ABSTRACT

This paper analyses the various models for the

future trade relations between the EU and the
UK, post-Brexit. to reveal their implications and
identify suitable response by Toyota Motors UK.

BREXIT AND Your Name

[Course title]

TOYOTA MOTORS
UK
An Exploration and Analysis of the impact of Brexit
Table of Contents
Introduction ..................................................................................................................... 2
Figure 1: UK FDI net inflows with/without EU Membership ....................................... 2
Table 1: UK Export and Imports 2015 ....................................................................... 3
Table 2: Comparison of UK and the EU’s Trade ....................................................... 3
Background ..................................................................................................................... 4
Figure 2: Average Foreign Imports Tariffs (%) .......................................................... 4
Figure 3: Exports/GDP (%) ...................................................................................... 5
Figure 4: Paradigms and Models .............................................................................. 6
Market Integration and Trade Liberalization .................................................................... 6
Methodology .................................................................................................................... 8
Table 3: Possible alternatives to EU membership and their consequences ............ 9
Table 4: CU alternatives to EU membership and its consequences ...................... 10
Analysis of possible outcomes of Brexit ........................................................................ 11
Figure 5: Export Destination of UK Manufactured Cars .......................................... 11
Table 5: UK Automotive Sector Aid (2018) ............................................................. 13
Strategies for Toyota Post-Brexit .................................................................................. 14
Conclusion .................................................................................................................... 15
References .................................................................................................................... 16

Word Count: 2447

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Introduction

The results of the United Kingdom’s (UK) referendum in favour of a Brexit have left the
EU weakened, and the UK facing higher uncertainties, lower investor and consumer
confidence, including a significant fall in the British pound. However, supporters of Brexit
disagree with such dire warnings of Brexit (Busch and Matthes, 2018).

The uncertainties surrounding how a country separates itself from a neighbouring

economic bloc, and prosper, has been a difficult question for economists (Bruno et al.,
2018), especially due to pending result of negotiations, that could result in varied
scenarios, each with vast consequences.

Figure 1: UK FDI net inflows with/without EU Membership

Source: Bruno et al.,2018.

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The paper acknowledges the conclusion of Brexit negotiations would fall under two
paradigms, which are market integration and trade liberalization. These paradigms are
explored further to reveal how they relate to possible scenarios of future trade relations
between the EU and the UK Post Brexit, which is evidently very important to both parties,
with huge political and economic significance (See Figure 1, Tables 1 and 2), and its
impacts on Toyota Motors, and the UK Automobile industry.

In addition, this paper would examine how Brexit benefits or threatens Toyota’s
operations, and how they might strategize to benefit from opportunities and avoid
potential threats.

Table 1: UK Export and Imports 2015

Exports Imports

£billions Share £billions Share

EU Countries 222 44% 291 53%
Rest of the 288 56% 258 47%
World
Total 510 100% 549 100%
Source: Kent, 2016.

Table 2: Comparison of UK and the EU’s Trade

£billion Share of total

exports
EU countries’ exports to the UK 291 6-7%
(2015)
UK exports to EU countries 222 44%
(2016)
Source: Kent, 2016.
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Background

Early researches regarding trade liberalization and market integration has almost blur the
difference between the two paradigms. Trade liberalization is the removal or reduction of
restrictions or barriers on the free exchange of goods between nations (Leibovici and
Crews, 2018), which results in more trade and increased GDP of countries involved (See
Figure 2 and 3).

While, Market integration is an indicator that explains how much different markets are
related to each other. At times, when market integration exists, the events occurring within
two or more markets are exerting effects that also prompt similar changes or shifts in
other markets that focus on related goods (Shodhganga, 2018).

Figure 2: Average Foreign Imports Tariffs (%)

Source: Leibovici and Crews, 2018.

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Figure 3: Exports/GDP (%)

Source: Leibovici and Crews, 2018.

The lingering Brexit negotiations have exposed the current gap between two paradigms
of international economic cooperation. Internally, and with 28 neighbouring countries
(European Union, 2018) EU has developed a sophisticated method of Market integration,
while externally, they have trade liberations with some countries outside the EU, like
Turkey.

Within the Brexit Negotiations, UK government attempts to argue for a bespoke form of
cooperation/integration with the EU, identifying possible relationship scenarios derived
from existing agreements between the EU and third countries. Norway (European
Economic Area, EEA), Turkey (customs union, CU), Canada (free-trade agreement, FTA
and CETA) and the World Trade Organisation (WTO) (Eeckhout, 2018).

All these models represent different level of integration, with Trade liberalisation and
market integration at opposite polar of the spectrum. This distinction divides the different
models (See figure 4). Consequently, this paper would attempt to explore the differences
between these two paradigms, highlighting their motives and causes, before looking at
the various models.

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Figure 4: Paradigms and Models

Market
• Norway, Switzerland and Ukraine Models
integration

Trade
• Turkey, Canada and the WTO Models
liberalization

Source: Eeckhout, 2018.

Market Integration and Trade Liberalization

There are a few examples of market integration paradigm in other parts of the world such
as Western Europe (European Union), South America (Mercosur), North America
(NAFTA), and the Asia-Pacific region (APEC and ASEAN) where members benefit from
preferential treatment and economic blocs to outsiders. They have been established
based on unique purposes they serve, in negotiations over a long period of time
(Lissovolik, 2017).
However, they would not exist without the principle of mutual recognition, as employed
by European Court of Justice (ECJ) and EU legislation, whereby, legislations bind
members, harmonize their domestic laws, ensuring adequate convergence of basic
freedoms and facets founded by treaties (Svensson, 2008). These issues result in
conditions and consequences for Brexit that needs to be established and explored.

Firstly, while, Britain clamour for Brexit, mainly to restrict immigration into the UK (ITN,
2016) yet want to be included in some type of market integration (Grant, 2018). Basic EU
integration policy requires members to uphold, free movement of both products (goods
and services) and factors of production (capital and labour), which goes against the
founding principles of why the Brits voted for Brexit.

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Secondly, market integration is a form of contract between the EU member States,
consequently, this contract requires strong and broad-based enforcement, hence, EU’s
Legal systems has jurisdiction over member states and overrides domestic laws. While
the ECJ assist in interpreting EU law mainly through the preliminary ruling’s procedure,
which ensures that the domestic application of EU law is safeguarded and consistent
among EU members.

However, integration of EEA parties (Ukraine and Switzerland) do not provide for their full
participation in the ECJ and EU's legal system, nonetheless, systems were established
to monitor compliance (including the incorporation of EU legislation in domestic law) and
to ensure strong enforcement where applicable (Lissovolik, 2017). For Brexit supporters,
they advocate for complete withdrawal from any Jurisdiction of the EU and ECJ (Grant,
2018), that there is no need for a strong institutional system governing all participants,
however, the core principle of Market integration is the convergence of economic
regulations (Neuwirth, 2015).

Market integration requires that there is a level playing field for all members, hence, state
competition policies should not distort competition and re-create barriers to trade removed
by internal market policies (Eeckhout, 2018). Some member states that have financial
power over other members can provide more financial backing to private companies
through state aid, which gives these companies an edge over other companies in other
states, in some cases, the state can reduce standards so that little compliance is required,
which makes the country more attractive to investors because of the business friendly
environment, as a result, EU regulatory agencies is also considered a requirement of the
market integration paradigm (Eeckhout, 2018).

In-the-other-hand, trade liberalization paradigm focuses on the liberalization of trade in

goods, such goods are distinguished by either tariff from non-tariff barriers (NTBs),
wherein, trade with tariff barriers are governed by a preferential trade agreement (PTA)
which creates either an FTA or a CU. Unlike CU, FTA gives members autonomy over
their trade policies towards other non-member countries, therefore, FTA’s rules that
goods circulated must originate from members, while CU allows free movement of goods
between members without establishing source.

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The CU agreement between EU and Turkey meant that Turkey cannot partake in FTA’s
negotiations with the EU, causes turkey to lose tariff revenue due from EU’s FTAs. While,
Market integration benefits from ECJ and EU governing legislations, Trade liberalisation
suffers a NTBs of lacking institutional legislation to enforce agreed terms of Trade
negotiations.

Methodology

This paper utilizes an analytic approach as established by Castro, et al. (2010), to explore
effects of Brexit on Toyota by understanding different issues and their consequences in
other to conclude on strategies that might help mitigate negative impacts, and maximise
opportunities, both individually or collectively.

A heuristic approach would be used to explore and observe the Brexit phenomenon and
the impacts of possible outcomes of the Brexit negotiations, with low collection and control
of data research context, therefore, using facts and information already available, and
analyse these to make a critical evaluation (Sarkar, 2007).

Sources of information includes:

 Information from economic experts and EU officials.

 Existing documents describing the economic indicators of both UK and EU.
 Scientific and professional papers about Brexit.
 Information about strategies used by other countries.

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Table 3: Possible alternatives to EU membership and their consequences

Norway Switzerland Turkey WTO

(EEA)
Disadvantages of a Brexit for
UK
No tariffs / free
movement of No Largely Largely Yes
Loss of goods
access Free movement of No Largely Yes Yes
to the persons
single Free movement of No Yes Yes Yes
market capital
Free movement of No Partially Yes Yes
services
Renegotiation of FTAs Yes Yes Yes Yes
Loss of decision-making Very Yes Yes Yes
rights in the EU largely
Advantages of a Brexit for UK

Avoidance of EU Possible Possible No Possible

protectionism
Avoidance of compliance with Very Limited Partially Yes
EU-regulations limited
Avoidance of financial Very Limited Yes Yes
contributions to the EU limited
Source: Busch and Matthes, 2016.

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Table 4: CU alternatives to EU membership and its consequences

Turkey
Disadvantages of a Brexit for
UK
No tariffs / free
Largely
movement of goods
Loss of
Free movement of Yes
access
persons
to the
Free movement of Yes
single
capital
market
Free movement of Yes
services
Renegotiation of FTAs Yes
Loss of decision-making rights Yes
in the EU
Advantages of a Brexit for UK

Avoidance of EU protectionism No
Avoidance of compliance with Partially
EU-regulations
Avoidance of financial Yes
contributions to the EU
Source: Busch and Matthes, 2016.

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Analysis of possible outcomes of Brexit

Toyota is one of the biggest automobile manufacturers in the UK, their Burnaston
produced nearly 150,000 cars last year, 90% exported to the EU (Berg, 2018),
consequently, Brexit would adversely affect Toyota, with little to no access to the single
market, therefore, exposing them to high cost of operations (ITO M. 2018), eliminating
economies-of-scale and comparative advantages. Consequently, Toyota have indicated
they would close their plants in the UK, should unfavourable terms arise from the Brexit
negotiations (Berg, 2018).

Figure 5: Export Destination of UK Manufactured Cars

Source: Warner, 2018.

For Toyota to gain access to the Single market, there must be a higher level of Market
integration achieved post-Brexit. Contrary to suggestions by Brexit supporters, it would
be immensely difficult for Britain to optimally balance the advantages and disadvantages
of a Brexit. Although, evidence from previous negotiations with non-EU members proves
that UK can strike a bespoke deal in the form of a more or less comprehensive preferential

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trade agreement, nevertheless, an important trade-off cannot be evaded, the higher the
Market integration, the higher the burden of EU regulations, migration and financial
contributions which is contrary to the core reason for the Brexit, hence, it is viable to say,
a less Market Integrated conclusion to Brexit negotiations would be the outcome. Thus,
envisaging results like the EEA (Norway) and bilateral agreement (Switzerland) Models
might seem implausible for Brexit.

Brexit would allow the UK government to manage and enforce their compliance
regulations, for which the EU is marred by, making EU countries unattractive to investors
because of difficulties that compliance carries, especially since market integration
discourages manipulation of standards of compliance to maintain a level-playing-field for
all members. EU uses the ECJ and EU legislation to enforce this rule, in the contrary,
should Brexit lead to a more Trade liberal paradigm, Britain can benefit from not having
any foreign jurisdiction preside over its intentions towards standards and compliance
issues, especially since, such trade liberalisation models like Turkey, Canada and WTO,
lack institutional legislation to enforce agreed terms of Trade negotiations.

In the spectrum of Trade liberalization paradigm, Toyota would be faced with increased
tariff barriers, evidently because Brexit might result in no access to the single market.
however, unlike Market Integration where governments cannot provide the state-aid for
their local private businesses, in Trade liberalization paradigm they can, Thus,
highlighting a major benefit of Brexit for Toyota, for example, when Nissan threatened to
downsize due to tariff related costs on imports of materials and export of their finished
goods, In response, the UK government committed funding towards mitigating any cost
related adverse effects of Brexit for car manufacturers (Conn. D. 2018).

The uproar in the UK Automobile industry regarding Brexit, has led to concessions made
by the UK government (Campbell, 2018), naturally, given Toyota more bargaining power
against the UK government (Conn. D. 2018). As such, UK government gave Toyota
£21.3m grant in 2017, in response, Toyota decided to build Auris family car in the UK
(Campbell, 2018).

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UK government are not financially burdened due to Brexit, Brexit freed-up funds once
dedicated to EU (Bergin T. 2016), whereby, the UK contributes £250m every week to the
EU (Fullfact, 2018), instead, private businesses can tap into these government resources
as a form of aid, since, the UK government has indicated that they would make huge
investments in automobile industry (Conn. D. 2018).

A form of NTBs, that is a resulting threat of Brexit, is that EU practices a CU internally,

hence, products traded anywhere in the EU could be traded everywhere in the EU, without
the need to establish origin of goods, this is supported by the EU certification of all goods
traded in the EU, as they are governed by standards established by the EU. Such
requirements are required to be fulfilled by Toyota, hence, Post-Brexit, would mean that
a vehicle produced in the UK, cannot be traded anywhere in the EU.

To mitigate this challenge, Japanese government stepped in to protect Japanese owned

companies, by engaging in talks that strengthening their ties with the EU. Recently, the
Japanese government signed a comprehensive trade pact, that can potentially put the
British car industry in jeopardy (Independent Staff, 2018).

Table 5: UK Automotive Sector Aid (2018)

1 A sector deal with £32 million of joint funding to develop ‘industry-led supply chain
competiveness programme’
2 A £26.4 million government investment in low-carbon vehicle projects with Ford,
GKN and Jaguar Land Rover, which will be matched by a further £52.8 million of
industry funding
3 A £500 million government investment over ten years to 2023 to develop new low
carbon automotive technologies, matched by £500 million of industry funding
4 Government funding of £225 million from 2023 to 2026 to support research and
development in the sector, with industry matching that investment
5 Government investment of £246 million to make the UK a ‘world leader’ in design,
development and manufacture of batteries for the electrification of vehicles
6 A £250 million government investment in connected and autonomous vehicles

Source: Warner, 2018.

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Strategies for Toyota Post-Brexit

This paper acknowledges that there is no silver bullet to Toyota’s Brexit challenges, while,
most intricate details of Brexit and other agreement models are not made public,
accordingly, author is not a professional in Brexit milieu, however, based on the findings
of this research, strategies to mitigate against established threats, and maximising
opportunities, are suggested.

Firstly, its important to state that this paper concludes that a form of CU that has mildly
facets of Market integration, is the feasible conclusion to Brexit negotiations that would
offer the best deal for the UK (see table 3 and 4), since, CU allows frictionless trade and
free movement of goods between members, without establishing origin of goods, and
without subjecting UK to extensive ECJ and EU legislations, in addition to requiring open-
border policies.

Since, Brexit threatens to invalidate certificates obtained in the U.K. on vehicles destined
for the rest of the EU (ITO M. 2018), Toyota can apply for certification with any EU
member states, or Turkey, then establish an assembling plant in those countries, hence,
with the support of UK government aid, would held cushion cost of transport of their UK
produce parts, to other countries, then assemble there, and distribute to EU countries.

Manufacturing requires supply of multiple components across the world, thus, Brexit
would create more tariff and cost barriers, According to ACEA, all (European)
manufacturers rely on ‘just-in-time’ and ‘just-in-sequence’ delivery and production,
without any delays or obstacles, everyday 1,100 EU trucks transports materials for car
and engine manufacturer in the United Kingdom alone. After Brexit, any short hold-ups at
customs will cause massive logistical problems, disrupting the production process and
generating significant costs (Winton, 2018).

Accordingly, Toyota need to source for more parts from the UK than abroad, thus, could
adopt similar strategy to Nissan UK, whereby, lobbied government to fund the north-east
local enterprise partnership towards the construction of manufacturing park (IAMP) for
Nissan suppliers, located near the Nissan plant (Conn. D. 2018).

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Finally, Toyota should focus on producing cars to sell to the UK market and countries
outside the EU, since all government aids is not subject only to mitigating against direct
impacts of Brexit.

Conclusion

The paper establishes several scenarios that can develop as a result of the Brexit
negotiations, through the concept of two essential paradigms (market integration and
trade liberalization). Exploring the rational behind the choice of continued membership of
the single market, through the EEA, or that of a CU or free trade agreement which
forsakes the integration of the UK and EU markets.

This report concludes that a bespoke of CU would be the better option for the UK, and
Toyota UK. However, it is important to state that this report is limited in scope and dept,
hence, some conclusions require further investigations, while each scenario resulting
from the conclusion of the Brexit negotiation require in-depth analysis.

According to De Lyon (2018), there is growing concern that Brexit can trigger an
unprecedented level of competition between the EU and the UK, which could result in a
trade war. Such issue needs to explore because of its ramifications.

The importance of understanding the implications of Brexit is crucial to the existence of

the Automobile industry, considering that tariff and non-tariff barriers would have adverse
impacts on companies like Toyota after UK leaves the EU’s CU and single market (Parker
and Hughes, 2018).

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