On March 29, 2017, for the first time in the European Union’s history, a member state declared its withdrawal from the union. This had been preceded by a referendum in June 2016 in which the British electorate voted by a narrow majority for Brexit, namely Great Britain’s withdrawal from the EU. In its notification of March 2017 the British government formally informed the European Council of its intention to withdraw, thus triggering the process under Article 50 of the Treaty on European Union. According to this process a withdrawal agreement has to be negotiated and ratified within two years of notice being given. The EU Council can unilaterally extend this period for an indefinite duration in agreement with the member state in question.
The heads of state and government of the EU have tasked the European Commission with conducting the negotiations on the withdrawal agreement with the British government. The negotiations fall into two phases. The first phase discussed all those points directly affecting the withdrawal. These included in particular Great Britain’s financial obligations, the rights of EU citizens in Great Britain and of British citizens in the EU as well as border issues, such as in Northern Ireland. The second phase is intended to negotiate in particular on details of a possible transitional phase and an agreement on the framework of future relations between the United Kingdom and the EU. The future relationship, also including a possible trade agreement, can only be negotiated once the withdrawal has been formally concluded, namely once Great Britain has “third country” status.
Trade with Great Britain
Deep economic ties have been forged between the countries of the European Union and the United Kingdom over a period of decades. The trade in goods alone between Great Britain and the European mainland totals almost 370 billion euros annually. The ties are even closer from a German perspective: 12 percent of German goods exports to the EU, approximately 86 billion euros, were to the United Kingdom in 2016. Imports from Great Britain accounted for 6 percent of total imports from the EU, namely approximately 36 billion euros.
The bulk of goods exports from Germany to Great Britain is accounted for by the automotive industry: In 2016 it exported vehicles and parts worth 28.5 billion euros across the Channel. Great Britain sent vehicles and parts worth 6.2 billion euros to Germany. The bulk of automotive trade – almost 80 percent – is accounted for by finished automobiles or trucks. German suppliers exported goods worth 5.5 billion euros to Great Britain and imported vehicle parts worth 1.3 billion euros.
British automotive industry
The figures illustrate that Germany enjoyed a significant surplus in automotive trade with Great Britain. However, the British automotive industry is also enormously dependent on exports, primarily to Europe. For example, Great Britain produced 1.67 million automobiles in 2017. Around 1.3 million automobiles were subsequently exported. That means that four out of every five automobiles manufactured in the United Kingdom are for export. More than half of them, almost 54 percent, were sold in the European Union. That makes the EU far and away the British automotive industry’s biggest sales market. The automobile market in Great Britain itself is also characterized by vehicles traded across national borders. New automobile registrations in Great Britain are accounted for by imported vehicles, significantly more than 80 percent. In 2017 Germany manufactured around 4.4 million automobiles for export. With almost 770,000 automobiles, Great Britain was the biggest market for German automobile exports. That means that approximately 18 percent of German automobile exports go to Great Britain. Imported vehicles are also very important in the German automotive market as well: in 2016 the import ratio was 64 percent; there were 2.2 million new vehicle registrations.
The high export and import ratios both in Great Britain and Germany illustrate that value chains do not stop at national borders. British automotive manufacturers’ supply structures also have an international focus. Nowadays, around 50 percent of parts for a car manufactured in Great Britain originate in another country. This pronounced internationalization of production chains means, however, that transaction costs (customs duties or border controls) can have a major influence on suppliers and manufacturers when it comes to collaboration. Brexit can therefore adversely affect automotive trade between Great Britain and the European Union in many ways.
The influence of Brexit on the exchange rate between the euro and the British pound is already clearly visible. The pound suffered an immediate devaluation after the Brexit referendum. The background to the devaluation was the expectation that the growth of the British economy would be weaker after Brexit. There are already indications of this in current economic data. One factor in this the major uncertainty about the future framework. Since the referendum, investors have been holding off from new investments in Great Britain. This is putting a damper on macroeconomic development. This is all the more important as the British automotive industry is strongly characterized by foreign manufacturers’ investment.
The exchange rate changes the fundamental trade framework. A weaker currency generally goes hand in hand with improved competitiveness because exports are cheaper while, at the same time, imports are more expensive. For British consumers this means, above all, price rises for imported vehicles. As the British market is for the most part served by imports, this affects whole swathes of the new automobile business.
Impact on production in Great Britain
Until such times as the future relationship between the EU and the United Kingdom is clarified, exact forecasts about economic development in the post-Brexit era are nigh impossible. Every new impediment to trade flows can potentially result in a decline in economic exchanges. Customs duties in particular, but indirectly non-tariff barriers as well, have the effect of increasing costs on traded goods. Higher costs reduce the breakeven point or else prices have to rise. The cross-border trade in products becomes less attractive. Cross-border value chains are also sensitive to practical trade barriers such as border controls. Waiting times at borders make just-in-time production, for example, significantly more difficult. It is thus evident that Brexit will potentially weaken Great Britain, especially as an automotive location. For companies producing in Great Britain this either means relocating to the EU or increased production costs.
Customs clearance after Brexit
In addition to the possible cost of new customs duties after Brexit, customs clearance could in practice also pose considerable problems. The VDA is therefore proposing a simplified customs clearance procedure based on self-assessment that guarantees a frictionless trade in goods without any additional administrative burden, both for companies and customs and tax authorities in the EU and the United Kingdom.
Irrespective of whether the future relationship between the United Kingdom and the EU is governed by a free trade agreement or a customs union, companies will have to perform customs clearance for the cross-border trade in goods as well as comply with customs declaration obligations. Even the simplified import and export procedures possible under European Union customs legislation do not satisfy a close EU-UK partnership and would mean restrictions on the free trade in goods. The procedure proposed by the VDA would enable goods to be supplied as before with no interruption in the flow of goods. In this way, production locations in the EU and in the United Kingdom could in particular exchange the materials and goods they need without hindrance
Avoiding trade barriers
The German automotive industry hopes that the negative effects of Brexit can be minimized. The objective should be to design the future relationship between the EU and Great Britain on the basis of the four fundamental freedoms. In addition to customs clearance other individual issues are also important to the automotive industry. For example, type approvals in the EU and in Great Britain should continue to be valid, irrespective of where they were issued. Also at issue is whether new automobile registrations in Great Britain should continue to be included in European CO2 regulation.
The uncertainties that the British Brexit verdict has caused are already negatively impacting economic growth, especially in Great Britain. The German automotive industry has a major interest in relations between the United Kingdom and the EU remaining as close as possible. Great Britain is an important partner for German automotive manufacturers and suppliers. New customs duties or other trade barriers can therefore be in nobody’s interest. However, in the event of Brexit, there is a clear economic and political priority for the EU and Germany: the cohesion of the 27 Member States. Ultimately Brexit is unlikely to be a successful model for Great Britain.