Trade deal ‘essential’ to protect UK car industry

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Britain must rush to agree a trade deal similar to the one being hammered out between the EU and Japan or face having the UK’s £72bn-a-year car industry taken apart, a trade lawyer has warned.

The alarm has been sounded by ­Hosuk Lee-Makiyama, a former diplomat who has represented the EU at the World Trade Organisation and is ­co-author of the European Commission’s Trade Sustainability Impact Assessment on the EU-Japan trade deal, the Telegraph reports.

He said Japan and the EU are close to sealing a deal – dubbed “cheese for cars” – which will give Japanese companies tariff-free access to European markets, an arrangement likely to benefit the country’s huge manufacturing base. In return, Europe’s farmers will get similar access to Japan.

The EU-Japan trade deal could be agreed in just six months and come into force before Britain bows out of the EU in 2019. Once in place it could suddenly make Japanese companies’ UK manufacturing plants less competitive than similar factories in Europe.

“In the case of a hard Brexit, there could be a tariff between the UK and the single market, whereas there will be none between Japan and the EU,” said Mr Lee-Makiyama.

“That has considerable consequences for the car plants at Sunderland and Swindon, because if you look at the supply chains of those plants they source a lot of parts from the single market, as well as Japan.”

Nissan’s Sunderland plant is one of the largest in the UK, responsible for 507,000 of the 1.73m cars rolling off UK production lines last year. Toyota’s  Derbyshire plant churned out 180,000 cars last year, with another 134,000 built at Honda’s Swindon factory.

“The cost of manufacturing [in the UK] goes up – the parts, technology and the people,” added Mr Lee-Makiyama. “The Japanese car industry flies a lot of experts and engineers back and forth and if all that is facilitated by the EU-Japan free trade agreement, it seems much easier just to move the manufacturing capacity currently based in the UK to the single market in the case of a hard Brexit.”

Mr Lee-Makiyama, who is a director of the European Centre for International Political Economy, added he would “be very surprised if Japanese industry is not already making plans” to relocate work inside the single market after Brexit.

Last autumn the Japanese government took the extraordinary step of publishing an open letter warning that the country’s banks, car manufacturers and pharmaceutical companies could quit the UK for Europe if Brexit leads to the loss of tariff-free trade.

Tokyo produced a 15-page list of ­demands from its companies and said Britain could become an increasingly unattractive place for the businesses.

The EU-Japan deal throws into sharp relief the Government’s fast-approaching decision on the UK’s trading relationship with Europe. Whitehall sources have told The Daily Telegraph that a ­decision on UK membership of the customs union is approaching and will be based on the idea of leaving the customs union but obtaining “maximum facilitation” between two discrete customs areas.

“It will be the same as with the US, Canada or Panama, say, but the focus will be on anything and everything that we can do between two different customs regimes that will make trade as easy as possible,” the source said.

The Government is looking to soften the ground for a decision to leave the customs union ahead of a White Paper on customs arrangements, ­including provisions for worse-case scenarios.

British ideas include remaining part of the Common Transit Convention, staying inside a common security zone, as well as ultra light-touch applications of Rules of Origin checks and warehouse-based customs controls using “authorised operator” schemes.

Philip Hammond, the Chancellor, has talked openly about the need to seek “Associate Membership” of the customs union, at least during a transition period, in which the UK would cede the right to negotiate trade deals on goods, but allow the UK to push for external deals on services, which are more important to the UK economy.

Experts disagree on the viability of this idea. Mr Lee-Makiyama said it was the “only approach that makes sense”, giving duty free access to the single market, without Rules of Origin controls, while leaving the UK free to negotiate trade deals covering agriculture, services, investment and regulations.

Other experts, like Matthew Weiniger QC, the head of international arbitration at Linklaters, who has worked extensively on the Brexit file, said Mr Hammond’s gambit, while non-disruptive, would not provide anything like the trade negotiating autonomy Brexiteers demand.

“Associate membership of the customs union would not survive any brush with reality,” he said. “If you have no ability to trade your goods, to negotiate on tariffs, why on earth would they start negotiating on services? It’s what Brexiteers would call a ‘stitch-up’.” David Davis, the Brexit Secretary, prefers a much cleaner break, however many experts doubt whether Britain leaving the EU Customs Union will ­result in anything like the “near-frictionless” trading arrangements that his department suggests.

And even if that were technically possible to create low-friction trade between the EU and UK after Brexit, added Mr Weiniger, there is no political will in Europe to make that happen, for fear other EU member states seek to follow suit.

“It’s as if intelligent, leave-inclined people sat down and wrote the perfect blueprint for leaving the EU, totally on the UK’s terms and to make it work as smoothly as possible. At which point, you have to ask, ‘well, who wouldn’t want that?’” Michel Barnier, the EU’s chief Brexit negotiator, warned against over-optimism on the British side in a speech earlier this month, noting that he had heard UK politicians talking about building a customs union to achieve “frictionless” trade. “That is not possible,” he said.

Mr Lee-Makiyama said that Britain should not underestimate the barriers to trade that would be thrown up by a basic deal, noting that proving Rules of Origin on complex manufactured goods – like cars – was vastly time-consuming and burdensome.

“Those who point to Norway and Switzerland as countries outside the customs union that deal with Rules of Origin forget that Switzerland does not manufacture much and SMEs in those countries often prefer just to pay the duty, rather than face the hassle – which should tell you something,” he said.