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The Society of Motor Manufacturers and Traders (SMMT) has called on the Government to secure an interim trading agreement with the European Union as Brexit talks begin this week.
The SMMT said maintaining single market membership until a final agreement with the EU is reached and implemented is needed to avoid businesses facing a 'cliff edge'.
It warned that unless this happens, businesses could be forced to trade under harsher World Trade Organisation rules until a new agreement is reached.
Leading up to the Brexit vote last June, the SMMT lobbied for the country to remain in the European Union, saying that the EU is by far and away and UK's largest automotive export market, warning that the country's economy could suffer as a result of a vote to leave the EU. But in the wake of the referendum result, Mike Hawes, SMMT chief executive, said: "We accept that we are leaving the European Union and we share the desire for that departure to be a success. But our biggest fear is that, in two years' time, we fall off a cliff edge - no deal, outside the single market and customs union and trading on inferior WTO terms. This would undermine our competitiveness and our ability to attract the investment that is critical to future growth."
Hawes added: "That's why we have to be honest with ourselves. If the UK cannot secure - and implement - a bespoke and comprehensive new relationship with the EU in two years' time, we need a back-up plan. Having looked at all the alternatives, we need the Government to seek an interim arrangement whereby we stay within the single market and customs union until that new relationship is implemented."
James Broadhead, CEO of Close Brothers Motor Finance added: "The automotive industry is unquestionably one of the leading lights of the British economy, with turnover in 2016 totalling a record £71.6 billion. But despite having been an undeniable growth industry in recent years - with seemingly endless records set for car registration numbers - it's difficult to dispute that we are entering into uncertain times for our industry, especially now Brexit discussions are under way."
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