit for the automotive industry have been, and will continue to be, well documented. Yet our focus on this as a topic ignores the potential threat to trade posed by another source – the Trump administration. Actions by the US could have a significant impact on the UK automotive market as, setting aside component and parts supply, figures produced by the Society for Motor Manufacturers show the US as the second largest market for exports of UK manufactured vehicles.President Trump came to power largely on the populist tide, with a key part of his political message being “America First”. Two years into President Trump’s term in office we have seen rising trade tensions (if not close to an outright trade war) between China and the US (which despite a 90 day “tariff truce” reached by the US and China at the G20 in November, remains on very shaky ground) and the start of a campaign in respect of the European Union through the imposition of tariffs on steel and aluminium imports from the EU into the US. As to be expected, the EU duly followed suit and these actions have led to rumblings that the next industry in the US’ sights is the automotive industry and a threat of a 25 per cent tariff on all US imports of European assembled cars. Why? We only need to look at the Twitter words of President Trump “Build them here!”.
EU manufactured passenger vehicles imported into the US are currently subject to a 2.5 per cent tariff so a hike to 25 per cent would be significant. Consumer spending and confidence is at a low and vehicle prices are rising and this additional cost will need to either be absorbed by the OEMs, passed into the supply chain through price reductions or passed on to consumers, none of which is an easy choice to make. If we look at it from the US side, the EU imposes a tariff of 10 per cent on vehicles imported from the US so there is an imbalance in approach. Oddly though, cars were not part of the talks in July between President Trump and Jean-Claude Juncker exploring a potential trade deal, even though one of the key reasons for those talks was the threat of tariff increases by the US in the industry.
Tariff battles
So what does this battle of the tariffs mean for our automotive trade with the US? Will we see a move to production in the US for the US market as a means of controlling costs? It is fair to say that most of the industry wants to remove barriers to trade and therefore disagrees with Trump’s trade policy in this regard, arguing that if it is implemented as expressed, it will result in higher prices for vehicles imported into the US, limit consumer choice and fundamentally ignores the fact that modern automobile manufacturing relies heavily on global supply chains. Will these arguments influence or in any way direct these policies or will they be ignored in favour of the more protectionist approach that is favoured by the current administration? Concrete conclusions to these questions are difficult to reach.There are countless variables, and each passing week seems to introduce new ones. For example, on 26 November, General Motors announced the closure of two plants in Michigan, as well as other plants in Ohio, Maryland and Canada. If these cuts are implemented, it is estimated that over 14,000 GM workers will lose their jobs. This announcement was met with significant backlash from the Trump administration - and specifically President Trump - who immediately took to Twitter to bitterly criticize Mary Barra, GM’s CEO, for the decision. In the days that followed, the president went further, threatening to cut government subsidies to GM if it failed to take steps to mitigate these closures.
These threats, whether credible or not, caused GM’s stock price to decline almost 4 per cent on the news. Two days later, President Trump followed up by suggesting again that he would be open to imposing new tariffs on all imported vehicles, regardless of origin or type, similar to the so-called “chicken tax”, which already imposes a 25 per cent tariff on all imported pickup trucks. If implemented, this wholesale tariff approach would cast a much broader net and could impact every country that imports automobiles into the US – including the UK.
Free trade planning
But could Brexit actually be a silver lining? Could it provide the UK with an opportunity to negotiate its own, unique deal with the US, with lower/better trading terms, independently of other key European vehicle importers like Germany and Italy? Well, that all depends on the Brexit deal reached and how free we are to negotiate independently of the EU. Clearly, the Department for International Trade places importance on the US as a trade partner and is gearing up for Free Trade Agreement discussions with the US, launching a consultation to inform any potential future deal with the US, which closed on 26 October. In it, it lists vehicles as one of the top three sectors in which the US exports the most to the UK – and we export even more to the US. So watch this space as to the outputs but it would be surprising based on the import/export figures for the automotive sector not to feature in any UK/US free trade planning.
It is also important to remember that tariffs are only one of many barriers to trade and we also need to factor in those other items, including a lack of harmonisation of rules around safety and standards. Work was taking place to lower these barriers, through measures such as the Trans Atlantic Trade and Investment Partnership. However, all of this has essentially been put on hold by the Trump administration (though, as mentioned above, with a possible thawing of relations with the July talks between Trump and Juncker). Even if we can negotiate our own trade deals with the US after Brexit, any agreement by the UK to abide by a “common rulebook” set by the EU on standards, etc , could potentially hinder future trade deals if we are too divergent with US standards.
None of us know how the global, protectionist politics will play out. The US may yet come back to the negotiating table in order to avoid being side lined in the ongoing discussions to try and harmonise standards and lower barriers to trade. We should be asking ourselves whether it is valuable for the UK to be at that table for itself and have input into these new standards. Many in the sector would argue the answer to that question has to be yes.
At a time when the sector is facing an unprecedented level of disrupters this is yet another “known unknown” which needs to be built into the business planning...
Written in conjunction with Michael Wirvin, partner at Robinson + Cole.