Analysing UK-EU trade relations in the context of Brexit

There has been an idea doing the rounds in the UK (which is now on its last legs) that German industry will ensure, via Chancellor Angela Merkel’s clout in EU decision making, favourable Brexit conditions for the UK. But this argument doesn’t hold water partly because it is not unclear what these conditions would entail and partly because German industry is really not pre-occupied with the fate of the UK.

In November last year the Cologne Institute for Economic Research, a German economic think tank with close links to business and industry associations, surveyed around 2,900 small, medium and large companies in Germany about the expected impact of the upcoming Brexit on German exports, investment, employment, human resources planning and production processes. The results: more than 90 per cent of the companies asked do not foresee any serious impact from Brexit on these business activities.

Concerns obviously vary depending on a company’s exposure to trade with the UK. Thus, the plight of some larger German companies with complex networks of production and supply links with the UK has received some attention. But the bulk of German industry, in particular SMEs, are rather relaxed about Brexit. Some even expect benefits for their own business activities due to diversionary effects, i.e. being able to pick up some business by replacing British suppliers.

British industry is more dependent on supplies from Germany and Europe than the other way round.

Consequences of a ‘No deal’ Brexit scenario

Now 30^th March 2019 is a key date. It is the date by when the UK is scheduled to leave the European Union. If there is no agreement by then, the UK will become a “third country” and will fall out of the customs’ union and the internal market. The effect of the “third country” label is that trade between the two economic areas will have to follow WTO rules, i.e. the re-introduction of tariffs and non-tariff trade barriers. This is going to hit some sectors more than others.

The Cologne Institute also did some research on what this means for Germany and found that the value regarding German inputs sourced from Britain is the highest for other transport equipment (a reference to transport for the production of ships, rail vehicles and, in particular, air and spacecraft equipment (such as Airbus)), followed by coke and refined petroleum products and the basic metal industry. From the UK’s perspective, the industries most affected, i.e. where the UK is importing most from Germany, are automobile and chemicals. Overall however, British industry’s intermediate input links with Germany are much higher than vice versa. Ten British industries export over 50 per cent of their intermediate input exports to other EU member states. To put it bluntly: British industry is more dependent on supplies from Germany and Europe than the other way round.

One also should note that the representatives and actors even in those hardest hit sectors nevertheless continued to support the EU’s positioning on Brexit.

Impact of Brexit in 2017

Interestingly, in March 2017, shortly after the UK triggered the Art. 50 process of leaving the EU, there was already a measurable decline of German exports to the UK mainly due to the devaluation of the British pound, which made British exports comparatively cheaper. The chemical sector (decline of exports by 20%) and the automotive industries (decline of 18%) were hit hardest. At the same time however, the German economy grew by 1.9%, indicating that German businesses found other markets for their goods and products. One also should note that the representatives and actors even in those hardest hit sectors nevertheless continued to support the EU’s positioning on Brexit.

But even though the claims on how German industry would come to the support of the UK are exaggerated, Brexit remains bad news for business on both sides of the channel. The loss of the second-largest European economy definitely hurts, both in terms of bilateral trade but also with regard to the EU as an institution. Thus, the belief in some special intervention by German industry and the German chancellor is built on sand, but the opposite, i.e. conspiracy theories about countries actively working against the UK in Brussels is equally ludicrous. EU heads of state and government have made it repeatedly clear that they deplore the UK’s decision to leave the Union and would prefer it to stay in the EU. As this unfortunately is not an option the UK itself wants to entertain, the position of the other EU members is quite clear – they are not going to sacrifice the EU for trade with Britain.

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