The consequences of Brexit will be felt globally and for a long time. Following the Brexit vote, the pound plunged to a 31-year low and markets slumped across Europe, America and Asia, as economists predicted that Brexit would push the UK into a recession. Those of us in the Foreign Direct Investment (FDI) community have been left wondering what the consequences of Brexit will be on such investment in the UK.
The UK has an FDI stock of over £1 trillion, about half of which is from other members of the European Union (EU). Additionally, a good deal of the UK’s attractiveness for global investors is that it brings easy access to the EU’s Single Market. After Brexit, higher trade costs with the EU will likely depress FDI, both FDI coming from other countries within the EU as well as from countries outside of the EU that have traditionally invested in Britain as a gateway into the EU.
We’ve examined the Centre for Economic Performance at the London School of Economic’s report on Brexit to learn more about the likely consequences of this dramatic event. As an FDI consultancy based in various European countries, and with a range of automotive related clients, we’ve paid particular attention to the report’s section on the auto industry.
We have summarized the report’s key findings below:
- The positive effect of EU membership on FDI is robust, ranging between 14% and 38% under different statistical assumptions. The report concludes that a very conservative estimate of the impact of Brexit on FDI in the UK is a 22% fall in FDI over the next decade.
- Striking a comprehensive trade deal – for example, joining Switzerland in the European Free Trade Association – would not significantly reduce the negative effects of Brexit on FDI, according to the data.
Estimates of the impact of Brexit on the UK’s car industry imply that UK production would fall by 181,000 cars (12%) and prices would rise by 2.5%.
- Even if the UK manages a comprehensive trade deal and keeps tariffs at zero, production would fall by 36,000 cars.
- This is due to two main disadvantages of Brexit: First, as trade costs rise, locating production in the UK is less attractive because it becomes more costly to ship to the rest of Europe.
- Second, there is an increase in the co-ordination costs between headquarters and the local production plants. Transfers of key staff within the firm may be harder if migration controls are put in place. Different regulatory standards can make engineering, R&D and consultancy services trickier.
In short, it seems the effects of Brexit on the auto industry will be significant and we will be playing close attention to see to what extent key players in the auto industry relocate their production facilities outside of the UK. In future posts, we will analyze additional perspectives regarding the consequences of Brexit, for example how Brexit will impact US EDA’s.