Brexit fears on minds of German manufacturers

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.

"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.

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.

"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."