• Dr Gerard Lyons


Updated: Jul 21, 2020

The Nissan U-turn: here are the key factors and lessons The main news this morning is the decision of Japanese car maker Nissan to not proceed with production of its new diesel SUV X-trail at its Sunderland plant. Not only is this decision important in itself but it is also being interpreted in terms of the Brexit debate. What should we make of it? Here I outline some of the key issues. Problems in the auto industry, plus the new EU-Japan free trade deal that came into effect on 1st February are likely, in my view, to have been more important than Brexit in this decision. Although, uncertainty over Brexit, and indeed future UK policy, relative to the future policy environment in Japan will not have helped. 

1. Timing. The new Japan-EU free trade agreement has just come into effect on 1st February. The timing of this, so close to Nissan’s announcement is important. Whether Brexit impacted the timing is hard to say, but my guess (and it can be no more than that) is that the timing of the announcement may have been influenced by Brexit, aimed at intensifying the pressure on the UK Cabinet. Despite that, it is by no means clear that Brexit will have impacted the main aspects of the business decision not to proceed. 

2. The problems in the auto sector, already clear to many, especially the collapse in demand for diesel vehicles clearly played a major part. This has been made clear by Nissan, which according to the UK media, has said, “The environment for the car industry in Europe has changed dramatically.” Nissan went on to quote the changing emissions regulations (in response to the emissions scandal triggered by the German carmakers) that has led them to invest more in their future models. Also, Nissan cited the reduction in their forecasts for future demand for such vehicles like the X-trail. “For these reasons the company has decided to optimise our investments and concentrate production in Kyushu.”

3. The EU-Japan free trade agreement is likely to have played a significant part in this. The landmark Economic Partnership Agreement came into effect on 1st February 2019 ( ). As Asia House notes, this will remove 99% of the tariffs applied by the EU to Japanese goods and 97% of those applied by Japan. Even without the problems in the European auto sector this would have incentivised Nissan - and who is not to say other Japanese producers - to keen future new production in Japan. Given the five to ten year production cycle dynamics of auto manufacturers the action announced by Nissan is entirely in line with logical long-term thinking in regards to the new Japan EU trade deal. Auto tariffs will decrease to zero over the next seven years, which fits with Nissan contracting its EU manufacturing base to refocus on their far cheaper (through active government aid and probably labour costs too) Asian home market. 

4. Nissan will still produce in Sunderland as at present. While the potential new production line would have meant new jobs and investment this has to be seen alongside existing productive capacity. Nissan has already said production of the Qashqai will continue in Sunderland. It is the previously planned production of the X-Trail SUV that will not proceed. Currently Nissan makes these vehicles in St Petersburg ( ) and were going to open a new production line in the U.K. but now the cars will be finished in Japan, not the U.K., to be then exported tariff free to the EU. This car has no real domestic Japanese market, being largely an export only car. 

I have heard it said that Nissan may have found this planed investment in the UK to have been a useful foil in that EU/Japan FTA negotiation process, implying this would have been used for them to put pressure on what they were looking to achieve in that trade deal. It is hard to say whether this is the case, but who knows, it may have been so. For those who want more detail, tariff schedules on the EU-Japan deal are attached below.  The Europeans tend to assume they will be able to access the Japanese market. More likely, it will be just the high end German carmakers, as when it comes to cheaper models the Japanese are more likely to buy at home, which helps explain possibly why Germany was keen on pushing the opening up of the auto sector between the EU and Japan. 

According to economist Martin Malone’s dive into the data, Japan accounts for only 3% of NIssan’s sales and less than 20% of Nissan’s global production. Over 80% of the X-Trail are sold in China, so transport costs relatively low. Moreover, Martin points out that Sunderland accounts for a quarter of Nissan’s production if we just consider their top ten selling models. So it is still a major footprint for the company. The production of three of Nissan’s top models: Qashqai, Leaf, Juke will remain in Sunderland. Also investment on upgraded models of Qashqai and Juke will go ahead as planned.

5. The favourable backdrop for Nissan in Japan and the challenge for the UK to compete. The UK has offered a decent settlement for Nissan since the 90s. I don’t have all the specifics of this, but by all accounts it included specific tax advantages. In addition, as The Times today announces, the UK offered a £60 million package of support to Nissan in 2016, tied to its pledges linked to the Sunderland plant. That may now be in doubt. But the previous assistance handed out by the UK has apparently been in the cross currents of European Commission state aid for some years. It would have been rendered illegal in 2025 by harmonisation ratchet clauses had the UK remained in the EU and given the current PM’s Withdrawal Agreement specifically states that the EU retains control of state aid after Brexit this area of policy aid will go. 

Bear in mind, regardless of government in Japan, Nissan can be confident of a favourable and largely predictable domestic policy environment at home. In contrast, Nissan will not like the uncertainty ahead for the U.K. - including future policy post Brexit and also a possible change in UK government. While Brexit provides great opportunities for the UK, one needs to bear in mind the impact of uncertainty in the near-term; hence one of the reasons I argued two years ago for a transition period  after March 2019, and also why most people would have preferred greater clarity and sooner by the government on its future policy. 

6. All this may be a useful trigger for the UK to consider the need for future dynamism on domestic economic policy by this, or a future, UK Government. Large parts of the UK manufacturing base are very productive, but will still need future supportive domestic policy. The way to address this is to make the U.K. competitive via taxes and regulations, (and in time grow the U.K. economy so we become an even more attractive market to sell into). This necessities a pro high end manufacturing stance. Outside the EU we can woo Nissan to stay or even increase its commitment. This also applies to other non EU and even EU manufacturing. We can likely liberalise many areas if we do not sign up to the PM’s Withdrawal Agreement, including tax, regulation and rapid adoption of new technologies.

7. Staying within a Customs Union (CU) should not be knee-jerk UK reaction and also  may not do anything more for the UK than ease short-term concerns. If we were to stay in a CU we would be bound by the EU. For instance we will be at risk to the same factors that allowed Slovakia to provide aid to JLR: ( ). The generic point about aid is alluded to at the end of the second paragraph in this note (helping a disadvantaged region without impacting competition), namely that it must not divert investment away from another region in the EU which has the same, or lower, level of economic development than the region where the aided investment takes place. This is always going to favour Eastern Europe, for new investment, over the UK, although German always seems to me to avoid these issues that impact mere other mortals. 

8. A general point is that there is an asymmetric way we tend to look at jobs. Greater attention is given, always, to jobs lost, than to new ones created. Just look at the media coverage of the City over the last year, where net new employment has taken second place to jobs relocated, even if far smaller in number. This matters with the debate on free trade. If we have a free trade deal with the US, new car manufacturers might for instance come, who knows, but this may not receive as much coverage as another particular firm that is already here going. So just as the media finds it easier to relate to real life stories of people who have been impacted by job losses, as opposed to those who may be about to get a job, there is tendency to overstate what can happen in any one particular firm. And when we are going through change, it is not possible to retain every job, or role, even though in net terms, if we take the right policy approach and direction, we should create new ones. And this links into the final point about free trade.

9. In free trade deals there are winners and losers. But losers attract attention (this is similar to what happens when it comes to tax changes; for instance, you rarely hear the winners celebrate, but the losers are usually vocal). The Economists for Free Trade have made the strong and powerful case for free trade. In my view, and a point Liam Halligan and I made in our book ‘Clean Brexit’, is to eradicate tariffs where we have no domestic production (tariffs are a tax on imports and hit consumers) but where we do have domestic producers, then make a policy decision as to whether to cut (and benefit consumers) or to keep tariffs and use as bargaining chips in future trade negotiations.  Appendix:

Here is a link to the Nissan press release:

Here is some additional background on that EU-Japan deal:

In this ACEA takes note that the FTA includes a seven-year tariff phase out for all automobiles as well as an Automotive Annex, designed to ensure continued regulatory convergence into the future as well as to provide certain protections against sudden and substantial increases of imports, or the imposition of non-tariff measures by Japan. Non-tariff barriers – The EU-Japan negotiations addressed many non-tariff measures that had constituted a concern for EU companies, as some Japanese technical requirements and certification procedures often make it difficult to export safe European products to Japan. The agreement will make it easier for EU companies to access the highly regulated Japanese market. Examples of such barriers addressed include. 

Motor vehicles – the agreement ensures that both Japan and the EU will fully align themselves to the same international standards on product safety and the protection of the environment, meaning that European cars will be subject to the same requirements in the EU and Japan, and will not need to be tested and certified again when exported to Japan. With Japan now committing itself to international car standards, EU exports of cars to Japan will become significantly simpler. This also paves the way for even stronger cooperation between the EU and Japan in international standard setting fora. It includes an accelerated dispute settlement between the two sides specifically for motor vehicles, similar to the one agreed under the EU-South Korea trade agreement. It also includes a safeguard and a clause allowing the EU to reintroduce tariffs in the event that Japan would (re)introduce non-tariff barriers to EU exports of vehicles. The agreement will also mean that hydrogen-fuelled cars that approved in the EU can be exported to Japan without further alterations.”

The tariff schedules for cars can be found here on pages 79-98: