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April 2017

Brexit, excise duties and the risks for the automotive sector

Dino Collazzo

According to Giuseppe Barile, President of ANFIA Components Group, UK's exit from the single market will create some shock waves in the market. For Italian automotive companies this translates into 2.9 billion Euro in exports. "Knowing what will happen is still premature. Certainly, one thing to avoid is a return to the rules of the WTO, where 10% excise duty on cars and 4.5% on single components would be harmful".
A fifty kilometer tunnel is obviously not enough to hold the EU and the UK together. The farewell letter signed by Theresa May a few weeks ago, started the Brexit  count down. And the uncertainties linked to a possible trade turbulence has raised some anxiety among those who tied their business hand in glove with London. Britain, in fact, by severing the cord that, at least up to last June, had kept the two sides of the channel together, says goodbye to free movement of people and goods. Not to mention the benefits of being part of a single market. Waiting to see what will come out of the trade agreement under negotiation between the European Commission and the British Government, one thing is clear: the economic effect of Brexit is a key issue for all our companies. Especially for the automotive industry, whose exports account for 12.8% of the total goods destined for the UK, worth 2.9 billion euro.
"At this stage it is difficult to predict what will happen. For now, all we can do is wait and see - explains Giuseppe Barile, President of ANFIA (Italian Association of the Automotive Industry) Component Group -. Certainly the market will not experience great changes in terms of total business volumes, but the fact remains that there will be some shakes and adjustments the effects of which will be visible only from the development of future vehicle platforms. It is quite difficult to imagine any sudden changes to investments already underway or annulments of already existing agreements". Commercial trade data for the automotive industry compiled by ANFIA, describes a 2016 on the rise with a positive balance of 643 million euro. A decisive role was played by the components sector, whose exports generated 1.35 billion euro in value. A result that led the sector to end the year with the highest balance ever - € 1 billion and a 9.8% increase over 2015 - among all trading partners. These numbers make the United Kingdom the fourth destination market for Italian component companies: spare parts and accessories, brakes, wheels, axles with differential, non-driving axles, seats, fuel pumps, oil and refrigerants for engines. These are products that the British industry cannot produce in sufficient numbers to fill the domestic demand from local manufacturers. In fact, only 41% of the components on a vehicle made in Britain - a single car is made up, on average, by 3,000 pieces - is produced locally, the rest comes from the continent. The decision, therefore, to leave the European single market will re-establish customs barriers that will restrict the flow of goods both inbound and outbound. Furthermore, customs duties would inevitably increase the final price of the above mentioned goods, which will probably end up completely on the shoulders of the final consumers. In economic terms, the effects of the Brexit, according to the National Institute for economic and social research, will lead to a 22 to 30 percent trade reduction with the EU. To avoid this scenario, Downing Street should strike a free trade agreement with the rest of the EU similar to the one currently in place. But that seems quite difficult. "The ideal would be a mutual understanding with similar rules to the ones already in place - continues Barile -. In any case it is not conceivable that negotiations will be concluded without a full or partial agreement. That would mean returning to WTO rules with 10 and 4.5% taxes on vehicles and components, restricting the UK’s competitiveness  with negative effects for the EU as well ".
According to Anfia’s spokesman, in order to it avoid having to pay these duties, many component companies may decide to invest in Britain. "The decision in this case would depend on the choices of each individual car manufacturer and what kind of guarantees the British government will be able to provide to convince them not to go anywhere else" says Barile. If they decide to stay - as it seems likely at this stage - it is imaginable that even the businesses that work with them will remain on the territory so as to have a complete supply chain in Pounds. If the contrary should take place, the road leading these companies out of the UK will take them straight to Eastern European countries. "This is all very theoretical – says Barile -. Considering a scenario over another is quite a gamble. Everything depends on future free trade agreements. Of course two years are rather tight to successfully manage this transition. Meanwhile, the advise I give to companies already based in the UK, is to stay there and make the most of the advantages of being in the UK market enjoying a supply network based on the Pound. On the other hand, to those who are planning long-term investments in England, it would be advisable to  obtain binding arrangements with manufacturers before making a move. Nevertheless, in this case it would mean that they have already struck a deal with the British government in order to stay".

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