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Jürgen Matthes IW-Report No. 8 8. March 2018 Brexit: What German firms should expect

At present, it is difficult for German companies to foresee future trading conditions with the UK after the withdrawal from the EU. This IW report attempts an initial assessment in order to reduce planning uncertainty. Firstly, the focus is on the shortterm effects of Brexit.

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What German firms should expect
Jürgen Matthes IW-Report No. 8 8. March 2018

Brexit: What German firms should expect

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German Economic Institute German Economic Institute

At present, it is difficult for German companies to foresee future trading conditions with the UK after the withdrawal from the EU. This IW report attempts an initial assessment in order to reduce planning uncertainty. Firstly, the focus is on the shortterm effects of Brexit.

Due to the devaluation of the British pound against the euro by more than 10 per cent after the Brexit referendum in June 2016, German merchandise exports to the UK plummeted, especially in the second half of 2016. Since exports have largely stabilised since then, the bulk of negative exchange rate effects seems to have been overcome.

Several important decisions regarding the future economic partnership appear to be relatively likely from today's perspective:

- After the withdrawal of the UK at the end of March 2019, there will probably be a transition period, at least until the end of 2020. Both sides have a common interest in making sure that their companies will face only one change in bilateral trading conditions, which should follow thereafter. As the EU sets strict requirements for the transition period, Brexit supporters in the British government must be prepared to make a compromise, especially with regard to the freedom of movement for workers and to continuously aligning regulatory measures to the EU.

- The UK will likely dispense with a customs union with the EU in order to be able to negotiate tariff preferences in envisaged free trade agreements with third countries. This will probably lead to costly and time-consuming border controls for German trade with the UK.

- As both sides clearly seek an ambitious free trade agreement, it is unlikely that tariffs will be imposed on trade in goods with the UK. However, should the negotiations fail unexpectedly, relatively high tariffs could be imposed on several agricultural goods, but also on some industrial goods, for example on passenger cars and trucks.

Important decisions in the Brexit negotiations pertain, before all, to two areas, that German firms should closely watch:

- Leaving the Single Market without any agreement on regulatory cooperation would imply the end to the free movement of goods between the EU and the UK. This could lead to sig-nificant non-tariff barriers for German companies. Thus, the question arises as to what extent the UK will also in the future continue to align its regulations with those of the EU in key areas, and whether the EU would consent to mutual recognition, despite current refusal.

- The EU is unlikely to allow the crossborder supply of UK financial services providers in the future. Therefore, German companies could face restrictions on access to potentially important financial services. However, this may only become relevant in highly specialised areas, as relocation of UK providers to the EU and further market adjustments are likely.

German companies also need to prepare for less likely events. Before all, contingency plans are indispensable for the case of a potential no-deal scenario, which would imply temporary regulatory chaos after Brexit. It is also important for the EU's negotiating position that companies in the 27 EU Member States would not be caught by surprise by such a scenario.

Download PDF
What German firms should expect
Jürgen Matthes IW-Report No. 8 8. March 2018

Brexit: What German firms should expect

Download PDF

German Economic Institute German Economic Institute

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