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Manufacturing: pre-Brexit
In 2016, manufacturing made up 9.8% of the UK economy. Manufactured goods accounted for 44% of UK exports, 58% of imports and directly employed 2.6 million people (see Table 8.4). Manufacturing is often closely linked with the provision of services, increasing its importance to the economy and international trade.
The EU was the UK’s biggest trading partner in manufactured goods (2016 figures).
- 47% of goods exports went to the EU (worth £134bn)
- 54% of goods imports came from the EU (worth £154bn)
- 300,000 workers in manufacturing came from the EU (11% of the workforce).
Manufacturing is R&D intensive accounting for 70% (£15 billion) of UK R&D spending, and has high productivity.
Three manufacturing sectors are crucial and made up half of non-food manufacturing:
- Transport equipment
- Chemicals/minerals
- Electrical/optical equipment
Within transport equipment, the automobile sector was the major employer, with about 169,000 workers in manufacturing. Over 800,000 worked in the auto sector when related services and activities are included (Society of Motor Manufacturers and Traders). Over 50% of UK car exports went to the EU.
Benefits of Single Market
As a member of the EU Single Market and Customs Union, manufacturing gains important benefits.
- No tariffs on goods traded between member states.
- No quotas or limits on the quantity of goods traded between member states.
- Non-tariff barriers to trade have been largely eliminated.
- For example, there are common technical specifications and labelling requirements throughout the EU.
- All member states set the same tariffs for goods imported into the EU from non-EU countries.
- Something manufactured in an EU member state can be shipped and sold in any EU country.
The UK’s manufacturing supply chains were often closely integrated with the EU. The UK imports intermediate goods (such as auto components) which go into UK goods (both finished and intermediate), often for export.
- Nearly half of the UK’s intermediate imports and exports were with EU countries. For example:
- Around 60% of the parts that go into a UK-assembled car are imported and there is no domestic supplier.
- 80% of UK-assembled cars are exported.
- Integrated supply chains are finely tuned to be as efficient as possible. They have limited tolerance for delays, extra costs, or additional process steps (such as new documentation of origin or customs checks).
Sources:.
Is the UK’s role in the European supply chain at risk?, Bruegel Institute, December 2016
What does Brexit mean for the UK’s automotive industry? Professor David Bailey, June 2016
House of Commons Library, Manufacturing statistics and policy, January 2017
Manufacturing: expected Brexit impact
Brexit will damage UK manufacturing, putting thousands of jobs at risk. An FTA is unlikely to address the non-tariff barriers that will appear as a result of Brexit. If the complexity of trading with the EU increases and profitability drops too much, UK-based firms are likely to move manufacturing activity, jobs and investment from the UK to the EU.
A study by the UK Trade Policy Observatory at Sussex University found that the implications of Brexit for different manufacturing sectors and regions varied considerably. The study concluded that high tech and medium-high tech sectors are more at risk of a decline than medium and medium-low tech sectors. They also predicted declines in textiles, clothing and footwear. On the other hand, they found that production in the food processing sector may increase.
The Brexit devaluation of sterling has assisted exporters because their products are cheaper for foreign buyers. However, devaluation raises the price of imports of goods (raw materials and intermediate goods) that feed into UK manufacturing processes. Some UK manufacturing exporters have had to raise prices as a result.
As a practical example, here is link to an SMMT ‘Brexit myth-buster’ for the automotive sector.
View of supply-chain managers
The Chartered Institute of Procurement and Supply surveyed 2,204 supply chain managers in March 2018 on the impact of Brexit. They found:
- Two-fifths (41%) of respondents plan to increase their prices in the future to offset the potential costs of Brexit
- Almost a quarter (23%) said they planned to reduce the size of their workforce.
- More than one in 10 (11%) EU firms have moved some of their workforce out of the UK
- 9% of UK firms have lost contracts, or had them cancelled, as a direct result of Brexit.
- 22% of UK businesses with EU suppliers are having difficulty securing contracts that run after March 2019
- 14% of EU firms with UK suppliers have already moved parts of their business out of the UK to reduce exposure to Brexit risks.
New trade deals with non-EU countries might open up new markets for UK manufacturers. However, these deals principally replace EU deals.
New trade barriers
Tariffs would be particularly damaging for UK sectors with an integrated EU supply chain, such as the automotive, chemical and pharmaceutical sectors. Tariffs could be levied multiple times in the production process as sub-components and intermediate goods move back and forth across borders.
Non-tariff barriers would have an important affect on all manufacturing sectors. Compliance with rules of origin requirements (to achieve freedom from tariffs) would introduce a significant additional administrative burden, particularly for sectors in an EU supply chain.
Regulation is an important consideration in some manufacturing sectors. In the chemical sector common regulation and safety standards are critical facilitators of trade between the UK and the EU. In the automotive sector, the US and the EU are the major drivers of regulation. After Brexit, the UK has a smaller voice in auto regulation and has to follow the US and the EU. A similar pattern is likely in other sectors.