Brexit: What Does It Mean for Petrolheads Around the World?
Well, the people of Britain have spoken. Britain is about to leave the European Union, which you’ve probably already heard about unless you’ve been stranded in Siberia for the past 24 hours. Now, seeing as this is not really a political post, I’m going to keep my personal opinions on Brexit to myself, and simply stick to what I can tell you for sure without any doubt—and that is the economic effect that Brexit will have on the automotive industry, both in England and abroad.
What Does the European Union Do?
As far as cars are concerned, the key function of the European Union is to enable free trade between all member nations; as well as to act as a trade superpower with the rest of the world. Clearly, both of these aspects should benefit Britain’s automotive industry. This is due to the concept of comparative advantage, which essentially states that countries should trade the goods that they are good at producing with other countries in exchange for goods which they are not good at producing. For example, Colombia would be a natural trading partner with Canada: Colombia is very good at producing coffee, Canada is good at growing wheat, and neither country is good at producing the other. Therefore, Canada should trade some of their wheat to Colombia in exchange for coffee. If done correctly, both sides will be better off than if they did not trade at all.
Back to cars. If we look at Britain, it doesn’t take very long to realize that they’re pretty good at making cars. Among the more prominent manufacturers who build cars in Britain: Jaguar; Land Rover; Mini; Vauxhall; Nissan; Toyota; and Honda, just to name a few. As you would imagine, quite a lot of these cars are exported to EU nations. Currently, with Britain still in the EU, there are fairly few trade barriers within other EU member nations.
What Happens After Brexit?
However, once Britain leaves the EU, all cars made in Britain will be subject to import tariffs (around 10% of the value of the vehicle) once they leave Britain. This pretty much automatically makes all British-built cars more expensive in EU markets. The laws of supply and demand tell us that as prices rise, the demand for products will decrease, hurting sales of British-built cars. I don’t think that companies such as Jaguar or Land Rover would stick the financial burdens of these tariffs solely on EU nations. Instead, I think that they would also raise prices on cars bound for other markets, such as the USDM.
Meanwhile, import tariffs would likely be charged on all cars entering Britain from other nations. I can’t imagine this being a very good scenario for British consumers, who import a significant quantity of automobiles. They’re going to have to pay more for their vehicles, one way or another. Neither can I see this being very good for Renault, who have already been slowly pulling out of the British market. If their demand for cars decreases, their sales will decrease, and that’s really the last thing that they need right now.
Brexit will also likely affect the supply side of the equation in the long run, as well. Consider Nissan, for example. They run a manufacturing plant in Sunderland, UK. Every day, they produce Nissans there and ship them out to other countries, primarily in the EU. Now that’s all fine and good until you slap a 10% import tariff on all British-built cars. If this were to happen (and it will), then Nissan would be better off shutting down their British operations and building a plant somewhere else. Generally speaking, this would be an attractive option to all automakers with operations in Britain.
However, smaller niche-market makers, such as Lotus, won’t be able to move their operations. These are the ones that will suffer the most. In fact, with Lotus in enough financial hardship as it is, I can’t imagine that the CEO of the company has gotten any sleep in the past 48 hours. Nor can I imagine that many factory workers did either, with Brexit putting their jobs directly in jeopardy.
But the effects aren’t limited just to Britain. The news of Brexit has affected pretty much the entire global marketplace. Japan is a pretty frightening example. News of the Brexit vote spiked the Japanese yen, which has had a catastrophic effect on Japanese exports. Of course, cars are a pretty big export from Japan, so it’s no surprise that the Japanese are pretty upset with the British decision to exit the EU. In fact, most British businesspeople are pretty upset with this decision, too. Hell, even I’m upset, because a boost in the yen will likely make parts for my Datsun a lot more expensive. Trying to renegotiate complicated trade arrangements with other nations is going to be an absolute migraine for politicians, diplomats and businesspeople. The logistics alone could cost millions, not to mention revenue shortfalls.
Is there anything good to come out of Brexit for petrolheads? Maybe, but only if you act quickly. It’s no surprise that Brexit sent the British pound into somewhat of a nosedive. Although it has recovered somewhat, the pound is still worth quite a bit less than before the referendum. Because there are presently very few trade barriers at the moment, this means that you might do well to import a used car from Britain, seeing as how used car prices will be fairly sticky (unchanged), while the purchasing power of the pound itself decreases. This is a big maybe, but it’s the only silver lining I can think of as a petrolhead.
We may never know the full effects of Britain’s decision to leave the European Union. But one thing is starting to look clearer and clearer: the rest of Brexit does not bode well at all for us car people. Whether or not you are an enthusiast, a car dealer, a parts manufacturer, a taxi driver or a factory worker, you’re going to feel the pinch. When you consider that the British automotive industry has been in pretty rough shape to begin with, you wonder how much more they can really take. In any event, the short run outcomes for British automobile manufacturing are clearly not good, and the ripple effects therein will have an effect on the whole world.
Special thanks to Alex Andrei for his insight and contributions to this article!