WTO rules

[Spinflight]

I've been puzzling over something and can't find a concrete answer so this is intended as a discussion rather than a slanging match.

The car industry in the North East was often quoted as being likely to take a bit economic hit if we operated under WTO rules, yet it was the North East which lead the way in voting for Brexit. The remainers would confidently predict that Sunderland would suffer and said so many times during the debate. So what did the Geordies know that the politicians didn't?

Thing is the EU is protectionist and the single market actually acts as a barrier to imports by imposing tarifs on the rest of the world and having none inside. A bit like a car boot sale where anyone from out of the area has to pay a premium.

So inside the EU we pay more for raw materials ( which are mainly sourced elsewhere in the world) which we then add value to and turn them into finished products.

Take some steel, rubber, plastic and glass, add labour and energy and out pops a car.

So outside the EU those raw materials will be cheaper. The energy too if they follow through on their promise to remove the VAT.

Hence cars made here will be cheaper to produce overall, even if labour costs rise as predicted.

Now the problem they highlighted was that these cars would then face tarifs ( of 10%) to get into the EU market.

Surely though if the raw materials are cheaper to import, and the energy is cheaper than in the EU then these cars would still be competitive, probably more competitive, than they are now? Surely the markup on them will be even greater, especially as the pound is lower?

A weaker pound plus tarifs both ways would make German cars significantly more expensive here, and ours significantly cheaper there would they not?

Happy to discuss...

The inputs that go into making a finished car are not raw materials like glass, steel etc., they are intermediate products like engines, tires, all sorts of other small manufactured components. These are made by a large number of companies, typically located close to the final car manufacturer in order to save transports costs and avoid tariffs. In the case of UK car manufacturing, we have benefitted enormously from being in the European single market as we can source these intermediate products from across the EU (very close in geographical terms) and import them with no tariffs into the UK. Should we leave the single market, particularly if we go to WTO rules will immediately increase the cost of assembling a car in the UK by 5-10% at least, plus the cost of dealing with the paperwork. It's just not worth it. Much better for the car manufacturers to move to a country still in the EU where they can get the skilled labour they need and still access all the intermediate products without tariffs. We will simply lose the car industry with resulting massive job losses.

There is also a UK steel industry that wouldn't take too kindly to seeing other countries dump their cheap steel on the UK market, resulting in the local industry closing down (again, with massive job losses).

Also the majority of both Nissan and Toyota cars made in the uk go to the eu market so any minor savings on the raw materials would be lost in any export tarrifs to the eu 10% of the finished value many times that of 10% of the raw materials.

Also looks like our steel industries are more fucked than ever as the uncertainty of the next few years seems to have put a number of bidders of.

Until article 50 is envoked we won't see where we are going in any duscussions

As a Swiss man pointed out yesterday they have taken 45 years to get the trade deals they currently have.

I do wonder if the people of Sunderland and Derby and other cities really voted with an open mind as to what may happen. But until we start down the road we will never know.

Spin, I am happy to discuss this because it's an industry I am familiar with, but you're going t o need to approach this with an open mind.

Surely though if the raw materials are cheaper to import

The pound has just fallen. This means that imported materials have just got significantly MORE EXPENSIVE for UK manufacturers!!!!

For manufacturers who export their finished vehicles, this might be irrelevant, because the exchange rate impacts will at least partly cancel each other out. However in order to import raw materials and
parts from the EU, post Brexit, auto companies will be paying additional tariffs and will need to pay for customs procedures. They will then, additionally, pay tariffs and customs costs when they export the finished vehicle.

The other point is that the auto market is not global. You can't easily take a car designed to be sold in Europe and sell it in the US, or in India. In the first case, it wouldn't meet local standards (for eg US emissions standards are different) and in the second, it would probably be too expensive - you can export a small number of European luxury cars to India, but you can't sell Indians smaller vehicles made in Europe as they are just not competitive.

The vast majority of vehicles sold worldwide are produced close to their end markets, not shipped halfway round the world - that's why Nissan and Toyota have factories in the UK rather than making the cars in Japan as they used to!

Oh I do have an open mind Misti, hence why I asked. :)

Whilst I've found many wild assertions on both sides I can't get a definitive answer.

I think logically, the differential between tarifs and exchange rate on raw materials and those on the finished product depend upon the value added.

If for instance a £10000 car only contains £1000 worth of actual raw materials then the value added is great and most of the tarif is therefore on that value added for the finished product.

If however the disparity is less, due to buying in components which are themselves manufactured abroad for instance, then I can see it works in the opposite way.

Even ignoring that and assuming things don't change...

A £10000 car with a 10% tariff would currently, post brexit, be a 13107 Euro one.

Pre Brexit that £10,000 car without a tarif would be a 13050 Euro one....

A £44 difference.

They led the way in voting leave? I thought it was more a case of their votes were counted first rate than 'oh, Sunderland has voted leave, maybe we'll do the same'

Are you from the north east of England and trying to build up your part?

I think logically, the differential between tarifs and exchange rate on raw materials and those on the finished product depend upon the value added.

I'm not being snarky but I really don't understand your argument here.

The tariff isn't applied to the value added. And car parts and cars are among the products with the highest tariffs under WTO rules.

Cars are made up of parts made by many different manufacturers, and often these parts are not fabricated locally. A car manufacturing plant is really an assembly plant.

If the UK is to maintain an auto manufacturing sector, then it must continue to sell to Europe. There simply isn't a market for "ordinary" cars made in Britain to be exported round the world. You can export upmarket BMWs and Mercs built in Europe to China because there are rich Chinese who will pay the premium for these vehicles. But for mass market vehicles this doesn't work. That's why Toyota has a factory in the UK where it makes vehicles to sell in the UK and in mainland Europe (it does of course also have manufacturing capacity in continental Europe), and a joint venture in China where it makes vehicles for the Chinese market, as well as factories in Japan, the US and other countries, all primarily serving local markets.

Have a look at where Toyota makes vehicles, and you'll see the problem for the UK industry:

en.m.wikipedia.org/wiki/List_of_Toyota_manufacturing_facilities

This doesn't just apply to the car industry.

I work in a sector with a high level of quality /regulation which means most value added activities are done in the local market ie EU. European supply chains are very interwoven. I simply can't buy many of the things needed to manufacture from either the UK or outside Europe, particularly the smaller pre-packed materials and assembled equipment. If the few UK manufactured goods we do buy dwindles further due to recession or falling foreign investment in the UK it just compounds the issue.

This applies to things like coffee and sugar IIRC, rather than more high tech stuff. It's why Germany makes more money than the entire continent of Africa out of coffee - there are tariffs on both raw beans and roast coffee. Tariffs are higher on processed (ie roast) coffee, so Germany buys the beans and roasts them, avoiding the higher tariffs. Africa lose out on the much greater profits associated with processed beans, because as soon as they do the processing, their products become more expensive and there are fewer buyers.

Tate and Lyle came out in support of Leave as a lot of their raw material comes from outside the EU and is subject to tariffs.

"The tariff isn't applied to the value added."

It is applied to the total price, which comprises the component parts plus the value added.

My point was that for industries which add a lot of value it really isn't clear whether this would be favourable or not under WTO rules, particularly if a loosely Keiretsu model is assumed - which car assembly tends to.

I've seen many confident assertions either way from economists, and several from industrialists who usually point out that currency fluctuations are more important than tarifs, as shown in my example of the £10000 car.

The question therefore is whether that same car is cheaper to make in the first place, and on the whole I think it is likely that it is, particularly assuming some shuffling of component suppliers.

it really isn't clear whether this would be favourable or not under WTO rules, particularly if a loosely Keiretsu model is assumed

Maybe you could expand on this, because your point isn't clear at all. Do you have any personal or professional experience of auto industry economics? Or are these just the current campaign "talking points"?

Most of the car industry follows a model pioneered by the Japanese, whereby many companies are involved in supplying components but they are so interlinked as to effectively be a family of companies, or Keiretsu.

They tend to be co-located and often the smaller component companies only supply the one larger car assembler.

For instance, to use a non-UK example, Mazda decided to reduce the weight of their new car by asking all suppliers of nuts and bolts through sub assemblies to reduce the weight of their components by 10% or so. Whilst separate entities they act uniformly.

Hence a car being manufactured in the UK will likely see these supplier companies located alongside them in the same region. Now if this isn't the case ( for instance using Bosch electronics) then tarifs would apply and the total value added lessened due to them.

If however the majority of suppliers were co-located then I think it very likely that WTO rules would actually result in a larger profit margin despite tarifs.

Cars manufactured here would be cheaper for us to consume and still competitive on the continent.

Cars from Germany on the other hand would have the opposite problem resulting in higher tarif take ( tax to the government) and a more expensive product on the forecourts of the UK. Also worth noting they send us an awful lot more cars ( and higher value ones too) than we send them. Given the numbers of Volks, Audis, Mercs, BMWs and the rest on our streets that is a lot of tax.

Basically freer trade and high value added beats protectionist measures in the market.

Let's stop the cut and paste please.

"Co-location" in the European context usually means "inside Europe". For example, the engine in my Toyota was made in France, although the car was assembled in the UK. Most of the engine management and emissions control components will be non-UK too.

No cut and paste from me Mistigirl...

Can we at least agree that it is more complicated and not as clear as rival politicians have made out?

The Japanese cabinet responded to the Brexit vote in crisis mode. This was partly because it made the value of the Yen rise and partly because of the exposure of their big companies to the UK.

The big Japanese manufacturers are very concerned about being pushed out of the single market. They do not think it will benefit them. I assume they have done a significant amount of economic modelling and will have plans in place to move if it's decided that the UK leaves the single market.

Can we at least agree that it is more complicated and not as clear as rival politicians have made out?

The auto industry is certainly complicated, and some car parts come from outside the EU so not all aspects of the business will be directly affected.

But regardless of whether you think brexit is a big negative, or a smaller negative - it's definitely negative for the car industry, and for companies that supply it, like my employer.

If you want to make a case for it being positive you have to tell us why. It's possible that wage costs in some industries will fall post brexit, assuming that the government gets rid of social protections, health and safety laws etc. If that is what you are arguing, then you're working from a different playbook compared to before 23rd June!

Whatever putative benefits there are to come from increased trade with the southern hemisphere, Asia and Africa in perhaps 5-10 years, the car industry is not among those which stand to benefit. I don't even know why you're bothering to argue this - I know the official narrative has changed from fairies and unicorns to "it's not as bad as they're making out!" but you can't change business realities. In the last quarter century, the auto industry has changed hugely, and the vast, vast majority of mass market vehicles are now made in the region that they are sold - gone are the days when Japanese car companies made huge numbers of cars in Japan to sell in America or Europe.