Following the decision to leave the EU and agreement on the so-called divorce settlement, the question now is the terms upon which we will be able to continue to trade with our former European partners. The Brexiteers have told us that the EU countries will be eager to do a deal with us in view of the fact that we import more from them than they import from us. This they say applies especially to Germany which exports so many of its cars to us.

But since the vote, Germany has consistently told us that when Britain leaves the EU access to the single market for trade will be restricted unless the UK both accepts the four freedoms which underpin the whole concept of the Single Market and also makes a financial contribution to the EU.
One of the freedoms is, of course, the free movement of citizens between Britain and the EU countries. Taking control over this was one of the principle benefits the Leave campaign put forward to justify a yes vote.  So then, faced with the loss of the UK as a tariff-free trading area, will Germany feel the need to soften their stance and bring its undoubted influence within the EU to bear on the negotiations to our and their benefit?  Let's look at this more broadly.  Let's look at the imports and exports between the UK and the rest of the EU as a whole.

In the 12 months to October 2017 we exported £137 billion worth of goods to the rest of the EU.  We imported from them £222 billion worth.  So then, if tariffs are imposed under WTO rules of only 5%, then our exports become £7 billion more expensive.  For the exports from the rest of the EU to us, they would become more expensive by £11 billion.  And so taken as a whole, they lose out more than we do and, so the argument goes, they will not want to incur such a financial penalty.  But this of course leaves out of account the fact that the EU bloc exporting to us consists of 13 main individual countries.  The biggest exporter to the UK is Germany at £57 billion, which means that the imposition of tariffs would cost that country only £3 billion.  The next biggest exporter to the UK is Holland which would cost them another £1.6 billion in tariffs and so on down to Poland which would incur an extra cost on its exports to us of £400 million and Denmark which would have a tariff bill of £200 million. So then, for each individual country, the extra tariff cost would be significantly less than the combined additional tariff cost to the UK in exporting to the EU of  £7 billion. 

But there's another factor to take into account.  Germany, upon which the Brexiteers rely so heavily in their assessment of the commercial pressure from tariffs, does in fact trade with lots of other countries in the world.  It's a huge exporter of manufactured goods.  In fact if you look at the figures, the total export trade from Germany to the UK is only 7.5% of its total.  Now it may be that all the EU countries, egged on by Germany, will see the combined cost to them as worth allowing us to breach the Four Freedoms and so endanger the stability of what remains of the EU, but I wouldn't hold my breath.

It seems that I am not alone in this view.  A note from analysts at Bank of America Merrill Lynch indicates that they too believe that it is unlikely that Germany will soften its stance when it comes to the UK's access to the single market. This is an extract from it:
"The UK is an important trade partner for Germany, but not the most important.
When speaking to clients, or reading comments elsewhere, we are often confronted with the view that Germany’s stance that Brexit means no access to the single market will have to soften because the UK market is too important for German exporters – car makers in particular. We are sceptical.
We agree that the UK is a very important export market. It is the third-biggest single export destination, absorbing 7.5% of German exports, behind France (9.5%) and the US (14.3%) and before China (6%). Exports to the UK are equivalent to roughly 3.5% of German GDP. Similar to the US, the UK accounts for a disproportionately higher share of car exports (11.6% of German car exports vs 7.5% of all exports) relative to total export share.
But should the UK not be part of the EU single market any more that would not mean the export market would be lost entirely. Instead, it would mean more complicated trade relations. Trade barriers (if not tariffs, then at least non-tariff barriers) could be put back in place – from the UK on imports from the single market, but equally from the EU on imports from the UK. Absent very restrictive import quotas, trade barriers would likely mean predominantly that exports would become more costly.


Merrill Lynch point out that although the UK is a significant trading partner with Germany, it is not the most important. They consider that ensuring tariff free trade with the UK is not therefore Germany's most important goal. They argue instead that their main motivation is to ensure that the European Union stays together.  To achieve this they are insisting on a by the book approach on UK access to the single market, expecting that it will discourage other nations from voting to leave the EU in future:
"Germany’s focus is on keeping the EU together, a goal to which exports to the UK may rank second (or lower). ...  If Germany had to choose between protecting a market, which absorbs 50% of its exports (i.e. the EU excluding the UK) and is thereby a 6.7 times bigger export market than the UK, it seems obvious where the long-term strategic economics preferences may be."

Another reason why a more emollient attitude is unlikely is that all of Germany's biggest political parties are united on the trade issue. Although published before the latest election in Germany, Merryll Lynch say:

"We also note that after much disagreement across parliamentary groups on policies such as the refugee crisis or the need of a domestic fiscal investment push, there now seems to be consensus within German government parties on a tough stance on British access to the single market after Brexit, with the SPD (social democrats) pushing for a clear and tough position."

I don’t believe that anything has changed in this regard post the election and indeed, after initially refusing to join a new coalition, the SDP has now signalled its willingness to engage in talks on the subject, something which may prevent the far right euro-sceptic AFD from obtaining anything resembling power.

I look forward to part 2 of the negotiations with interest.


Paul Buckingham