How the political economy of Brexit affects manufacturers and traders

More than half a year into Brexit and the implications are still being fully worked through. The UK’s decision to leave the EU has important trade consequences for businesses, as well as larger macroeconomic effects. As scholars try to anticipate macroeconomic effects, businesses need to implement robust trade solutions to manage uncertainty.

Let’s consider how complex economic changes can affect businesses directly and have important political economic consequences. 

Revisiting the Rules of Origin

We’ve previously discussed the benefits and limitations of the UK-EU Brexit trade deal, formally known as the Trade and Cooperation Agreement (TCA).

One of the more significant provisions allows for tariff-free trade if Rules of Origin criteria are met. As we’ve noted, not all UK businesses will be able to meet RoO rules, and will therefore not be able take advantage of tariff-free export to the EU. 

Most obviously, businesses that import goods into the UK for resale to customers in EU states now have to pay customs duties on those goods. For some companies, the additional cost makes trade unfeasibly expensive. 

By contrast, manufacturers that produce goods made from locally sourced raw materials can trade between the UK and EU and claim preferential terms of trade, thereby avoiding paying tariffs. 

Manufacturing, tariffs and the green revolution 

However, the TCA is complex and meeting RoO is rarely straightforward.

In a recent article in LSE European Politics and Policy, the authors sketch out how RoO can have serious consequences for the UK’s green economy initiatives.

In line with the UK’s ambitious net-zero carbon goals, government has announced that the sale of new petrol and diesel cars will be banned from 2030.

However, as the authors point out, in terms of the TCA, from 2027, 55% of the final value of a manufactured vehicle needs to be made from originating components (components manufactured in the UK or EU) in order to meet RoO criteria. 

That raises a potential problem for UK manufacturers that want to take advantage of the new green economy by producing electric vehicles. As the authors indicate, the batteries currently used in electric vehicles are currently mainly produced in Asia, and can comprise as much as 50% of the value of an EV. 

And that means that UK exporters may be at a competitive disadvantage if they wish to sell their goods to customers in the EU. By contrast, a manufacturer could produce an EV in Germany, comprised of multiple components imported from outside the EU or UK, and sell it to, for instance, customers in Italy, without paying any additional tariff.

Minimise the aftershock of Brexit  

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