Brexit's Effect on the UK's Manufacturing Sector
Britain is today the ninth largest manufacturing nation in the world, but the effect of Brexit on the UK's manufacturing sector may be serious.
According to the Office for National Statistics, since the 2008 recession, the largest expansion in British manufacturing has been in: transport equipment (trains, planes and ships), motor vehicles, food, and machinery repair. Steep drops have occurred in pharmaceuticals, machinery, printing and recorded media, basic metals, and fabricated metal products.
Boris Johnson's recently proposed deal to leave the European Union includes the following conditions:
- The UK will have its own customs territory and set its own tariffs
- Standards on agriculture and manufacturing will give the UK flexibility, while Northern Ireland will follow the standards of the EU
- The UK will be able to diverge from the EU's labor and environmental standards
- The UK will be able to strike new trade agreements in goods and services
- The UK will have a free trade agreement with the EU on goods only, with minimal services and significant non-tariff barriers.
Currently, 54% of all goods imported into the UK come from the EU and nearly half of all British goods are exported to the EU. A 2016 study concluded that if you take into consideration those countries having free trade agreements with the European Union, that 63% of all Britain’s goods are exported to EU members. The EU market is comprised of around 450 million people.
Brexit's effect has already been felt
In anticipation of Brexit, British manufacturers have stockpiled raw materials and components. This has led to small and medium-sized manufacturers having low cash reserves.
In April 2019, the British manufacturing sector was down 4.1% due to carmakers cutting back in anticipation of the original Brexit date of March 29, 2019. Carmaker Vauxhall, which is owned by French firm PSA, has said it will cease production at its Ellesmere Port UK plant if Brexit goes through.
In May 2019, Canadian airplane manufacturer Bombardier announced the sale of its Northern Ireland factories which make airplane wings and fuselages. While this may have been in response to market challenges from Boeing and Airbus, overall investment in British manufacturing has declined.
UK investment in plant and machinery fell 7.5% in 2016, and 6.5% in 2017, which led to significant lay-offs.
Nowhere has the scope of this problem better been seen than in Honda Motor Company's address to the UK parliament. Honda told MPs that each day, it imports 2 million components from Europe that arrive on 350 trucks. Due to its Just-in-Time (JiT) inventory system, Honda said it had only about one hour’s worth of stock at any given time.
Honda also told lawmakers that should Brexit go through, it would take 18 months for it to put proper customs administration in place, and that every 15 minutes of delay would cost the company £850,000!
Additionally, Honda pointed out that 40% of the workers who build its new Civic automobile in the UK are EU nationals. Brexit will restrict the free movement of workers, and this may cause a lack of skilled workers to run manufacturing machinery.
If the UK adopts standards that are different from those of the EU, British manufacturers might have to create two separate versions of every product.
Tariffs and customs checks would be a serious problem for many manufacturers who currently rely on frictionless trade to source components and export goods. Manufacturers would have to abandon entire product lines if new tariffs make those products' parts too expensive to import.
Second quarter 2019 figures show the UK at the bottom of the G7 nations' growth. Canada came in first with 0.9% growth, and the U.S. and Japan posted 0.5% and 0.4%, respectively. France had 0.3% growth, while Germany shrank by 0.1% and Italy's growth was flat. The UK's economy contracted by -0.2%.
Looking for a silver lining
A recent bright spot has been Jaguar Land Rover's announcement that they would build electric vehicles in Britain. However, according to an article in the Financial Times, economists have forecast an increase of just 0.8% in British manufacturing output in 2019 which would decrease to 0.6% in 2020.
Websites are touting the Internet of Things (IoT), cloud computing and artificial intelligence (AI), as coming to the rescue of British manufacturing. However, "preparing for Brexit through digital transformation and technology investment" isn't going to solve the underlying problems posed by Brexit.