22 June 2017

The conclusions of a new study by Deloitte Germany bring into focus a tension facing the EU-27 that cannot be put off for much longer: to what extent does the EU prioritise the integrity of the single market (and what do various EU actors think that means?) over national economic interests in the Brexit negotiations?  Focusing on the impact of Brexit on the German car industry, the study echoes what was argued by proponents of Brexit before the referendum: the country’s biggest export sector would face significant risks if the negotiations fail to conclude a trade deal between the UK and the EU.

These findings underline the challenge in maintaining the united negotiating front of the EU-27. This has consistently held that the UK cannot continue to enjoy the benefits of the single market after Brexit, unless it also accepts the obligations of the single market. In Germany, industry representatives have, so far, been largely supportive of the political imperatives prescribed by the government, with the President of the Association of the Automotive Industry (VDA) Matthias Wissmann saying,

In the view of the German automotive industry, everything must be done to maintain the free movement of goods and services between Britain and the other EU countries in the future. But there is a clear priority: the cohesion and the integrity of the EU are both a foundation and precondition for reaching a reasonable understanding.

However, this stance is bound to be tested as the real economic risks that a breakdown of the negotiations would entail come to the fore. The Deloitte study examines the scenario of a Brexit with no EU-UK trade deal, which would imply the introduction of WTO tariffs on imports. For the car industry, that means a 10% tariff on vehicles and a 4.5% tariff on car parts. In addition, the study accounts for a 10% devaluation of sterling based on the currency’s trajectory since the referendum last June. What the study doesn’t consider is that this scenario would also entail the introduction of customs controls and a range of non-tariff barriers, notably rules of origin, which all additional issues likely to concern the car industry.

Its main findings can be summarised as follows:

  • The total revenue from vehicles in the UK will fall by approximately €12.4bn (-18%), and profits by €900m. While producers from the UK and from outside the EU would benefit, the revenue of the EU without Germany would fall by €8.3bn and of German producers by €6.7bn.
  • In the year of withdrawal, car sales will decline by approximately 550,000 units (-19%) in the UK. The German car exports would fall by 255,000 units (-32%).
  • Based on the sales and revenue decline, approximately 18,000 jobs in the German car industry would be put at direct risk.

Overall, the study finds that the impact of such a Brexit on the German car industry would be similar to that of the financial crisis, with car production falling to 2.28m units in 2019, down from 3.07m in 2016 and close to the 2.19m of 2009.

Speaking on BBC 4’s Today programme, Chancellor Philip Hammond reiterated the idea that a ‘cliff edge’ scenario is not in Europe’s interests, saying,

This is not just a UK problem. This in an issue in the European Union as well… Companies in Germany who want to supply goods… to car manufacturers in the UK… need to know the basis on which they will be supplying them in three or four years.

Indeed, as the study confirms, both negotiating sides have a strong interest not only in concluding a free trade agreement, but also in ensuring a smooth transition period between the UK’s full membership to the EU and their new relationship. With German jobs and exports from one of the country’s biggest industries at risk of being severely hit by a failure to conclude a trade deal, it becomes clear that a successful negotiation of all aspects of the UK’s withdrawal is will serve the interests of all.

As negotiations progress to the next “phase”, including what form any transitional arrangements may take, it will be increasingly difficult for the EU and national governments to ignore these economic interests. They are, or course, not confined to the German car industry, other countries and industries will make want their interests protected too.  The exclusive focus of the European side on the Brexit ‘divorce’ rather than the future relationship with the UK has allowed the EU to evade the much more complicated questions concerning Britain’s access to the single market and the potentially conflicting interests in that regard. Not only will member-states have to confront a trade-off between their national priorities and a common position on access to EU markets, governments will also be held accountable by their respective industries for the decisions taken on the European level.