Even in today’s price competitive global market place there are a few industries in which the United Kingdowm can be said to punch above its weight. Automotive is one, it accounts for 10% of the UK’s trade in goods, and over 50% of UK manufactured cars go out for export.
Defense is another. The U.K. is the world’s fourth-largest arms exporter after the US, Russia and China. But maybe the crown jewel of U.K. manufacturing is the aerospace sector. It doesn’t come much more value-add than aerospace and the U.K. ranks fourth in the world behind the US, Germany and France for export values. However, France’s numbers are distorted by the fact Airbus aircraft are receive their final assembly in Toulouse. So, although 75% of the aircraft is imported as major components — fuselage, wings, tail, engines, etc. — the total value of the aircraft is reflected in France’s export earnings even though most isn’t made there.
And therein lies the problem for the U.K. post-Brexit. The wolves are gathering around the gates slavering at the prospect that the majority of the citizens’ decision to leave the E.U. means the position of U.K. aerospace manufacturers in the Airbus supply chain is up for grabs.
According to the Financial Times, Airbus will face political pressure to bring jobs back to France, Germany and Spain as a result of the U.K.’s decision to leave the single market. BAE Systems (LON:BAES) has played a leading role in the development of wing technology, designing and manufacturing virtually the entire wing for Airbus’ super jumbo jet, the A380. But there has been a constant move by Germany to get as much wing work out of the U.K. because it is one of the most lucrative parts of the supply chain. The bottom skins of the wing for the new A350 went to Spain and Germany, both keen to secure further work as new models come up for bidding.
Last year, the U.K. aerospace sector grew by 6.5% to £31 billion ($38 billion) 87% of which was exported. The industry fears a clampdown on free movement of labor and political influence over trade regulations could combine to raise the cost of business for U.K. companies in the sector.
Although aircraft and their parts are exempt from tariffs under World Trade Organization rules, the FT reports there is a fear the competitors could encourage their governments to find loopholes during exit negotiations that would create barriers or raise the cost of business for U.K. companies. For Rolls-Royce (LON:RR), the U.K.’s premier aero-engine manufacturer, the major concern is that a block on free movement of labor would inhibit the company’s ability to move workers between Europe and the U.K. at short notice as production issues demand.
About a quarter of Rolls-Royce’s workforce is based in the E.U. outside the U.K. Despite the U.K.’s reputation for engineering excellence, the country is desperately short of engineers. As a result, the manufacturing sector has been at the forefront of lobbying government for exemptions to a blanket block on immigration.
The future prosperity of U.K. manufacturing was probably not at the forefront of voters’ minds when they opted to leave the E.U., but if it is found that highly paid jobs are lost as a result of the U.K.’s exit from the single market, economic issues me yet come back to become a focal point in any post-Brexit analysis.