Brexit can potentially act as a reset button for British manufacturing

by Fhaheen Khan

An economics and public policy expert summarises how a no-Deal Brexit will impact manufacturing in the UK and India.

In 1610, the English adventurer Sir Thomas Roe was sent by Queen Elizabeth on a mission to the West Indies in search of the fabled El Dorado, the city of gold reported in the myths of Spanish conquistadors. Roe failed, however, and instead turned his attention to the East, seeking Emperor Jahangir’s blessings to bring British trade to India. The result was to separate Britain’s interests from Europe’s path at a time when England’s ambitions were too often stifled by those of greater European powers.

Four centuries on and the UK is again seeking to diverge from its European neighbours. In trying times, where Brexit dominates the news with little clarity on its impact domestically or internationally, more trade with India may be a step in the right direction. Even so, there has been very little emphasis on how non-EU countries, like India, will be affected.

While the size of the manufacturing sector has declined over time in the UK, the sector’s prominence has grown in India, resulting in two nations with significant productive capacity in manufacturing. For example, the UK is the ninth-largest manufacturer in the world by output, accounting for 10 per cent of domestic GDP and 44 per cent of exports. India, however, has steadily grown its presence since the mid-2000s, to become the sixth-largest manufacturer by output worth approximately 15 per cent of domestic GDP.

In anticipation of the original Brexit deadline of 31 March, Make UK data shows that output skyrocketed as a result of stockpiling activities between Q1 and Q2. The subsequent effects from this made it appear as if the UK manufacturing sector was performing well amidst the uncertainty. However, the March deadline being pushed back to 31 October and a series of unpredictable political events over the past three months led many manufacturing subsectors to weaken, with average output falling severely since Q2. This, alongside a drop-in order both domestically and internationally, means that many manufacturers are having their margins increasingly squeezed as they are unable to raise prices to cover costs over fears of losing key foreign suppliers. As a result, business confidence has fallen to its lowest since the referendum. A culmination of the above has now left many UK manufacturers with little desire to invest over the next year.

At the moment, it all seems to be gloom and doom for the UK. So, what is the bright side to this chaos? Are there opportunities for gain as opposed to losses for British manufacturing? In theory, many opportunities could exist. The outcome depends on new trade deals with both the EU and the rest of the world post Brexit.

Consider the UK and India. India is an economic powerhouse today, with a rising share of middle-class citizens with a growing taste for high-quality foreign goods. According to the Department for International Trade (DIT), trade between the UK and India totalled more than £20 billion in 2018, of which the value of UK export goods totalled £5.5 billion. In the grand scheme of exports, trade between the UK and India is relatively small – as a reference point, the value of manufactured goods exports from the UK to the US totals at £45 billion.

It is true that trade between the UK and India has remained surprisingly stagnant over the last decade, whilst in the same timeframe, trade between the EU and India has increased. One might like to believe that because trade links between the UK and India are relatively weak, a no-deal Brexit would not directly and substantially impact India’s economy.

However, if we consider trade through the instruments of “value-added” travelling through supply chains, then some proportion of the products that India imports from the EU will contain elements of British manufacturing (such as a component of a passenger vehicle, which is then completed in Germany). Subsequently, businesses in India will be indirectly affected – a concept that economists refer to as spill over effects – in the form of increased delays in orders and potentially higher prices from tariffs applied to UK goods when trading with the EU.

For example, take the UK’s automotive sector, which relies heavily on international demand to survive and sees over 50 per cent of UK produced vehicles exported to the EU. It is also one of the main UK subsectors integrated as part of the automotive supply chain, within the Indian economy, and includes companies like JCB, Jaguar Land Rover and GKN Driveline.

Make UK’s Q3 Manufacturing Outlook publication highlighted a sharp fall in orders for basic metals, a key component of automotive productions. This fall in demand is primarily from North America, but a domino effect will ensue, impacting UK automotive manufacturers’ domestic and foreign operations, as a result, thereby affecting India. A no-deal Brexit will lead to further stagnation in the automotive sector for the UK, with knock-on effects within the Indian automotive sector in the form of reduced demand for vehicle components.

Nevertheless, the impact on India will be less than that on the UK itself, and its closest neighbours in the EU. Additionally, the UK primarily imports textiles, jewellery, machinery, pharmaceutical goods and mechanical appliances from India. A weak exchange rate will have already impacted the demand for these goods. Without an improvement in purchasing power, UK manufacturers will struggle to import important materials from India, raising the need for an efficient trade deal between the two nations. In the absence of effective trade, both UK and Indian manufacturers will feel the repercussions of a No-Deal Brexit. The only uncertainty is to what magnitude this will take place.

The final question remains: why has trade between the UK and India failed to progress? The value of trade between two of the largest economies in the world may seem insignificant but suggests that there is opportunity for growth. Brexit has the potential to act as a reset button for British manufacturing, providing the sector with a fresh opportunity to consider new trade relationships, to some extent. In a world where we no longer trade freely with the EU, perhaps simpler trade with India could be the answer. Of course, India and the EU are not perfect substitutes (i.e. interchangeable) as a trading partner for the UK due to a number of constraints, including the differences in business culture and time-zones. Moreover, a key determinant of trade is geographical proximity which illustrates that we tend to trade more with countries that are geographically closer to us. As far as we know, and as convenient as it would be, it is not possible to move one country next to another for trade. Truly, if that were possible, we would end up reverting to Pangea! Despite this, the EU has successfully developed a strong trading relationship with India.

Although it is clear that the potential challenges that await UK manufacturers from a No-Deal Brexit will only impact India partially, an efficient trade agreement between the two nations could potentially mitigate the negative consequences of Brexit, as well as fill the gaps left by reduced trade with the EU. It should be noted, however, that in a post-Brexit world, the EU is likely to remain the UK’s most important trading partner and immediate negotiation efforts are expected to be concentrated in stabilising UK/EU trade before developing trade deals in the interest of UK manufacturing with the rest of the world.

Fhaheen Alam Khan is an Economist for Make UK, the manufacturer’s organisation.

 

2019-09-27T15:19:45+00:00September 26th, 2019|2019, UK Edition – 27th September 2019|

About the Author: Fhaheen Khan