What can the Nissan reinvestment in Sunderland tell us about Brexit?

Living through the rhetoric of Brexit in the UK feels a bit like being a mouse on a wheel. The statement "Brexit means Brexit", often delivered with steely tones, sets us off up the wheel sprinting towards an unknown destination, only for the retort "but what does Brexit mean anyway?" to send us back to the starting point. So who is right?

Well, everyone of course – with a question so ill-defined there cannot be an alternative answer. It is worth stating the obvious: the UK's relationship to the EU has developed over decades, and decoupling the UK will have highly unpredictable outcomes. But while relations with Europe are important to all those in the UK, this does not imply that all will be equally affected, or even if they were, all would be treated equally.

A significant clue appeared when one of the first visitors to the newly appointed Prime-minister, Teresa May, was Carlos Ghosn, the CEO of Nissan, who left the PM's office with a beaming smile. This meeting followed on from a stark report released by the Japanese foreign ministry that Japanese FDI in the UK was endangered by Brexit. A message that was delivered in person to the British nation by the Japanese ambassador to the UK, Koji Tsuruoka, when he was interviewed on Radio 4's Today Programme  on the 5th September. It cannot be seen as a shock that a few weeks later Nissan announced their continued investment.

So what is going on? Is it a case of those who make the most noise are going to be heard? Is it something about cars? Is it to do with Nissan's plant being located in a part of the UK where wages are lower than the UK average and jobs relatively harder to come by?

The answer to all these questions is a categorical 'yes'. It is certainly the case that as cars are a status symbol, with benefits to many people, they are also a status symbol with benefits to nations. The consequences for the UK economy selectively supporting industries could be substantial. In the wake of Nissan's decision to continue investing in the UK, there has been an outcry that selective support for industries and supporting a "financial Brexit" would be disastrous. It may well be if deals needed to be done firm by firm, but this may not be the case. What appears more likely is that there will be winners and there will be losers. And the government is starting to indicate who those winners will be – the car industry. But recent history also suggests that other sectors such finance, and "strategic industries" such as aerospace, and high-tech pharma will likely be on the winners list.

The reason why the Nissan deal is significant is that it finally provides analysts with something concrete to actually discuss − in this case a Brexit deal that shows what the government is willing to do to neutralize the impact on the car industry. More specifically we can look at an instance of how a major foreign investor is treated in an industry where there are a number of major oversea based firms with subsidiaries in the UK, including from Japan (Honda, Toyota), United States (Ford, Vauxhall (GM)), India (Jaguar-Land Rover (Tata)), Germany (Rolls Royce and the Mini, (BMW)). As the car industry indicates, we are all foreigners now, in ownership terms at least. What is also clear is that within this single industry there are quite a number of large multinational players and many have plants in Europe already and are not likely be interested in being treated differently to Nissan.

The Japanese government report made them the first to make themselves heard – with Nissan then taking the lead for Japanese manufacturers, and potentially for the sector as a whole. Indeed, by letting it be known in loud and public terms that they had decisions to make as to where to build their cars, that they had options, and that they wanted a clarity that was absent in the public discourse, Nissan pressed the government into a response.

It is worth asking the question why were the Japanese keen to locate their production in the UK to get clues for what the future may hold. The reason for Japanese firms locating in the UK was based upon the thorny issue of access to the European market. It is easy to forget that the Japanese presence in the UK has always heavily dependent on Britain’s place in the EU. Europe takes the bulk of Japanese exports from the UK. The problem that Japanese firms faced back in 1999, was that they were not able to sell in a number of large European countries because countries limited the amount that the Japanese could sell from outside the EU through bilaterally negotiated Voluntary Export Restraints. The solution was to locate inside the EU and sell directly to constrained European markets where pent-up demand following restrictions on Japanese products ensured sales to continental European consumers. The countries which were protecting their markets from Japanese cars, most notably the French, having refused to accept Nissan products manufactured in the UK, were forced by the European Commission to accept these imports as 'European'. It was also the case that the Japanese got a good deal in the UK. Nissan, for example, got subsidized land and other sweeteners, which helped ensure that they were not "disadvantaged". The use of such sweeteners to attract MNEs were something that the EU regulations have sought to control, but if Britain moves outside the EU, the competition could be re-started. 

Are large multinational manufacturers going to pack up and shift to continental Europe overnight? No, they are not. Who wants to be the first major firm that abandons the UK exacerbating the negative economic consequences of Brexit?

There was no need as far as Nissan is concerned to do so as the company held a lot of cards. The loss of a symbolically important player from outside Europe would undermine the relevance of the British government's claim that it is "open for business" with the rest of the world − what is the point being open for business from across the globe if those businesses are not interested in doing business with you. That Nissan's plant is located in an area argued to be of relative economic deprivation is not unimportant economically, but is certainly politically important for the government. It is difficult to say that Brexit is a positive force when faced with well-known and symbolically loaded brands like Nissan redistributing production and investment to alternative plants outside the UK.

From Nissan's perspective there is no need to pull back if they are compensated for the adverse effects of Brexit, indeed the plunge in the exchange rates can then come as a welcome bonus. This is not exactly a matter of government leaving things to the free market capitalism but there is a show of pragmatism here.

But who is going to be compensating the car manufacturers? It will be the UK tax payer to a degree, however, that does not mean that offering subsidies to car firms is a poor policy. Plants provide jobs, profits can provide tax benefits, and it may be that consumers benefit from having efficient manufacturers to the extent that any savings are translated into prices in the UK car market. 

In the past the UK benefited by being a EU club member in enabling access to the EU market to non EU manufacturers even where EU members, such as France, pushed back against this. European institutions and governments may not necessarily feel that supporting parts of the UK economy via some form of customs union is something they want to engage with at any price, or may wish to extract significant concessions that will not necessarily benefit other British industries.

Professor James Walker
Head of International Business & Strategy


 

This piece is based on: 

Walker, J. (2015) Voluntary export restraints between Britain and Japan: the case of the UK car market (1971–2002). Business History. ISSN 1743-7938 doi: 10.1080/00076791.2015.1038519

Walker, J. T. (2015) Strategic trade policy, competition, and welfare: the case of voluntary export restraints between Britain and Japan (1971–2002). Oxford Economic Papers, 67 (3). pp. 806-825. ISSN 1464-3812 doi: 10.1093/oep/gpv026. Updated to incorporate estimates of employment effects.

Work by the same author and his colleague, Peter Scott, takes the long view to predict future government policy related to the financial services industry: The Impact of 'Stop-Go' Demand Management Policy on Britain's Consumer Durables Industries, 1952–1965.

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