Brexit Impact

German firms brace for added costs in British trade

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Britain’s western-facing port at Liverpool shows that the future of its trade is not confined to the English Channel. Source: Reuters

Germans are big worriers and what many business leaders worry about now is Brexit. After reaching agreement on the cost and timing of Britain’s exit from the European Union, London and Brussels are now ready to focus on the relationship after the break.

“At the end of the day, you trust the political decision makers on both sides of the channel to bring the whole thing somehow to a more or less tolerable conclusion,” said Kay Uplegger, head of a family firm in the Hanover region that trades in cheese and other chilled food products with Britain and other countries. But one thing is clear about future trade with Britain: “It will be more complicated and so more expensive.”

Whatever type of free trade agreement may be reached, there is sure once again to be a customs control, with all the paperwork that entails. Just how much more paperwork is hard to estimate, since exchange of goods and services in the single market requires no documentation. But the Finance Ministry in Berlin expects at least 2.7 million new customs declarations for imports, while the Association of German Chambers of Industry Commerce forecasts 15 million for both imports and exports.

The cost of this added paperwork could be as much as €200 million ($240 million). But even if you add in another €300 million for certificates of origin that may become necessary, that represents only 0.4 percent of the $138 billion in trade between the two countries in 2016. Somehow German industry is able to handle the paperwork for its $184 billion in annual trade with the US and $150 billion with China, as well as all the other countries outside the EU.

“The negotiations about the future will not be straightforward. They will generate the same public thunder and lightning that we have seen in the past year.”

David Davis, chief Brexit negotiator for Britain

In short, it will probably cost more to trade with Britain post-Brexit than it does now, but the amount seems trivial compared to the value of the trade itself. That doesn’t stop the worrying. The Berlin government is worried, sources inside the Finance Ministry told Handelsblatt, that many firms still underestimate the consequences of Brexit.

Nobody, not even a German businessman, likes more bureaucracy, and it is clearly one of the merits of the EU single market to eliminate many of the barriers to trade. But David Davis, Britain’s chief negotiator in the Brexit talks, reiterated why Britain is eager to regain control of its borders and its laws, even at the cost of added paperwork in trade.

“The EU might work for countries who have chosen to be members,” Mr. Davis wrote this week in an op-ed for the Daily Telegraph, “but at a time when the Commission themselves say that the vast majority of future global growth will come from outside Europe, it makes sense for Britain to place itself at the cutting edge of new technologies and the regulatory regimes they will require.”

The British secretary of state went on to stake out negotiating positions for the impending talks on a future relationship. “In terms of scope, the final deal should, amongst other things, cover goods, agriculture and services, including financial services, and be supported by continued intelligent cooperation in highly-regulated areas such as transportation, energy and data,” Mr. Davis said.

This broad brush approach is at odds with the position taken by EU chief negotiator Michel Barnier, who shortly before Christmas said the EU had never concluded a free trade agreement on services and doesn’t envisage one for Britain, either. The riposte from Mr. Davis in his op-ed: “A deal which took in some areas of our economic relationship but not others would be, in the favored phrase of EU diplomats, cherry picking.” The British official added a little of the saber rattling already used by Prime Minister Theresa May, implying that the EU will need and want continued cooperation with British military and intelligence for defense and counter-terrorism.

“The negotiations about the future will not be straightforward,” Mr. Davis concluded. “They will generate the same public thunder and lightning that we have seen in the past year.” But, much like Mr. Uplegger, the British negotiator believes that mutual recognition of the value of the relationship will lead to a successful conclusion of the talks.

No one in Brussels is willing to express the same optimism. The erratic behavior of the British government in the negotiations so far and challenges to Ms. May’s leadership at home make the outcome of the talks uncertain. There is concern in Brussels as in Berlin that London may not keep to its commitments so far and will make demands that throw off the timetable. The formal exit will be end of March next year, but there is an understanding there will be a transition phase at least to the end of 2020 where the relationship remains more or less the same.

Any confidence that the British government will negotiate in the interest of business has disappeared. The consequences of Brexit for business are being ignored, according to one manager responsible for the British market for a German firm. “That we don’t know under what conditions we will be able to operate here in the future is becoming more and more of a problem,” he warned. German firms are devising emergency plans for dealing with regulations, customs and IT changes. They are also holding back on investment.

“The Brexit process up till now has been highly unsatisfactory,” worried Holger Bingmann, president of the German Association for Wholesale and Foreign Trade (BGA), “and the talks over the future relationship with Great Britain will certainly be at least equally difficult.”

Handelsblatt reporters Ruth Berschens, Martin Greive, Jan Hildebrand, and Kerstin Leitel contributed to this report from Brussels, Berlin, and London. Darrell Delamaide adapted this report into English for Handelsblatt Global. To contact the authors: berschens@handelsblatt.com, greive@handelsblatt.com, hildebrand@handelsblatt.com, leitel@handelsblatt.com, and d.delamaide@extern.handelsblatt.com.

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