German Carmakers Warn “Seismic” and “Devastating” No Deal Consequences

-edited

The German carmakers have finally broken the Brexit silence. Their No Deal consequences are enormous.

Silence Broken

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.”

No Winners

I agree there will be no winners, at least short-term.

Long-term, the UK will be a huge winner.

Brexit Propaganda

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.

UK Obligations

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.

Lose-Lose

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".

Brexit Irony

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.

Mike "Mish" Shedlock

Comments (73)
No. 1-24
Carl_R
Carl_R

Re: "The UK is not obliged under WTO rules to impose 22% tariffs on the UK." Based on the subsequent discussion, I believe that the second UK should be EU.

Mish
Mish

Editor

Thanks - Fixed

avidremainer
avidremainer

It is my understanding that until Argentina, Russia, Australia,New Zealand etc... remove their objections to the UK's WTO schedules the UK will be treated as a third country by all members of the WTO. Is this interpretation incorrect?

flubber
flubber

Just a small point....although olives predominantly come from Spain, Italy, and Greece, there are a multitude of other countries in Mediterranean and Middle East countries that produce olives and olive oil.

Mish
Mish

Editor

If the UK left the European Union without a deal, it would automatically fall back on World Trade Organization (WTO) rules. I believe that implies "third" country in the absence of another deal. Seems to have nothing to do with Argentina and etc. all collectively having to agree to something.

It's important to remember that, under the WTO's "most favoured nation" rules, the UK couldn't just lower tariffs for the EU, or any specific country, unless it had agreed a trade deal. It has to treat every WTO member around the world with which it does not have a trade deal in the same way.

Mish
Mish

Editor

The UK is already part of the WTO. It just does not have a lot of its own trade deals, and can't right now, because it ceded 100% control to the EU. But it can set its own tariffs and do so to its advantage. I propose 0% across the board. UK consumers would be a huge winner.

Mish
Mish

Editor

" If there was any fairness - you should be forced to live it in it instead of infecting more sane areas with your political foolishness."

Asinine comment of the year - and obviously false too

I support reduced government and government spending. Trump ought to try it.

I am against public unions and have been all my life. Never once voted for a union candidate which makes 2banana a liar.

Trump did nothing on that score. Nor did he propose bankruptcy reform which easily would have passed.

For that, 2banana exposes his anti-Mish bias to the nth degree.

He is clearly a delusional "Trump can do no wrong kind of idiot" hiding behind a TDS accusing mask.

And on top of it, he proposes a policy that amounts to once you are born in a blue state you cannot leave it.

2banana you are really pathetic.

Thanks for exposing yourself

caradoc-again
caradoc-again

As a side note, Helena Morrissey is supposed to have her hat in the ring as next BoE governor. Pro-Brexit.

Well educated, capable and with a big stake in the future - lots of kids. Her Brexit support from early kn encouraged me to investigate it.

She fits so well for post-Brexit I guess the establishment will block her chance.

caradoc-again
caradoc-again

Strip it back to basics.

Everyone needs customers and the more enlightened want prosperous customers as they are able to buy more stuff.

Theres no shortage of sources of supply for stuff and right now every region of the planet is searching for customers.

The only reason the EU wants the UK in is as a customer. They've never really liked us, we never wanted the full integration malarkey and we just a convenient customer.

caradoc-again
caradoc-again

Lastly, if there is an extension it's likely there will be a ruckus in Brussells as it has been made clear there will be vetoes wherever the UK can use a veto - passing the budget being one example.

On top if that it has been suggested the UK Commissioner will be selected as a particularly awkward character that doesn't give a monkey's what people think of him.

God only knows where this leads but change is coming like it or not. Theres little pleasure in any of this and a period of substantial adjustment and stress awaits.

caradoc-again
caradoc-again

Really lastly, I'm seeing many more Hyundai EV and Tesla now. I'm not seeing many VW EV at all. Substantial Hyundai on the roads I travel. If this is mirrored across the country VW better start competing as they have bet the house on EV going forward.

As general EV reliability us supposed to be higher than ICE the old VW reliability card they played will be eroded. It will come down to price (not good for VW) and range (where is there a VW advantage?).

Whomever improves battery technology will win. Korea is strong in that area.

Webej
Webej

Some of the examples are completely besides the point. There is nothing to prevent the UK from importing spinach or olives from the EU after a no-Deal Brexit, or for that matter, (German) automobiles. There is also nothing to prevent exporters from selling into the British market. Especially for products that are entirely imported now, there is no reason not to have a zero percent tariff. For products where the UK wants/needs to protect its domestic products from being washed away by cheap foreign imports, it may levy tariffs (and under WTO rules, need to levy the same tariff for all similar imports). German car imports may become somewhat more expensive (depending on the import tariffs) and less competitive, but that is all. On the other hand, German cars may be sold for less to compensate any import tariffs.

I suspect that longer term, the exchange of services will be impacted more than commodities and manufactures.

caradoc-again
caradoc-again

All the talk about the EU is missing an important point. It's not the future of the world. Elsewhere is and new tech is disrupting everything. Hundreds of thousands of people in banking - FORGET IT. It's one of the first sectors to hit the automation/AI brick wall and new heads will be added outside Europe.

Low rates in the EU won't help. Change is upon us irrespective of Brexit, no-deals or any other stuff.

HSBC - “We’ve known for years that we need to do something about our cost base, the largest component of which is people - now we are finally grasping the nettle."

“There’s some very hard modelling going on. We are asking why we have so many people in Europe when we’ve got double-digit returns in parts of Asia.”

Mish
Mish

Editor

"For the next time ... could you leave 2banana's comment undeleted for us all to see? I am saying this for 101st time - the censorship on this blog is hurting you"

Waggy ....

1.I have not deleted 2banana's comment unless they accidentally got caught in a chain with yours 2. It's my blog and I really do not give damn what you think. 3. I will continue to delete your asinine comments the moment I see them

How long I put up with 2banana is another matter, assuming they are not the same person.

Mish

Six000mileyear
Six000mileyear

The competition for German automaker campaign funds should heat up very quickly.

Mish
Mish

Editor

"If the UK set tariffs at 0% across the board what possible incentive is there for any country/trading block to enter into an FTA agreement with the UK?"

Tariffs are a tax on consumers. If other nations do detrimental stuff, do you follow?

The first nation that abolishes tariffs, regardless of what any other nation does would be a winner.

Mish
Mish

Editor

If it's good for the consumer, it's good policy. Tariffs are a tax on consumers. Eliminating them is good policy no matter what any other county does or doesn't do.

Anda
Anda

Far as I make out German car production is in decline already, and many markets are saturated. Maybe it just suits them to be able to blame Brexit. Either that or there was some deal where UK got production dumped on it, it's only a small fraction of EU and developed country population, let alone global population. For that they are going to close down ?

Country Bob
Country Bob

Germany's economy is based on exports. They need PAYING customers -- every business does, but especially true for an export economy. Selling goods for IOUs is a long road to self bankruptcy, unless those IOUs are paid within ~30 days (when one's own suppliers expect to be paid).

Obviously there are some very wealthy people all around the EU, but as a more general statement the EU cannot afford to buy German cars even if they want to. Most of the EU lives paycheck to paycheck, and still "finances" a lot of their life. For a lot of the EU, financing means they borrow and then inflate the debt away -- they do not pay ever.

There are more cash (and/or net 30 days) customers in the UK than in the rest of the EU. The percentage of paying customers for German exports is about to nose dive. And its not just car makers.

A similar lesson holds for China. For the last few decades, the US WAS the consumer of last resort. And we used to pay our bills (note the use of past tense). More recently, we have resorted to printing pesos and drachma instead of paying. Our politicians, central bankers and even some morons in the private sector are all laughing at China and suggesting we crank up the printing press and make more pesos and more drachma. If China never wants to get paid, too bad for them.

There is nothing wrong with a business increasing sales with a certain amount of financing, especially if a 3rd party takes the credit risk. But ALL businesses need paying customers in order to keep the lights on.

Germany is now (or will be as of 31-Oct) part of a shopping mall where customers do not expect to pay. Customers get angry when asked to pay.

The EU has no future with or without the UK -- but without the UK the EU goes from a mix of consumers (some cash, some credit) to mostly "financing" consumers.

Metaphorically speaking, the EU will soon be a street lined with check cashing stores, pawn shops, lottery ticket sellers, and rent to own stores.

EddieLomax
EddieLomax

I think you are wrong to say no one prospers from a trade war, in the political time they do.

Trump is hammering China causing some production to return to the US at a time when we have excess production and need therefore to reduce supply. The Donald is exporting the recession.

For the UK we do not really care who builds our cars, if Japan and US displace the EU then that it surely a win for them. If the UK gets better access to US/Japanese markets then that is a win for the UK.

KidHorn
KidHorn

Does Germany really sell that many cars in Britain? I know they'll suffer, but it seems they're exaggerating a bit.

The German auto industry is having problems, but it's mainly because of increased competition. The quality gap has shrunk. I know 2 people who leased Mercedes who switched over to Kia. And they'll never go back. They can get a 7 person SUV with more amenities for less than a 2 seater c class.

Harry-Ireland
Harry-Ireland

Oh dear, I feel so much sympathy for a large, unethical multinational corporation who cheated their customers... And I changed my mind completely about Brexit too.... Thank you German Carmakers. Thank you Avid Remainer. Thank you European Union. Thank you Corbyn. I have finally seen the light and from now on, I will obey and comply and bow down to your commands.

frozeninthenorth
frozeninthenorth

Mish I take issue with the idea that the UK will lose less than Germany or Ireland, the reason is simple -- the interactions and the law of unintended consequences are too important to make such judgment. In the face of it, the UK will suffer the most in short term, on the bright side the UK was never part of the Euro -- some of these issues go away.

However, it is far to soon to determine the long term cost if Brexit for the UK and for Europe. There is no doubt that in a hard Brexit the UK will not hand over 50 billion Euro -- so that's a win! But that's not that much money over the "long term". It all depends on what the UK does with this freedom? That's the big unknown -- the Brits have a tendency (I am one) to think they still have the Empire...they don't.

JustASimpleMan
JustASimpleMan

I love my daily dose of Avidremainer. Today he asks a question he already know the answer for, but as usual, his facts are wrong. May I refer you to either the Guardian or the Project Fear website - their fallacies are much more superficially believable than your own.