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No-deal Brexit fears on minds of German manufacturers | Business| Economy and finance news from a German perspective | DW

23. November 2018
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No-deal Brexit fears on minds of German manufacturers | Business| Economy and finance news from a German perspective | DW
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Bookmakers — those who accept wagers and bets — are everywhere on British streets. The odds they offer on various events are generally held up as one of the most reliable guides to the prospect of something happening or not.

When it comes to the most vexatious issue of the day — the UK’s Brexit deal — British bookmakers rate the chances of the current EU-UK draft agreement being signed off by all parties by March 30, 2019 (Brexit Day) as only 50:50.

A no-deal Brexit is still very much on the table. Chaos, division and rancor abound in British politics. There’s disagreement in Europe too, with Spain threatening to hold up the deal over Gibraltar. Other European governments reportedly have concerns over concessions granted to the British.

If the worst happens and the UK leaves the EU without a deal of any kind, many aspects of life will change on both sides of the English Channel but it’s arguably business people who will be most affected in the short term.

The huge German manufacturing sector has a particularly big stake in the discussion. Ulrich Ackermann is a foreign trade specialist representing the German Mechanical Engineering Industry Association (VDMA), the body which represents Germany’s influential machinery manufacturing industry.

Ulrich Ackermann, VDMA Leiter Außenwirtschaft (VDMA)

Ulrich Ackermann, foreign trade specialist representing the German Mechanical Engineering Industry Association (VDMA)

“If a hard Brexit comes, then I think in the first weeks and months, we will have chaos,” he told DW. “But what I could imagine is that after some days or weeks, both sides decide, ‘ok, let’s go back to the status quo’. Because everyone will realize —hopefully the British side too — that chaos doesn’t make any sense.”

Back to the WTO

What would chaos look like? Firstly, if the UK leaves without a deal, there will be no transition period, provisionally agreed to last until December 2020. That would mean that from March 30, 2019, all EU-UK trade would be under World Trade Organization (WTO) rules.

The implications of that for EU companies that have trading relationships with the UK, either through supply chains or direct sales are profound. Under WTO rules, there would need to be immediate customs and regulatory checks, and tariffs would need to be levied on goods moving between the EU and the UK.

Read more: Trade wars and real wars: another perspective on the world economy

“Today, a customs declaration for goods moving across the Channel takes 30 seconds,” says Ackermann. “People have calculated if that takes just 2 minutes, then we will have 20 or 30 kilometers of trucks at both sides of the borders.

“That means a lot more time and a lot more money for our members. So in that scenario, most of our companies will look for other sources to knock the British components out of the value chain.”

German manufacturers have already started making plans to, as Ackermann puts it, “make their value chains ‘Brexit-free.'” Considering the value of trade between German machine builders and the UK, that’s a big challenge.

Infografik Großbritanniens wichtigste Handelspartner Januar 2017 ENG

According to the MIT Observatory of Economic Complexity, in 2016, almost 21 percent of UK imports from Germany were machines and machine parts, worth more than €16 billion ($18.2 billion).

Add in parts and components made by vehicle machine builders in Germany, and the number swells further to €24 billion, just under one-third of all German exports to the UK. It’s easily one of VDMA members’ biggest markets.

Technical standards a major question

Earlier this year, the German company Schaeffler, a bearings manufacturer, said uncertainty over Brexit was behind its decision to close two UK factories.

Yet Ackermann says that so far, not many German manufacturers have left their UK bases and that a more common hard-Brexit planning contingency has been to stop buying parts and components from the UK, so their supply chains will be unaffected regardless of the outcome of Brexit.

Read more: Hard Brexit could trigger ‘massive crisis,’ warns German industry

On the export side, there has been an increase in goods sold to the UK this year but Ackermann believes this is due to the devaluation of sterling and the fact that British manufacturers have decided to buy “in safe times.” “Next year we really expect a decline,” he said.

Another area of concern for businesses in the event of a no-deal Brexit relates to technical and safety standards. Different technical standards on goods between a non-EU UK and the EU 27 is a possibility, but Ackermann says there is currently no clarity on how this could develop from the UK side.

England Blockade Eurotunnel (Getty Images/AFP/B. Stansall)

A no-deal Brexit could result in long lines for trucks at the Dover-Calais crossing

“If we have a smooth Brexit, then we have time until the end of 2020, where the regulations will be the same. But if we have a hard Brexit, the UK is theoretically able to do what they want.

“But in reality, they are not able to change the technical system within months or years. It took us Europeans decades to implement it.”

Typical German, or typical British?

The manufacturing sector is one of several where trade would be drastically affected by a no-deal Brexit. The food sector is arguably even more susceptible to the effects and last week, reports surfaced that Britain was running out of food warehousing space as retailers rushed to stockpile goods amid growing fears of a no-deal Brexit.

As messy as things could be for German manufacturers in the event of a no-deal Brexit, it would pale in comparison to the effects on British manufacturers. That’s because they are far more dependent on exports in the machinery business than Germany is.

“They are dependent on imports from Germany, Europe and other countries,” says Ackermann. “That means that independent of how this situation develops, they have to import the machines.”

That would be hugely costly for them if tariffs, and the application of different technical standards, had to apply on EU goods.

None of this may yet come to pass. But with the politics of the UK growing more uncertain by the day, all options remain on the table, with all their dramatic implications.

“What is interesting,” says Ackermann, “is what our members hear from their customers, suppliers or employees in Britain about the possibility of a hard Brexit. They say ‘oh it’s so typically German to think like that. It will never happen, we will find a solution!’

“The approach is rather different on both sides.”

  • Hard and soft boiled eggs (picture-alliance/dpa/R.Vieira/W.Rothermel)

    Deal or no deal? Brexit options boiled down

    Hard or soft options

    It’s essentially a choice of a harder or softer Brexit. Harder prioritizes border control over trade. UK firms would pay tariffs to do business in the EU, and vice versa. The softest Brexit would see access to the single market, or at least a customs union, maintained. That would require concessions — including the payment of a hefty “divorce bill” — to which the UK has provisionally agreed.

  • People jumping off a cliff (picture-alliance/Mary Evans Picture Library)

    Deal or no deal? Brexit options boiled down

    A leap into the unknown

    Businesses have expressed concern about a “cliff edge” scenario, where Britain leaves the EU with no deal. Even if an agreement is reached at the EU bloc level, the worry is that it could be rejected at the last minute. Each of the 27 remaining countries must ratify the arrangements, and any might reject them. That could mean chaos for businesses and individuals.

  • Thumbs down and EU flag

    Deal or no deal? Brexit options boiled down

    No deal – better than a bad deal?

    If there is no agreement at all, a fully sovereign UK would be free to strike new trade deals and need not make concessions on the rights of EU citizens living in the UK or pay the financial settlement of outstanding liabilities. However, trade would be crippled. UK citizens in other parts of the EU would be at the mercy of host governments. There would also be a hard EU-UK border in Ireland.

  • A ring and scissors (Fotolia/Jens Klingebiel)

    Deal or no deal? Brexit options boiled down

    Divorce-only deal

    The EU and the UK could reach a deal on Britain’s exiting the bloc without an agreement on future relations. This scenario would still be a very hard Brexit, but would at least demonstrate a degree of mutual understanding. Trade agreements would be conducted, on an interim basis, on World Trade Organization rules.

  • Maple leaves (picture-alliance/All Canada Photos/L. Staples)

    Deal or no deal? Brexit options boiled down

    Limited arrangement, like with Canada

    Most trade tariffs on exported goods are lifted, except for “sensitive” food items like eggs and poultry. However, exporters would have to show their products are genuinely “made in Britain” so the UK does not become a “back door” for global goods to enter the EU. Services could be hit more. The City of London would lose access to the passporting system its lucrative financial business relies on.

  • Swiss Cheese (picture-alliance/Anka Agency International)

    Deal or no deal? Brexit options boiled down

    Bespoke deal: Swiss model

    Under the Swiss model, the UK would have single market access for goods and services while retaining most aspects of national sovereignty. Switzerland, unlike other members of the European Free Trade Area (EFTA), did not join the European Economic Area (EEA) and was not automatically obliged to adopt freedom of movement. Under a bilateral deal, it agreed to do so but is still dragging its feet.

  • Flash-Galerie Frauen-Fußball-WM 2011 Australien - Norwegen (dapd)

    Deal or no deal? Brexit options boiled down

    The Norway way

    As part of the European Economic Area, Norway has accepted freedom of movement – something that no Brexit-supporting UK government would be likely to do. Norway still has to obey many EU rules and is obliged to make a financial contribution to the bloc while having no voting rights. Some see this as the worst of both worlds.

  • Trucks lined up near Dover (Reuters/N. Hall)

    Deal or no deal? Brexit options boiled down

    A Turkey-style customs union

    Turkey is the only major country to have a customs union with the EU, as part of a bilateral agreement. Under such an arrangement, the UK would not be allowed to negotiate trade deals outside the EU, instead having the bloc negotiate on its behalf. Many Brexiteers would be unwilling to accept this. It would, however, help minimize disruption at ports and, crucially, at the Irish border.

  • UK - Protests against Brexit (Getty Images/AFP/O. Scarff)

    Deal or no deal? Brexit options boiled down

    No deal, no Brexit?

    EU President Donald Tusk says the outcome of the talks depends on Britain, citing a good deal, bad deal or “no Brexit” as possible options. However, with both of the UK’s major political parties – the Conservatives and Labour – committed to going ahead with Brexit, that looks unlikely.

    Author: Richard Connor



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