As March 2019 draws closer, the UK government remains divided over the type of trade relationship it wants to achieve in the ongoing negotiations with the EU. Paola Conconi (ULB/LSE) explains why Japanese multinationals may pull out of the UK in case of a hard Brexit, one which would mean there is no kind of customs union with the EU

Conconi, Paola

LSE Research Online

Many	multinationals	may	pull	out	of	the	UK	if	it	leavesthe	Customs	UnionAs	March	2019	draws	closer,	the	UK	government	remains	divided	over	the	type	of	trade	relationship	itwants	to	achieve	in	the	ongoing	negotiations	with	the	EU.	Paola	Conconi	(ULB/LSE)	explains	whyJapanese	multinationals	may	pull	out	of	the	UK	in	case	of	a	hard	Brexit,	one	which	would	mean	there	isno	kind	of	customs	union	with	the	EU.Some	members	of	May’s	Cabinet	are	pushing	for	a	“soft”	Brexit,	which	would	allow	remaining	close	tothe	EU’s	single	market	and	customs	union.	Others	favour	a	“hard”	Brexit	and	aim	to	strike	a	trade	dealsimilar	to	CETA,	the	agreement	concluded	between	the	EU	and	Canada.	Multinational	corporations	with	plants	in	theUK	favour	a	soft	Brexit.	In	a	leaked	report,	the	Japanese	government	points	out	that	879	Japanese	companies,including	manufacturing	giant	Hitachi	and	carmakers	Honda,	Nissan	and	Toyota,	employ	142,000	staff	in	Britain.	Itcalls	Mrs	May	to	keep	Britain	in	the	EU	single	market	and	customs	union,	warning	that	Japanese	companies	mayotherwise	relocate	to	continental	Europe.On	February	8,	Mrs	May	met	with	Koji	Tsuruoka,	Japan’s	ambassador	to	the	UK,	and	representatives	of	majorJapanese	companies	including	carmakers,	other	manufacturers,	and	banks.	Speaking	after	the	meeting,	theJapanese	ambassador	has	reiterated	the	warning	that	his	country’s	firms	will	leave	Britain	if	Brexit	makes	it“unprofitable”	to	stay.	“If	there	is	no	profitability	of	continuing	operation	in	the	UK,	not	Japanese	only,	no	privatecompany	can	continue	operations,”	Mr	Tsuruoka	said.Multinational	companies	like	Honda	and	Nissan	have	used	the	UK	as	their	base	to	serve	the	European	market.	Forexample,	almost	80%	of	the	cars	manufactured	by	Nissan	in	its	plant	in	Sunderland	are	currently	sold	to	consumersin	the	rest	of	Europe.	EU	membership	guarantees	regulatory	alignment	with	the	rest	of	Europe	and	duty-freetreatment.	Exit	from	the	single	market	would	imply	that	UK	and	EU	regulations	are	no	longer	automatically	aligned.More	importantly,	exit	from	the	customs	union	would	mean	that	multinationals	may	face	high	tariffs	if	they	want	toserve	EU	customers	from	the	UK.This	may	seem	surprising,	given	that	in	free	trade	agreements	like	CETA	tariffs	on	most	manufacturing	products	areslashed	to	zero.	The	key	difference	is	that,	within	a	customs	union,	goods	cross	borders	without	any	checks	at	all.	Bycontrast,	in	a	free	trade	agreement,	shipments	need	to	be	checked	by	customs	authorities	to	ensure	that	theyconform	with	rules	of	origin	(RoO).	Only	goods	that	comply	with	these	rules	are	considered	as	originating	frommember	countries	and	are	granted	preferential	tariff	treatment.	Satisfying	origin	criteria	is	straightforward	for	simplegoods	like	iron-ore	but	is	much	more	complicated	for	goods	like	cars,	which	are	produced	in	international	valuechains	using	components	from	around	the	world.LSE Brexit: Many multinationals may pull out of the UK if it leaves the Customs Union Page 1 of 3		Date originally posted: 2018-02-28Permalink: http://blogs.lse.ac.uk/brexit/2018/02/28/japanese-multinationals-may-pull-out-of-the-uk-in-case-of-a-hard-brexit/Blog homepage: http://blogs.lse.ac.uk/brexit/Copyright:	Public	Domain.In	a	recent	study	(Conconi	et	al.,	2018),	we	show	that	rules	of	origin	in	free	trade	agreements	distort	global	valuechains,	deterring	final	good	producers	from	importing	inputs	from	non-member	countries.	We	have	constructed	aunique	dataset	of	the	RoO	contained	in	NAFTA,	the	world’s	largest	free	trade	agreement:	for	every	final	good,	wecan	trace	all	the	inputs	that	are	subject	to	RoO	requirements;	similarly,	we	can	link	every	intermediate	good	to	thefinal	goods	that	impose	RoO	restrictions	on	its	sourcing.	Exploiting	cross-product	and	cross-country	variation	intreatment	over	time,	we	show	that	NAFTA	RoO	led	to	a	sizeable	reduction	in	imports	of	intermediate	goods	from	thirdcountries	relative	to	NAFTA	partners.	In	terms	of	magnitude,	our	estimates	imply	that	imports	of	affected	intermediategoods	from	non-NAFTA	countries	would	have	been	around	45%	higher	in	the	absence	of	RoO.Our	study	can	help	to	explain	why	Japanese	multinationals	may	pull	out	of	the	UK	in	case	of	a	hard	Brexit.Companies	like	Honda	and	Nissan	rely	on	global	supply	chains.	For	example,	key	components	for	the	models	theyproduce	in	the	UK	are	imported	from	Japan.	Right	now,	they	can	automatically	sell	the	cars	they	produce	in	the	UKto	the	rest	of	the	EU	at	zero	tariffs.	In	the	case	of	a	UK-EU	free	trade	agreement,	they	would	face	a	tradeoff,	if	theydecide	to	remain	in	the	UK:	stop	importing	key	components	from	Japan	and	other	non-member	countries,	to	complywith	rules	of	origin	and	obtain	duty	free	treatment;	or	keep	their	global	value	chains	in	place,	but	face	a	10%	tariffwhen	exporting	their	cars	from	the	UK	to	the	EU.	Relocating	to	continental	Europe	would	allow	them	to	remain	in	thecustoms	union,	avoiding	this	tradeoff.Leaving	the	customs	union	would	thus	be	more	problematic	than	envisaged	by	both	voters	and	politicians	at	the	timeof	the	Brexit	vote.	It	would	not	only	raise	the	possibility	a	hard	border	between	Northern	Ireland	and	the	Republic,endangering	the	reconciliation	process	between	them;	but	it	may	also	lead	multinationals	to	move	out	of	UK,resulting	in	the	loss	of	thousands	of	jobs.	It	is	then	not	surprising	that	Jeremy	Corbyn	has	called	for	the	UK	to	be	in	apermanent	customs	union	with	the	EU.If,	as	it	seems	likely,	the	government	decides	to	go	for	hard	Brexit,	it	should	make	sure	that	the	rules	of	origin	itnegotiates	with	the	EU	as	part	of	the	new	trade	deal	are	as	flexible	as	possible,	to	minimise	the	distortion	of	globalsupply	chains	and	the	risk	of	relocation	of	multinationals.	The	devil	is	in	the	detail:	what	threshold	of	minimumdomestic	content	is	agreed	on	cars	may,	for	example,	decide	whether	companies	like	Honda	and	Nissan	remain	inthe	UK	or	move	to	France	or	Germany.This	post	represents	the	views	of	the	author	and	not	those	of	the	Brexit	blog,	nor	of	the	LSE.	It	is	based	on	the	LSE’sCentre	for	Economic	Performance	Discussion	Paper	No	1525,	“From	Final	Goods	to	Inputs:	The	Protectionist	Effectof	Rules	of	Origin”	by	Paola	Conconi,	Manuel	García	Santana,	Laura	Puccio	and	Roberto	Venturini	(forthcoming	inthe	American	Economic	Review).LSE Brexit: Many multinationals may pull out of the UK if it leaves the Customs Union Page 2 of 3		Date originally posted: 2018-02-28Permalink: http://blogs.lse.ac.uk/brexit/2018/02/28/japanese-multinationals-may-pull-out-of-the-uk-in-case-of-a-hard-brexit/Blog homepage: http://blogs.lse.ac.uk/brexit/Paola	Conconi	is	Professor	of	Economics	at	the	Université	libre	de	Bruxelles	(ULB)	and	Visiting	Professor	at	theLondon	School	of	Economics.	She	is	the	Director	of	the	CEPR	Research	Network	on	Global	Value	Chains,	Tradeand	Development.LSE Brexit: Many multinationals may pull out of the UK if it leaves the Customs Union Page 3 of 3		Date originally posted: 2018-02-28Permalink: http://blogs.lse.ac.uk/brexit/2018/02/28/japanese-multinationals-may-pull-out-of-the-uk-in-case-of-a-hard-brexit/Blog homepage: http://blogs.lse.ac.uk/brexit/

Many multinationals may pull out of the UK if it leaves the Customs Union

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Many multinationals may pull out of the UK if it leaves the Customs Union

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