Getting hot under the bonnet ahead of the referendum

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The UK government likes to boast that the UK’s auto industry is undergoing something of a revival, in assembly terms at least. Indeed the UK’s auto sector has experienced investment on an unprecedented scale of late. This has come on the back of a major upturn in auto assembly in the UK – up by over 50% from a low point of around a million cars in 2009 – combined with changes in economic fundamentals which are encouraging firms to build more cars here and to source more components locally.

Remarkably, over £8bn has been invested by major auto assemblers over the last three years. Off the back of this, it’s hoped that the industry will – by 2020 – overtake its historical peak level of output of 1.92 million cars (a record set back in 1972). However, in the same time-frame the UK government will hold an ‘In-Out’ referendum on EU membership. How might the UK’s exit from the EU effect the motor industry?

This topic was explored in a recent UK in a Changing Europe event organised by the Aston Centre for Europe (ACE). Participants heard a mix of views, with arguments in favour of continued EU membership, and also of exit.

Those in favour of continued membership of a reformed EU, including Mike Hawes of the Society of Motor Manufacturers and Traders (SMMT), John Leech of KPMG and Tony Burke of Unite the union pointed to what they see as significant benefits for the UK’s auto industry from staying in the EU, particularly in relation to investment, growth and job creation (all the things that the UK’s auto industry has been enjoying of late).

Other voices, notably Alex Storey from Business for Britain, and automotive journalist Neil Winton, argued that the UK auto industry would continue to do well outside the EU.

The pro-EU membership argument stresses that EU membership boosts both the attractiveness of the UK as a place to invest and the competitiveness of the domestic automotive industry. Not surprisingly, it notes that access to the single market is fundamental to UK auto manufacturing, thereby supporting sales and facilitating supply chain growth.

Those pro-Brexit, like Neil Winton, argue that if Britain left the EU “it would quickly negotiate a free trade deal with little difference to the current arrangements”. That’s probably correct; a trade deal with Europe would probably indeed be done.

But, a second more powerful argument centres on regulations and standards. Those in favour of continued membership highlight that the UK needs a powerful voice at the EU level to make sure that the specific needs of the UK’s auto industry are considered. Over 50% of UK auto exports go to the EU, so even if the UK were to leave and maintain access to the single market, producers in the UK would still have to meet European regulations so as to sell into Europe.

That would mean having to follow European regulations without being able to shape them; and in turn, it might enable German or French firms to shape them for their own benefit. For example, UK-based niche firms like Bentley, Aston Martin and Jaguar Land Rover can benefit from the British government having a seat at the table when regulations are thrashed out that impact on the industry.

These firms have actually benefited from the government managing to soften tough EU carbon emission regulations for its smaller niche manufacturers; they would lose that voice if the UK was no longer a member.

On the other hand, the eurosceptics are suspicious of this argument, pointing to how the likes of BMW and Mercedes are “hugely successful in the US and China, with no say in the politics at all” (although it should be noted that China has tended to follow the EU’s own ‘euro’ standards on engines over time).

A second aspect is the issue of bargaining power on the world stage. Those supportive of the EU membership point to EU bargaining power in trade negotiations being critical to improving access to international growth markets, thus helping major exporters such as Jaguar Land Rover, and in ensuring mutual recognition of standards.

Sceptics argue that the UK acting alone could more quickly cut its own trade deals with other countries than an EU that has to please 28 countries. That’s probably the case but some critical issues would remain on ensuring mutual recognition and greater regulatory convergence across technical standards and approvals procedures. Thus, the SMMT cites work by the Centre for Economic Policy Research suggesting that transatlantic regulatory divergences are equivalent to a tariff of 26%.

It was interesting that at the Aston Centre for Europe (ACE) new technological opportunities and challenges around autonomous cars and data protection were highlighted in the European context by discussants, both in terms of standard setting for new technologies and in maintaining access to research networks developing such technologies.

The latter point relates to some other arguments for remaining in the EU, such as on ensuring access to EU funding and research networks that has supported R&D and innovation at businesses and universities in the UK, and the free movement of labour which enables UK-based firms to combine domestic and international talent (which was seen as especially important by some at the event given skills shortages in the UK industry).

None of this is to suggest that the EU can’t be improved – such as through the simplification of regulations and reducing complexities for firms operating in the EU. Indeed, this is something that those in favour of continued membership were keen to stress. However, the debate on the importance of EU membership for the UK auto industry boils down to two views.

On the one hand is a view that Brexit is compatible with retaining a strong auto industry, as trade deals would easily be cut with Europe and other countries.

In contrast is the view of the SMMT that “being part of a strong Europe is critical for future success”, in particular by being able to shape regulations in Europe and ensuring mutual recognition of standards in wider trade deals.

While the ACE event focused on the UK car industry, the issues it raised – in terms of the single market, influencing regulation, trade, access to funding and networks for innovation, and the free movement of labour – will no doubt be relevant for other sectors in the UK economy as the in/out debate gathers pace.

By David Bailey, Professor of Industrial Strategy at Aston Business School.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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