No-deal Brexit implications on the Automotive industry

Introduction

The No-deal Brexit refers to the possibility of the United Kingdom’s withdrawal from the European Union without a withdrawal agreement. According to the article 50 of the European Union, the treaties of the union stop being applicable following either the ratification of a withdrawal agreement or after two years following the indication of the will of a member state on leaving the union (McKee 2018). The two years can be extended if unanimous consent is arrived at by all the member states of the union, including the country that exhibits the desire to leave. Following the indication of the wish of the United Kingdom on leaving the union, the United Kingdom, and on three different occasions, the European Union and the United Kingdom have held negotiations to establish a withdrawal agreement (Feng et al. 2017). However, on three separate times, the house of commons of the United Kingdom have voted against the ratification of the withdrawal agreements. The prior proposed to withdraw agreements had contained provisions regarding border agreements, resolution of disputes, border agreements, and money liabilities (Hunt and Wheeler 2017). Without the establishment of such agreements existence by the end of the period specified in article 50 treaty of the European Union. The laws and arrangements would be null and void in the establishments of interactions between the United Kingdom and the European Union. Also, the interactions of the United Kingdom and the European Union may have to be renegotiated.

 No-deal’ Brexit on the strategies of UK international businesses in the automotive sector.

The carmakers in the united kingdom could be facing an annual bill of approximately four billion pounds in the case of the no-deal Brexit as a result of the challenges such as the increased costs for imported parts of the vehicles, and tariffs placed on the vehicles exported to the other regions of the European Union and the rest of the world. The effects of Brexit on the United Kingdom Automotive will increase (Bailey, Driffield and Kispeter 2019). The challenges caused by the Brexit no-deal will cause increased financial burdens that the United Kingdom automotive businesses will face. The regulatory alignment with the United Kingdom must be maintained in the case that the United Kingdom manufacturers intend to export their cars to other countries, including the rest of the European Union, with exports viewed to represent almost 85% of the predicted four billion pounds.

A no-deal Brexit will see costs such as seven million pounds for low volume manufacturers exports, vehicle companies’ components, and engine exports, and two thousand seven hundred million for exported cars. According to the report, the free flow of information, data, and talent between companies has to be maintained in the United Kingdom in the case that the manufacturers have to continue being competitive internationally. According to the manufacturers, the motor industries operate by explicitly relying on a system of tight, just in time supply chains for the delivery of the components and parts required in the manufactory process of the vehicles (Porter 2018). A no-deal Brexit could result in significant delays at the borders. This is a new customs checks that could be applicable and consequently delay the clearing of the goods at the borders. As a result of these delays, the manufacturers will be forced to incur more costs concerning the money put in as a result of the time lost, and the resources used to handle the stock keeping and stockpiling of the components and car parts as the deadline of the Brexit approaches.

There are a significant number of strategies that could be used to handle the adverse effects of a no-deal Brexit. Among the policies and measures include increasing the local content of the vehicles made in the United Kingdom, refocusing the production of the United Kingdom for the domestic market and increasing the exports of the United Kingdom made vehicles to other markets other than the United Kingdom. However, it could still be challenging to cover the extra costs that are likely to result from a no-deal Brexit. There is the possibility that a no-deal Brexit would bring the European Union and the United Kingdom together quickly. This would lead to the attainment of a free trade agreement (FTA) in the case that the fall out for both the United Kingdom and the European Union is considered as being too disruptive. The alternative option is that the United Kingdom could feel that it can operate on the strict rules of the World Trade Organization for the medium term. In both cases, however, the implications of the decisions would not be attractive to the manufacturers of vehicles in the United Kingdom as the industry would be adversely affected. A no-deal Brexit represents a model that is not sustainable for the automotive manufacturers in the United Kingdom.

UK’s BoP current account – main trade partners, main exports and imports,

the balance of trade.

In the year 2018, the current deficit of the United Kingdom widened to 4.3% of nominal gross domestic product. This increase in debt widened from 3.5% of the GDP in the year 2017.  According to the financial records of the county, the current deficit remains highest in the history of the country. The current deficit is a result of the widening, and the increasing gap is a result of the widening in a trade deficit that fell to 1.8% from 1.2% in the year 2018 (Lane 2015). The financial account of the United Kingdom recorded a net inflow of 77.2 billion pounds in the year 2018. This amount was equivalent to 8.3% of the gross domestic product of the country. During this time, the foreign residents in the country invested 177.7 billion dollars that were partially offset by the United Kingdom residents who invested 100.6 billion pounds abroad (Nasir and Simpson 2018). Among the main trading partners of the United Kingdom include the United States that is responsible for 13.4% of the exports of the United Kingdom, Germany that takes up 9.6% of the exports, Netherlands at 6.8%, France at 6.5%, Ireland at 5.8% and China at 5.7%. With the continuous fall, the automotive industry will be adversely affected following the no-deal Brexit. This is as the number of resources used in the trade will significantly drop.

UK’s areas of competitiveness

Over history, the United Kingdom has performed relatively well compared to its major competitors. However, over the last decade, growth was increasingly driven by household consumption and activities of the government while the contributions of business investment and net trade both drastically declined. The most recent global competitiveness report by the World Economic Forum (WEF )ranks the united kingdom as the 8^th most competitive country in which to do business, especially with regards to its strong historical performance of businesses. The country has competitive regimes and a flexible labour market (Holmes, Rollo and winters 2016). Due to these qualities, the United Kingdom has been viewed to attract inward investment into the country, an aspect to which it is second only to the United States. The long term prospects of the United Kingdom, however, need to be considered within the aspects of fundamental changes in both the levels and patterns of both global demand and global supply. The United Kingdom holds a significant position in the automotive industry as it can develop its products successful with the high level of science and innovation that it possesses. This places the automotive industry at a position in which it can survive effectively even with the no-deal Brexit as the efficiency in its manufactory attracts competitiveness

The sterling exchange rate, its relatively recent past evolution and how it affected trade and investments

 Over the last years, the British pound has drastically declined in value. The significant decline in the pound since the Brexit has resulted in significant adverse effects in the businesses of the United Kingdom. The drop in the exchange rate has resulted in the value of the British pound; in some instances, ratting lower than the Euro. A significant number of businesses have avoided operating in the United Kingdom, and the use of the pound in industry. The conduct of business in the United States is currently viewed as being 22% more expensive in the year 2019 in comparison to the past years (Hantzsche and Young 2019).  With the continuous fall of the exchange rate of the pound, the automotive industry in the United Kingdom continuous experience a downward trend. This is as the manufacturers of automotive in the UK incur losses in the case of international trade, and fail to bring in high profits as previous. By trading in pounds, profits are affected by the exchange rates as the pound is valued at a lower rate.

Discussion of current trade arrangements as a full member of the EU

The European Union is the most significant trade partner of the United Kingdom, with the United Kingdom exporting goods and services to the countries within the European Union. In the year 2017, the exports of the united kingdom to the European Union was valued at two hundred and seventy-four pounds out of the six hundred and sixteen pounds total exports that were made into the European Union. This amount has, however, declined following the increase of exports of other countries into the union. As a member of the European Union, the United Kingdom benefits from various trade arrangements that the United Kingdom has with the European Union as a member of the European Union. Among the trade agreements that the United Kingdom has with the European Union include that it has the liberty of moving its goods, capital, and human resource freely within the union. As a result, trade is more efficient due to the lack of restriction in movement. Also, the United Kingdom enjoys the liberty of being export its products into the European Union without tariffs being imposed on the goods that it exports (Böröcz 2015). As an EU member, the UK enjoys the liberty of s selling its cars within the union without additional costs on tariffs being imposed on the automotive. The EU acts offer a ready market in which the UK easily sells its automotive by being a member of the union.

Discussion of WTO global rules of trade and how they will impact the areas of competitiveness identified previously

The rules of trade of the world trade organization are currently contained in three agreements of the world trade organization. These agreements include the General Agreement on Tariffs and Trade (GATT). This agreement deals with rules that cover international trade in goods.  The second agreement is the General Agreement on Trade and Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The goal of the various agreements is to create a conducive environment that supports free trade (Trommer 2017). Among the essential functions of the rules of the world trade organization include cubing the imposition of import tariffs on its member states, to facilitate better procedures at the customs, to reduce quotas and subsidies imposed on imports, to discourage the domestic laws and taxes that are classified as protection. The rules of the WTO are based on various guiding principles, including free trade, promotion of economic development and growth, and the law of non-discrimination. Following the requirements of the WTO, the GATT and GATS provide list commitments to which the member states have to abide in the process of allowing different service providers and products into their markets. By operating as a manner of WTO, the UK would be forced to adhere strictly to the rules of the trade organization. As a result, its areas of competitiveness will be adversely affected. This is as it will be forced to treat all automotive and other goods within its territories in a similar manner, this means that it may end up importing automotive that are cheaply priced than its own, leading to a drop in the automotive industry.

Discussion of expectations of sterling exchange rate change post-no-deal-Brexit

The British currency, the pound, remains under pressure following the projected will of the United Kingdom to leave the European Union with no deal. Among the expectations is that the pound would settle for a hard Brexit equilibrium. In this case, the current accounts of the United Kingdom would take a direction towards a balance, or become more manageable. According to the current account of the United Kingdom, the country imports more goods and services in comparison to what it exports. Thus phenomenal leads to an outflow of currency. This trend should reduce the pressure on the value of the pound. This is as the country spends more with the rest of the world in comparison to what it consumes. A balance is created for the outflow through inflows of investment capitals and profits on investments abroad. As a result, the value of the pound is maintained at a significantly stable equilibrium. However, the UK could face the problem of the dry up of the inward investment in the case that the investors exercise caution and avoid trading with the pound.

Following the failure of the United Kingdom to reach a deal with the European Union, the value of the pound has been on a continuous downward trend. This is with the expectation of more political uncertainties in the region. With the declaration that the United Kingdom would pursue Brexit at all costs, businesses have continued to experiences lose in the region, with the value of the pound falling further (Plakandaras, Gupta and Wohar 2017). There is the fact that the exchange rate of the pound could end up falling at significant rates against the Euro over the next month with the no-deal Brexit. Even although the pound has, for a significant recent past, been stronger than the Euro, the no-deal Brexit could lead to adverse effects on the economy of the United Kingdom, leading with the value of the pound falling.

Discussion of implications for strategies of UK MNCs

Following the move of the no-deal Brexit, the UK multinationals have attempted to come up with strategies that will ensure their survival even after the United Kingdom leaves the European Union. Among the strategies include the establishment of subsidiaries of the multinational in other regions other than the European Union. This move will help in the survival of the MNCs as the exchange through ensuring that they trade with strong currencies. Also, it will limit the costs that they incur in the exportation of their products to other regions. Another strategy that the multinationals could embrace entails the establishment of cooperation with firms and organizations from other regions other than the European Union (Syafrian 2019). Through these corporations, the MNCs from the United Kingdom benefit as they can trade with other regions through the umbrellas of the corporations, consequently getting better deals.  The automotive manufacturers from the UK may have to partner with other companies abroad in the case that they intend to continue making profits. Through this, they would have the ability to operate more effectively as they will the MNCs with whom they partner may have better deals.

Conclusion

A no-deal Brexit would cause adverse implications on the automotive industry of the United Kingdom. This is as the United Kingdom will be forced to renegotiate deals with the independent members of the European Union to facilitate the trade deals that it has with the various countries. The downward trend experienced in the exchange rate of the British pound against other currencies is likely to continue. This would cause more negative effects to the automotive industry as potential trading partners are likely to avoid trading with the United Kingdom in the process of limiting possible risks.

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