OTTAWA – Automakers based in the U.K. may see tariffs levied on their exports to the European Union now that government has confirmed it will push ahead with leaving the EU following the June 23 Brexit referendum.

The duties could be imposed after the two years of mandated talks on a future relationship with the EU following the U.K.’s decision to trigger Article 50 under the Treaty on European Union, which establishes the procedure for leaving the single market.

If the U.K. refuses to allow free movement of workers from EU member countries into its economy while negotiating a future relationship with the EU, it almost certainly will be barred from the European Economic Area.

A sort of downsized EU whose members include Norway and Iceland, the EEA maintains duty-free trade with the EU in industrial goods, such as automobiles, parts and materials.

But with the new government of Prime Minister Theresa May acknowledging a key factor in Brexit’s approval was opposition to unrestricted immigration from the EU, the U.K. probably will have to forge a new bilateral trade deal with the EU that may involve additional duties being charged on U.K. exports.

Such an agreement could resemble Switzerland’s relationship with the EU. That country remains outside the EU and the EEA but has extensive free trade with the EU for industrial goods, including automobiles and parts

Immigration Caps Could Uncap Tariffs

However, even this preferential agreement might be out of reach for the U.K. Switzerland’s special EU market access is based on its allowing citizens of EU member countries to live there, but this deal could unravel; Switzerland is preparing to implement its own immigration caps by 2017, following its own referendum in 2014.

As a result, negotiations on giving Swiss exporters even better access to EU markets have been frozen and some existing Swiss EU trading rights ultimately might be lost. The same fate could face a U.K. government determined to impose EU immigration caps.

If the EU plays hardball on the immigrant-worker issue, the U.K. might have to accept the basic World Trade Organization member-state standards for trade with the EU, and duties then could be applied.

David Bailey, professor of industrial strategy at Aston University, warns of a “big uncertainty” for the sector following the U.K.’s vote to leave the EU. Without a deal he fears a return to the days when stiff tariffs were the norm. “What we don't want in two years’ time is to go back to (WTO) rules which involve 10% tariffs on car exports.”

Indeed, under WTO trading standards, 10% duties would be applied on almost all U.K. vehicle exports to the remaining EU, along with 3.7% duties on exported firefighting vehicles; 19% on chassis fitted with engines; 4.5% on bodies (including cabs); and 3% on bumpers, brakes, transmissions, axles, wheels and suspension systems.

Any new duties could be damaging to U.K. exporters who rely heavily on EU markets, figures released by the U.K.’s Society of Motor Manufacturers and Traders indicate.

The U.K. exports 57.5% of the cars it makes to the EU, according to the SMMT. Quoting figures for 2015, the industry group says Jaguar Land Rover produces 500,000 cars a year in the U.K., of which 20% are exported to EU countries; Ford makes 1.6 million engines annually and exports 57% of them to the EU. BMW makes 250,000 engines, with 56% bound for the EU.

BMW’s Mini subsidiary makes 220,000 cars in the U.K., of which 37.5% are exported to EU countries; of Honda U.K.’s 140,000 annual builds, 40% are exported to the EU; Nissan’s yearly output of 500,000 sees 76% shipped from the U.K. to the EU; Toyota’s annual U.K. production is 180,000 cars, 75% of which go to the EU; and General Motors’ Vauxhall brand sees 80% of its 120,000-unit annual output exported to EU countries.

While more than 40% of components purchased by U.K. automakers are imported from EU countries, the region is a key source of transmissions, axles, springs, valves, brakes, drums, engines, engine parts, cylinder heads, pistons, tires, shock absorbers, filters, gaskets, gears and other auto parts.

There are 2,049 businesses in the U.K. automotive supply chain, the SMMT says. The region makes 2.3 million engines a year including the 1.6 million built by Ford, whose Dagenham facility supplies diesel engines for all of Ford of Europe.

Duties May Drive Investment Decisions

Meanwhile, significant decisions are pending on where major manufacturers will locate new plants, and a Brexiting Britain may not be included in the discussions.

Nissan must decide where to produce its Qashqai model in 2017, Land Rover is mulling where to make the Range Rover Sport in 2017 and Vauxhall must choose where to build all Astra models in 2018.

But the U.K.’s role as a global production hub may help. “At this moment, it is not clear what conditions and rules will ultimately replace the U.K.’s membership (in) the EU, so we will need to carefully monitor developments in this area,” Ian Howells, senior vice president-Honda Motor Europe, tells WardsAuto.

“However, it’s important to note that Honda’s U.K. plant in Swindon, plays an important role in our global manufacturing operations. We’ve recently invested over £200 million ($262 million) into the plant, as Swindon is developed into the global manufacturing hub for the new Civic 5-door model.

“Swindon will no longer be solely manufacturing cars for the European market, but will also export to North America. As such, our U.K. plant will be less reliant on the European market and will be feeding into Honda’s global operations. Honda remains committed to its manufacturing activity in the U.K.”

SMMT CEO Mike Hawes says: “The British public has chosen a new future out of Europe. Government must now maintain economic stability and secure a deal with the EU which safeguards U.K. automotive interests.

“This includes securing tariff-free access to European and other global markets, ensuring we can recruit talent from the EU and the rest of the world and making the U.K. the most competitive place in Europe for automotive investment.”

Daimler CEO Dieter Zetsche says of the U.K.: “Geographically, the country may be an island; politically and economically, it is not. It is now even more essential that Europe does not continue to drift further apart.”

And, assuming negotiations on a Transatlantic Trade & Investment Partnership deal between the EU and U.S. succeed, U.K. vehicle output could grow 7.3%, the SMMT projected before the Brexit vote.

But TTIP probably would not apply to the U.K. if it quits the EU, and it would need to negotiate a separate trade deal with America – something President Barack Obama says would not be a priority for Washington.

– with Andrew Burnyeat in Brighton, U.K.