Reading between the lines of the Nissan deal

Greg Clark, Secretary of State for Business, Energy and Industrial Strategy, gave the closest thing to a ‘running commentary’ on the Government’s Brexit negotiating position on Sunday. Pressed for detail by Andrew Marr on what he had promised Nissan to secure their investment in post-Brexit Britain, he explained: ‘our objective would be to ensure that we have continued access to the markets in Europe and vice versa without tariffs and without bureaucratic impediments, and that is how we will approach those negotiations.’ Clark’s comments sketch out some of the key issues for government as it formulates its negotiating position. His commitment to remove tariffs suggests that the Government is looking for some kind of preferential access to the Single Market – it will not simply fall back on World Trade Organization rules, under which the European Union (EU) would apply its common external tariffs to the UK, including its 10% import duty on cars. This is not an attractive to proposition for Nissan as it looks to export from the UK to the EU.

In committing to remove tariffs, Clark is steering towards a free trade agreement (FTA) or customs union Free trade agreements eliminate ‘substantially all’ tariffs on goods. The trade agreement between the EU and South Korea, for example, means that purchasers of South Korean cars in the EU do not pay the 10% import duty on cars. Membership of a customs union would also mean the UK avoids tariffs – for example, purchasers of cars imported from Turkey, which is in the EU Customs Union, do not pay the 10% tariff. Avoiding that tariff is good for Nissan.

Both an FTA and customs union can also tackle ‘bureaucratic impediments’… Tariffs are only one type of policy that can have an impact on trade. Regulations, labelling requirements and intellectual property laws are all examples of ‘non-tariff measures’ that can make it harder to trade. The EU’s recent approach to FTAs has been for ‘deep and comprehensive’ agreements which resolve some of these issues. Article 5 of the EU-Canada trade deal, for example, includes a provision to ensure that neither side introduces new regulations on cars without considering whether this would make it harder to trade.

… but even under an FTA, some ‘bureaucratic impediments’ would remain. One of the best examples is the EU’s ‘Rules of Origin’” requirements which reflect that not all goods are made within one country. For example, a Nissan car might be assembled in Sunderland, but some of its parts may come from Asia, or Africa. While the UK and EU might strike an FTA to remove tariffs on cars, only those cars where a sufficient proportion was ‘made in the UK’ will be tariff-free. This means that every car being exported from the UK to the EU would have to demonstrate which bits of it were made where – adding paperwork and a ‘bureaucratic impediment’ to UK-EU trade.

Membership of a customs union would remove many non-tariff barriers, but limit scope for UK trade deals with third parties Membership of a customs union with the EU would remove many non-tariff barriers, including Rules of Origin requirements. The World Bank calculated that in Turkey, which is in a customs union with the EU, exports to the EU were 3–7% higher than they would have been under an FTA, precisely because many of these barriers were removed. But there are downsides to joining a customs union with the EU – members of a customs union are limited in their ability to sign their own FTAs. Theresa May’s dismissal of previous statements by Liam Fox, Boris Johnson and David Davis serves as a warning to anyone trying to read too much into the pronouncements of a government minister. But a UK government decision to pursue either an FTA or customs union will ultimately be subject to agreement from Europe. This means that Nissan will have treated any promises about the outcomes of Brexit negotiations with some scepticism. The other reassurances on skills, research and the supply chain may have swung it for Nissan.