U.K. Begins EU Exit Process

Today the U.K. formally notified the European Union that it will quit the 27-nation group. The process, triggered by invoking Article 50 of the EU membership agreement, is likely to take about two years to complete.

The move could have a huge negative impact on England’s auto industry, which exports about 57% of the vehicles it makes to the EU. And vehicle prices are likely to rise regardless of the details of post-Brexit trade agreements, according to market analysts IHS Markit Ltd.

One bright spot: European carmakers with sufficiently high sales volume in the U.K. might determine that the higher cost of tariffs would justify building assembly plants in England. IHS Markit cites Volkswagen and PSA-Opel as examples.

The firm’s analysis notes that a so-called “hard” Brexit would result in the U.K. swapping its current tariff-free status for duties between 3% and 4.5% on EU trade. Tariffs would have a major impact on local carmakers, because they import almost three times as many components (80% of the total from the EU) as they export. The U.K. also imports twice as many finished vehicles as it exports.

British-built cars average only about 34% local content, according to IHS Markit. A big reason is that it has been more economical for carmakers in the U.K. to tap the well-established European supply chain. Matching that efficiency by fostering a stronger local supply base appears highly unlikely.

The U.K. could opt to support its auto industry with a “duty drawback” plan that enables the country’s exporters to claim a tax deduction for tariffs they pay overseas. But that would work against efforts to expand the domestic supply chain. IHS Markit also estimates that duty drawbacks would cost the British government about £240 million ($300 million) per year, equal to its annual budget for roads.