Is the car industry about to be caught in a UK-EU trade war?

After two years of Covid lockdowns, a global chip shortage, the war in Ukraine, soaring commodity prices and a looming recession, you would be forgiven for thinking the UK car industry has quite enough on its plate. But in the past few months, a new problem has appeared on the horizon: the risk of a trade war between the European Union and the UK as Brexit flares up again. And the car industry, probably correctly, fears that it could be on the front line if the worst comes to the worst. Although there have been rumblings of a dispute centred on the Northern Ireland Protocol since last year, it was the BBC’s economics editor Faisal Islam who uncovered the deep concern of the car industry. Islam revealed that Volkswagen boss Herbert Diess had been in discussions with the British ambassador in Berlin. He quoted Diess as saying: "There's a lot of communication going on. And there's also a dependency. We have a British brand, Bentley, which is doing extremely well. Also the UK is our biggest export market in Europe for the premium brands for Volkswagen and Audi. So I think there will be, let's say, a mutual interest now to keep [trade] open., "We will try to calm down the situation between France and the UK as much as possible, because I believe that only [Russian president Vladimir] Putin and our enemies will be happy with yet another disagreement between such close partners as the UK and the EU." Clearly, the possibility of tariffs being added to certain manufactured goods being exported from the UK, and then the possibility of the UK retaliating in kind, is now high on the automotive’s industry’s agenda, even though no other brand bosses have yet gone public about their concerns. So what exactly might happen to the car industry if the negotiations break up without agreement? In recent years, former US president Donald Trump took part in a trade war with both France and Germany, partly because the World Trade Organisation gave both the US and France permission to extend new tariffs on each other as the result of the long-running dispute between aircraft makers Airbus and Boeing. Manufactured goods heading to the US that incurred higher customs duties of between 10 and 25% included aircraft components and even whiskey, cheeses and olives. There's also something called carousel retaliation, whereby these tariffs change to different products every six months. And there's general agreement that any kind of automotive tariffs - along with fishing-related products - would be in the front line in any UK-EU trade dispute. One of the problems for EU-based car makers is that the UK is a very significant market for European vehicles, especially German-branded cars – hence Diess’s concerns. According to the Society of Motor Manufacturers and Traders (SMMT), UK factories made over 895,000 cars in 2021. Of these, 82% were exported, so around 706,000. And of these, 388,000 were exported to the EU. The full-year SMMT figures for 2020 estimated that the value of UK vehicle exports was £27bn – the most valuable single grouping of exports, ahead of power-generating machinery and pharmaceuticals. Clearly, any extra tariffs on UK car exports would be a significant issue. On the other hand, the EU is more exposed to the UK new car market than the UK is to the EU. In 2019, the last full year before the pandemic, the UK imported just over 2.0m vehicles, of which around 1.56m originated in the EU. However in 2020, imports of cars to the UK slumped to around 1.4m. Diess’s concern can be seen clearly: the rich pickings of the UK market have already been hit by the lockdown and chip shortages. The Volkswagen Group doesn't want to see a further fall in UK sales as part of a trade war. So does the UK have the upper hand in any automotive trade dispute? The figures make it clear that the EU has more to lose than we do, but it’s not that simple, of course. In an article published shortly after the EU-UK Brexit deal was signed, David Bailey of Birmingham Business School noted that there's a clause in the automotive section of the deal that could prove very tricky for the UK car industry. The EU had insisted that the UK-made electric vehicles had to have at least 55% EU/UK-sourced parts content by 2027 to allow them to be imported tariff-free to the EU. If the UK government seeks to renegotiate the Northern Ireland Protocol, who could rule out, for instance, the EU opening a dispute under Rules of Origin for automotive components? Indeed, the EU refused to allow the UK to use components from Japan and Turkey as part of the automotive Brexit deal. Autocar talked to one leading economist who said that it was no surprise the automotive industry would be in the front line of a trade war, adding that the Brexit deal was "crafted almost entirely around the [UK] car industry". He further suggested that if in extremis the EU could massively impact the UK car industry by blocking component exports, it would "be cutting off its nose to spite its face". He continued: "My best guess is that the EU won’t retaliate through the motor industry over the NIP. It's disproportionate and would win them little sympathy." However, he also hinted that the French government might be most vociferous in the potential dispute, echoing Diess in telling the BBC that Volkswagen "will try to calm down the situation between France and the UK as much as possible". With the UK free to do its own trade deals around the globe, the EU is likely to be unsettled by UK makers using automotive parts sourced from low-cost countries outside the EU. Such a move would probably be viewed as unfair competition for UK-made cars that are sent to the EU. It’s an incredibly complex area, and we're some way from a breakdown in relations and tit-for-tat trade dispute, but clearly the reverberations of Brexit will be playing out for some time and the auto industry is in the front line. Why has talk of a trade war flared up? Any dispute would be triggered by a failure to agree on changes to the post-Brexit Northern Ireland Protocol, which the UK government says isn't working out as planned. The EU is very keen to keep goods that aren't made to EU regulations out of the Republic of Ireland, so it has been conducting extensive checks on everything arriving in Northern Ireland. The UK government argues that the checks are over-zealous and are affecting the UK’s internal market. Movement of some goods from the UK is being unnecessarily hampered, it claims, which in turn claim is a breach of the 1998 Good Friday Agreement. The stakes are clearly high, and any EU-UK trade flare-up could well reflect that.