The German carmakers have finally broken the Brexit silence. Their No Deal consequences are enormous.
Conventional wisdom says the UK will suffer more in the the event of No Deal.
I never accepted that bit of economic wisdom, noting in particular, Germany would get clobbered.
Silence is now broken.
The Telegraph reports No-deal Brexit nerves grip Wolfsburg, the German home town of Volkswagen
The German carmakers finally broke their silence on Brexit last month. In a rare joint statement with car industry lobby groups from across Europe, they warned that a No Deal Brexit would have “seismic” and “devastating” consequences for the sector.
A German study released earlier this year predicted that No Deal could put as many as 100,000 jobs at risk in Germany – and that Wolfsburg would be among the worst hit cities. Already reeling from the Dieselgate scandal, No Deal is the last thing VW needs.
“We absolutely need a deal with Britain,” Hartwig, Erb, Wolfsburg’s most powerful trade union leader, told the Telegraph.
“There are no winners from a No Deal Brexit. The European economy will be weakened, but “There are no winners from a No Deal Brexit. The European economy will be weakened, but the effects on the British economy will be even worse. Donald Trump is not going to save you.” Donald Trump is not going to save you.”
I agree there will be no winners, at least short-term.
Long-term, the UK will be a huge winner.
But note that myth again: “effects on the British economy will be even worse.”
The second half of that statement, “Donald Trump is not going to save you” is certainly true.
But the myths linger. Those myths are in reality nothing but propaganda.
Trade War Battles
For starters, exporters always get hurt more in trade battles, always. If you understand that key point you come to the correct conclusion without looking further.
The same applies to US vs China trade wars. China is hurting more, but China has far more pain tolerance than the US. And of course, loosing less is not winning, no matter what Trump says.
The EU in general, and Germany in particular depend more on exports than the UK. That’s about all you need to understand, but pain and remedies go well beyond that.
UK vs EU Remedies
The UK can lower corporate and personal taxes, which I believe it would do. Because of budget rules, the EU will mostly be stuck.
WTO tariffs will be uniform, but a lower pound will mitigate the UK export damage.
In short, the “UK will get hurt worse” is nothing but purposeful scare tactic propaganda.
Food Scare Tactic
The Guardian comments How a No-Deal Brexit Threatens Your Weekly Food Shop.
UK reliance on EU food imports is a major risk if the country crashes out of the union. Walk into any British supermarket and you will be surrounded by European products, from Italian cheeses to French wines. Around 30% of all food consumed in the UK is imported from the EU, but for some foods, such as spinach and olives, the EU is practically the UK’s sole supplier.
With Boris Johnson claiming he will take Britain out of the EU by 31 October “do or die”, the UK’s reliance on EU food is a major risk. In the event of a no-deal Brexit, the UK would be obliged under World Trade Organization rules to impose average food import tariffs of 22% and conduct product inspections, leading to delays and shortening the shelf-life of products.
OK, 30% of UK food comes from the EU. There are other suppliers for most of that, but not some things like olives.
The UK is not obliged under WTO rules to impose 22% tariffs on the EU. That is a purposeful Guardian lie. The UK can impose whatever tariff it wants, including zero, as long as it’s uniform.
And it can be one level for lamb or things that the UK produces, and another level for olives which it doesn’t.
Zero Tariff Plan
On March 13, well before the above scare mongering tactic, the Guardian reported UK Will Cut Most Tariffs to Zero in Event of No-Deal Brexit.
One thing the UK cannot do is apply higher tariffs on the EU than it does other countries, but it is well withing the UK’s right to set tariffs at whatever level it wants, not 22%.
It is on this basis that that some UK farmers are afraid of Brexit, but the advantage to the consumer of zero tariffs is obvious.
Regardless of which “who is hurt more” story you believe, No Deal Brexit will be a lose-lose proposition in the short run, with some countries clobbered.
The two countries clobbered the hardest are undoubtedly Ireland and Germany, the former estimated at 4% of GDP.
That’s one hell of a hit. It would be up to Ireland to put in border controls because Northern Ireland wouldn’t.
It is on this basis I expect a deal, but one never knows in a game of “Chicken”.
Meanwhile, I note Brexit Irony: EU Rejects Its Own Proposal.
The second irony in this setup is the “No Deal blockers” actually increased the odds of No Deal.
If Ireland comes on board, there will be a deal.
If not, expect a No Deal outcome with another extension until January 31.