Brexit and its Impact on German Companies

Table of contents

List of abbreviations

List of figures

1. Introduction

2. Context and Evolution of the Brexit
2.1. Outline of the Reasons
2.2. Chronological Development

3. Impacts on German Companies
3.1. Impacts on Trade
3.2. Impacts on Value Chains
3.3. Impacts on Employees

4. Conclusion

Bibliography

List of abbreviations

EU European Union

UK United Kingdom

WTO World Trade Organization

List of figures

Figure 1: Referendum Results 1975 and 2016

Figure 2: Chronological Development of the Brexit

Figure 3: Trade between Germany and the United Kingdom

1. Introduction

This essay deals with the withdrawal of the United Kingdom (UK) from the European Union (EU) and the resulting consequences for German companies which have business relations with the UK.

The result of the referendum in June 2016 makes the UK the first country in the history of the EU to leave the association of states. The Brexit¹ process and the associated contract negotiations took several years until the UK finally left the EU on 31.01.2020. However, many aspects – such as trading conditions – have still not been fully negotiated and there will be a transitional period until the end of the year. Since Germany and the UK are major trading partners for each other, there are consequences for German companies in various areas. In addition to the impact on trade, there may also be implications for value chains, employees or even corporate financing. In the following, the process and the reasons for Brexit will be explained chronologically followed by various consequences for German companies.

2. Context and Evolution of the Brexit

The United Kingdom had been a member of the European Union since 1973. Ever since their entry into the EU, many British citizens have not been supporters of the union because of their wish for independence of the United Kingdom.² Already in 1975, shortly after joining the EU, a referendum was held. Although in contrast to 2016, citizens voted in favor of staying a member of the union.

Figure 1: Referendum Results 1975 and 2016

Abbildung in dieser Leseprobe nicht enthalten Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Berndt, Gero, Imöhl, Sören, Schüller, Daniel, Brexit Chronology, 2020

Even though many UK citizens were no supporters of the EU from the beginning, the EU opened up many opportunities for them – such as access to the EU single market with its freedoms like the free movement of capital and goods. Despite many other benefits that arise for EU member states (shared fundamental rights, improvements in labour law for employees, more influence on world politics or increased national security), over the past years and decades a political stance has developed in the UK that has finally resulted in the withdrawal from the EU.³

2.1. Outline of the Reasons

The Brexit was caused by political developments in the UK, which in turn were influenced by many factors including social and economic factors and the global trend towards international integration and globalization.⁴ As a result of worldwide internationalization, especially in the EU, some groups have benefited, and others suffered. One example is the increasing income gap, which has widened in many parts of the world. Therefore, an anti-globalization mentality has developed in the UK since trade liberalization has failed to spread its benefits.⁵ This mentality led, for example, to the desire to end payments to the EU, which the British perceived as excessive. The public consciousness was dominated by the idea that every British taxpayer had to pay a large share of his tax contribution to foreign companies and European institutions each year rather than investing in the national economy.⁶ Furthermore, labor mobility and unrestricted migration between EU countries was perceived as negative for the British economy as well. Through Brexit, the UK was given back control over borders and restrictions on immigration.⁷

Another main reason to leave the EU was that the UK would be able to negotiate trade agreements with other countries individually and may be able to negotiate better terms as a result. Even though the UK aims to reap the benefits of the EU and, for example, to remain part of the single market, the UK does not want to subordinate itself to common standards and rules.⁸ This aspect affects not only trade but also all regulations, standards and laws in all areas from building regulations to the labor market.

2.2. Chronological Development

The Brexit began with the referendum on 23 June 2016, in which the majority of voters supported the decision to leave the EU.⁹ After the official submission of the declaration of withdrawal on 29.03.2017, a two-year period began in which a possible agreement between the UK and the EU could be negotiated.¹⁰ Since Brexit has been a very complex issue from the beginning, as the deep integration of the countries in the EU has tied them together in many ways, the most important key facts are listed in chronological order below.

Figure 2: Chronological Development of the Brexit

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Berndt, Gero, Imöhl, Sören, Schüller, Daniel, Brexit Chronology, 2020

After leaving the EU on 31.01.2020, the existing law will continue to apply until the end of the transitional period. If extended, the UK will even remain a member of the single market and the customs union for up to three years.¹¹ Therefore, potential consequences can only be speculated about until the end of this year.

3. Impacts on German Companies

The UK was the second largest economy in the EU and within many years numerous business relationships with German companies have developed, covering all sectors of the economy. Attractive market conditions on the EU single market have led to the UK becoming one of the most important trading partners for Germany. Nevertheless, since the Brexit referendum in 2016, a downward trend in trade between the two countries has been recorded.¹² In 2015 – the year before the referendum – the UK was still in fifth place among Germany's most important trading partners overall. In 2019, with foreign trade turnover (exports and imports) of 117 billion euros, the UK was only in seventh place.¹³

Figure 3: Trade between Germany and the United Kingdom

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Federal Statistical Office, Trade Volume UK, 2019

Although the UK remains one of the most important partners, the negative trend continues.

In addition to the more tangible commercial sectors, the UK also became the main trading center of the European finance and insurance industry.¹⁴ There are already fewer investments in the UK or shifting of investments to other markets (especially in other EU countries).¹⁵ Furthermore, many businesses are already leaving the UK due to uncertainty, as new regulations might be too complex and expensive, and day-to-day operations may not be able to continue as before. But even though companies are leaving as a result of the Brexit, they create new entry options to the internal market. For instance, companies from the insurance and investment banking sectors have announced that they are reducing their business in London and relocating to other EU countries.¹⁶ This shift to other EU countries could even have positive consequences for German companies, if – for example – Frankfurt (Main) and not Paris were to become the new main trading center for the financial sector in the EU.¹⁷

3.1. Impacts on Trade

The trade business is influenced by many factors. Changes in the framework conditions under commercial law, such as customs duties or non-tariff barriers, can lead to fluctuations in sales on international markets.¹⁸ For instance, until now, customs duties have not been paid on goods transactions within the European Union because of the EU's fundamental freedoms. The level and structure of those duties in the future cannot yet be answered today but it is likely that they will increase significantly.¹⁹

After the transition period, it might be possible that for example MFN tariffs could apply in trade between the EU and the UK in accordance with World Trade Organization (WTO) rules, unless a trade agreement is concluded.²⁰ Furthermore – apart from tariffs and the import duties now incurred when goods are brought into the EU – the EU tax would apply as well, from which the UK was not previously affected.

Therefore, it can be clearly recognized that the Brexit will lead to higher costs – e.g. due to customs duties – and a higher complexity – e.g. due to tax law efforts – in trade between Germany and the UK.

But apart from the possible disadvantages resulting from the changed trading conditions, the automotive industry for example, as a German export giant, could even benefit from the weakening of British competitors. While exports to the UK are becoming more expensive, exports to Europe are also becoming more expensive for British companies such as Rolls-Royce or Jaguar. Since the British sales market is comparatively much smaller than the European domestic market, this could even create an advantage.²¹

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¹ The artificial word "Brexit", which is made up of "British" and "Exit" refers to the withdrawal of the UK from the EU.

² See Chang, W., Brexit Consequences, 2017, p. 2351.

³ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.7-13.

⁴ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.15.

⁵ See Chang, W., Brexit Consequences, 2017, p. 2351-2352.

⁶ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.16.

⁷ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.17.

⁸ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.16.

⁹ See Chang, W., Brexit Consequences, 2017, p. 2349.

¹⁰ See Chang, W., Brexit Consequences, 2017, p. 2349.

¹¹ See Chang, W., Brexit Consequences, 2017, p. 2363.

¹² See Destatis, Foreign Trade, 2020, p. 45.

¹³ See Destatis, Foreign Trade, 2020, p. 45.

¹⁴ See Moseler, K. N., UK Development, 2019, p. 38.

¹⁵ See IAB, Employment Relevance Trade UK, 2020, p. 2.

¹⁶ See Moseler, K. N., UK Development, 2019, p. 38.

¹⁷ See Moseler, K. N., UK Development, 2019, p. 38.

¹⁸ See IAB, Employment Relevance Trade UK, 2020, p. 2.

¹⁹ See IAB, Employment Relevance Trade UK, 2020, p. 2.

²⁰ See IAB, Employment Relevance Trade UK, 2020, p. 2.

²¹ See Niedermeyer, A., Ridder, W., Brexit-Referendum, 2017, p.40.