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Why Liam Fox's trade deals would be useless to British carmakers

Selling cars abroad could be a tricky prospect. Credit: PA

When Theresa May arrives in Davos for the World Economic Forum on Wednesday afternoon, she’ll find that all the talk among those she denigrated as citizens of nowhere (the super-rich of banking and tech) is how Brexit has transformed the global economy - which is now expanding at rates we haven't experienced since the 2008 Crash.

I am being facetious. Forgive me.

The point is that almost the entire globe is booming, except for the United Kingdom.

The rate of global annual growth has been revised up since October by 0.2 percentage points to a smidgen less than 4% in this year and next, in the International Monetary Fund's latest set of forecasts - which simultaneously projects UK growth unchanged at 1.5% this year and down 0.1 of a percentage point to 1.5% next year.

Liam Fox might not be able to help carmakers. Credit: PA

The story is that the UK is not sharing in the global boom: there is a serious revival in global trading volumes under way, which is helping our exporters of course, but the drag from other parts of our economy means we are just treading water here.

Of course it is far better to tread water than sink. So as luck would have it, this is perhaps the most propitious moment to quit the EU - if, as I have always argued, the economic impact of our choice to worsen our terms of trade with the EU makes us a bit poorer than we would otherwise have been for a few years at least.

But a global economic bounce does not stop our manufacturers and exporters worrying that what they see as the wrong kind of Brexit would make them - and by extension us - poorer.

World leaders are in Davos. Credit: PA

Anxiety is perhaps most acute among motor carmakers - who collectively, with their suppliers, probably provide only around 1% of UK economic output, although it's a symbolically important 1%.

They've pointed out to me something which they think the PM and her trade secretary Liam Fox ought to know, but probably don't - that the third-party trade deals, with the likes of China, America, Korea and so on, which leaving the EU and its customs union would enable the UK to negotiate, would probably be of no value to them (and Fox is also in Davos, promoting the merits of such deals).

How so?

Well the integration of UK car assemblers with suppliers and manufacturers all over the world, but especially in the rest of the EU, brings the consequence that the UK-made content of a "British" vehicle is typically between 20% and 25%.

British carmakers could move abroad. Credit: PA

It is the corollary of cross-border supply-chains that work especially well in an EU customs union whose salient feature is that lorries laden with stuff can whizz through borders unchecked and unimpeded.

But in most trade deals, there are so-called rules of origin stipulating that zero tariffs only apply to goods where the domestic-made content is around 55% to 60% (and much higher if Donald Trump gets his way).

So even if Fox were to forge a UK free-trade deal with Korea or China or the US for example, that would not be of benefit to British based carmakers, whose UK cars are only 25% British by virtue of where their bits are actually made.

Those cars would probably be hit with painful, profit-squeezing 10% tariffs when sold abroad.

This means UK carmakers would face a choice, if Brexit were to see the UK leaving the customs union and therefore also see Fox negotiating those supposedly precious third-party trade deals.

Carmakers provide 1% of the UK economy. Credit: PA

The likes of Nissan, Toyota and Jaguar Land Rover could try to procure more of their parts - wheels, powertrains and so on - from UK-based makers.

Or they could move their manufacturing across the Channel and back in to the EU, and thus take advantage of the EU's trade deals with Korea, Canada and the rest - under which the whole of the EU, not a single country, is treated as the place of origin under those rules of origin.

Given that the UK simply does not have enough makers of powertrains, wheels and other bits of cars, do you think the manufacturers would stick around here till that capacity arrives - or do you think they would shift some or all of their capacity and jobs out of the UK?

There might be a patriotic case for staying in the UK and facilitating - over many years - a process of "on-shoring" manufacturing to the UK. But none of the owners of our mass-market car makers are British. So why on earth should they be British patriots?