Brexit Britain Plays Russian Roulette With Its Industry

(Bloomberg Gadfly) -- Few industries have flourished in modern Britain like carmaking and aviation. Car production rose to a 17-year high last year and thanks to budget carriers such as EasyJet Plc, Brits can fly across the continent for a pittance.

Today those achievements stand on shakier foundations, as Britain begins two years of negotiations over withdrawing from the EU. Theresa May's government projects confidence but has little control over the outcome. Brexit might have many losers. But cars and planes -- symbols of trade and free movement -- could be among the biggest.

True, Britain has a chance to boost trade with non-EU countries. It must. Yet more than half of the passengers using U.K. airports are flying to or from the EU, while more than half of British car exports head to the continent. These things need protecting. It's not as if Britain is awash with industrial success.

A hard Brexit, swapping the single market for WTO tariffs, would push up the cost of assembling and exporting a vehicle from the U.K by almost 2,400 pounds ($3,000), PA Consulting Group estimates.  

Meanwhile, British airport passenger growth is expected to halve because of a weaker pound, reckons Moody's. In a worst-case scenario, the U.K. could be ejected from the European Common Aviation Area. Absent an agreement, or action by the airlines, EasyJet wouldn't be able to offer intra-European flights. Ireland's Ryanair Holdings Plc might face similar problems in the U.K. 

Because European airlines must be majority-owned by EU citizens, British investors might have to divest shares. As an example of the hara-kiri absurdity of Brexit, it's hard to beat making a company tell its own investors to sell.

Brexiteers dismiss all this as fear-mongering. Reason will prevail, they say: Germany's car industry doesn't want to lose tariff-free access to the U.K., nor would Spain benefit from aviation restrictions that stop Brits flocking to the Costa Brava.

This “mildly lunatic optimism” (in Ryanair CEO Michael O'Leary's words) needs to end. The EU's 27 other members don't seem too inclined to offer special treatment. Even Germany's car lobby says preserving EU unity is its chief concern:

“The UK is an important market for us but the EU market is much more important. If the EU were to fall apart, that would be a lot worse for our industry,” Matthias Wissmann, president of the German Automobile Industry Association president (October).

Carsten Spohr, boss of Deutsche Lufthansa AG, sounded gloomy this week: “Brexit means Brexit -- our industry won't be exempt.” It would be "virtually impossible" to reach a comprehensive aviation agreement in the time available, he added.

Worryingly, Britain seems under-prepared. The government didn't commission any research into the impact on airlines, ministers concede.

There are hopes that Brexit might encourage U.K.-based car plants to buy more parts locally, thereby avoiding any new import tariffs. But those plants are almost entirely foreign-owned. It might be easier for some owners to move assembly to the EU rather than overhaul supply chains. BMW has hinted it may do just that with its new electric Mini.

The British autos industry is desperate to take part in the once in a century switch from combustion engines to electric cars. But this needs investment, and foreign carmakers will be nervous until new EU trade terms are settled. The value of announced autos industry investments fell by one-third in 2016, according to the Society of Motor Manufacturers & Traders.

Nor will companies sit tight. EasyJet is setting up an EU-based operating company to prevent disruption. There's surely a risk of jobs and investment drifting to the continent. Ryanair is already prioritizing growth outside of the U.K.

Given the dangers here, one can only wish Britain the best of luck with the exit talks. It'll need it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

1. In that scenario tariffs would also imposed on cars imported into the UK, of course.

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.