The Impact of Brexit on foreign investments in the UK car industry and the probability of damage claims

Brexit is a precedent of which the consequences are not yet entirely clear.

It is the first time in history that a Member State leaves the EU, and therefore also the largest Free Trade network in the world. It is certain that this will have an impact on the investments made in the British car industry. Which regulations will apply? Which markets will still be available, and at what rate will this be? How are supply chains disrupted? These are all crucial questions whose answers will determine the price of vehicles produced in the UK. The scope of that impact, however, strongly depends on which type of Brexit will be chosen. Whether it will be a no-deal Brexit or a Brexit with withdrawal agreement and additional prospect of an agreement on the future relationship, should be officially known by the current Brexit deadline on the 31st of January 2020.

The British car industry in figures.

The UK automotive industry is a central element of its economy and industrial policy, and created some £ 14 billion in added value in 2016. In the same year, the sector accounted for a direct employment of 159,000 people and another 238,000 in the further supply chain. Investments amounted to £ 3.5 billion, or 1.1 percent of total business investment in the UK. The sector accounted for 3.4 billion pounds in investment in research and development. The sector is also very export intensive and accounts for £ 40.3 billion, of which £ 18.3 billion comes from exports to the EU. The previous figures relate to 2016. All global vehicle manufacturers with factories in the UK are in foreign hands. The EU is by far the largest market for their production plants. The crown jewel of the British car industry, Jaguar Land Rover is currently in the hands of the Indian Tata Motors (Tata), but Japanese investors have also invested several billions in assembly plants in the UK over the years. That the interests at stake are large, is an understatement.

Consequences of EU membership for the British car industry.

As long as the UK is an EU member state, it will be bound by EU regulations for motor vehicles. As a member of the internal market and the customs union, motor vehicles and parts of motor vehicles benefit from the free movement of goods. As a result, these goods are protected against the levying of customs duties or formalities, or import and export quotas from other Member States. This legal framework also prevents non-tariff barriers that can indirectly limit import and export. This could be due to the fact that different product standards are applied to goods from another Member State. This problem has been solved because there is a common set of product standards within the EU that are supported by voluntary standards. The principle of mutual recognition applies to goods that fall under these common standards. As a result, cars lawfully manufactured and marketed in one Member State cannot be subject to additional product requirements in another Member State. Cars imported from another Member State must be treated in the same way as cars from the receiving Member State.

Such regulatory standards play a crucial role in determining the design and production costs of vehicles. The harmonized regulations of the United Nations Economic Commission for Europe (UN-ECE) mainly relate to safety and help to minimize part of these costs. In addition, the UK implements EU legislation on harmonized vehicle standards, which applies to all road vehicle productions. All new vehicles and trailers sold in the EU must be approved by an EU approval authority before they can be registered. This process ensures that vehicles, regardless of their production location, comply with the environmental, safety and protection rules arising from both UN-ECE and EU legislation. In the UK, the approval authority is to date still the “Vehicle Certification Agency” (VCA), an executive agent of the Department of Transport. The UK has been a member of the UN-ECE 1958 agreement as an individual member since 1963 and as a member of the EU after its accession in 1998. The UK will therefore remain a member after the Brexit. To sell a vehicle in the EU, the vehicle must be checked by an approval authority. This authority will check whether the vehicle meets up to 60 different technical standards. After the Brexit, the VCA will no longer be allowed to do this and vehicles from the UK must be checked by an EU approval authority upon their arrival in the EU, with all the delays that this entails.

Consequences of No-Deal Brexit for the automotive industry.

In case of no-deal Brexit, no transitional regime will apply and EU law will immediately cease to have effect on the UK after 31 January 2020. This in turn means that:

  • the UK becomes a third country and EU law ceases to have an effect on the UK and in the UK;
  • the EU will be obliged to apply its regulation and rates of 10% at the borders with the UK as it does to third states, including customs controls, sanitary and phytosanitary standards and verification of compliance with EU standards. These checks will result in serious delays for road transport and ports. The estimated cost of these non-tariff barriers adds about 5% to the price of a good;
  • the UK becomes a third state whose relations with the EU are governed by general public international law, including the rules of the WTO. In particular, for heavily regulated sectors, this means a significant decline compared to current market integration.

Professor Adam Lazowski, of the Westminster Law School at the University of Westminster, clearly states that the no-deal scenario creates a legal vacuum with the largest free trade bloc in the world, and also the UK’s most important trading partner. As a result, the UK will be losing the preferential trade agreements that it enjoys as a result of its EU membership. The UK will therefore fall back on the WTO regime. However, the EU has exercised powers and rights for many years on behalf of EU Member States. This was also the case for the WTO schedules. Thus, questions arise as to whether, and if so, to what extent, the UK will have to negotiate the terms of its future WTO membership outside the EU. In addition, foreign investors can rely on BITs between their state and the UK. The UK has ninety-three BITs that are still in force.

What a no deal will mean for the goods sector and, by extension, for the car industry, is made very concrete by John Foster of the CBI, the most prominent British business association: “The UK would face tariffs on 90% of our EU goods exports by value.” The CBI estimated that trading on WTO most-favoured nation terms would equate to “an average tariff of 4%, which is about £4.5 billion to £6 billion-worth of increased costs per year on our exports”. Although an average rate of 4% is considered by some to be relatively low, it must be said that this is significantly different for some sectors. In the automotive sector, these rates are at 10%.

The sum of both tariff and non-tariff barriers after Brexit will increase the price of vehicles produced in the UK destined for the European market by at least 15%.

Investment protection for foreign investors in BITs

If an investor in the British economy is a national of a state that has a working BIT with the UK, it can rely on it. Investment protection in BITs is based, among other things, on the “fair and equitable treatment” principle.

This is the fastest exceedable investment protection standard and consists of: 1) the obligation to respect the legitimate expectations that investors might have at the time of the investments they made; 2) the obligation to at all time provide a stable and predictable regulatory framework for the investments and; 3) the obligation of total transparency with regard to foreign investment in the UK.

Foreign investors in the UK car industry may argue that the obligation to “Fair and Equitable Treatment” relative to their investments has been violated in the case of no-deal Brexit. It is perfectly conceivable that these foreign investors had the legitimate expectation that the UK would remain a member of the EU customs union and that it would continue to enjoy tariff-free access to the internal market. And that it could also rely on the supply chains present in the Union, with a low administrative cost and short waiting times for deliveries. They could also expect it to attract the necessary workforce from across the EU to fill vacancies in assembly as well as in research and development, without the administrative burdens that have been eliminated by the free movement of people.

Furthermore, the UK may have been chosen as the place of investment because of the legitimate expectation that the UK is a stable and predictable legal order, where investments can be made without many risks. A developed legal order like that of the UK must be kept to the highest standard in this area. The regulatory framework that applies to the investments made is completely compromised in the event of a no-deal. There is still no real clarity about this at the moment. A breach of the transparency obligation is therefore likely. Considering all of these elements as a whole, it is likely that FET of investments will be substantially breached and as a consequence, foreign investors in the UK car industry will be able to bring a successful damage claim against the UK.

The UK Government needs to mitigate these effects and make sure that the most unreasonable, disproportionate and most far reaching option to leave the EU is not chosen. An orderly Brexit with an agreement is potentially sufficient to protect the UK from damage claims based on FET.

Although this will depend on the speed and conditions by which an FTA is concluded now the ‘backstop’ is eliminated from the exit-agreement. If the UK fails to do so and no-deal Brexit becomes reality it will be vulnerable to a plethora of damage claims from foreign investors with a high probability of success.


The consequences of a no-deal Brexit for investments made by foreign investors in the UK car industry will be harmful for sure, and probably unreasonable. The combination of both tariff and non-tariff barriers confronting car exports from the UK as well as the disruption of supply chains will form a solid ground for foreign investors to launch damage claims against the UK. They can do this based on BITs their country of origin has concluded with the UK. In case of no-deal Brexit, the Fair and Equitable Treatment’ standard in those treaties will likely be breached. The UK could avoid these claims by concluding a withdrawal agreement with a transitional regime for the sale of goods. Since Brexit is not yet known, it might be wise for foreign investors to check which investment protection instruments are available to them.

For more information on the subject, feel free to contact me at

Leander Docx

This is a summary of the master thesis: Investment Protection After Brexit: ‘Fair and Equitable Treatment’ as a basis for possible damage claims for foreign investors in the British car industry, by Leander Docx under the supervision of professor Tim Corthaut, VUB 2018-2019.