By Eike Radszuhn
Once the Brexit negotiations had begun, most people presumed that the EU and the United Kingdom would somehow get their act together and find common solutions to avoid unnecessary burdens on business. However, after five months of talks, most of this confidence is gone.
"We've reached a state of deadlock which is very disturbing," said the EU's chief negotiator Michel Barnier in October. Both sides are still fighting over the details of the exit agreement, particularly over the sum that Britain has to pay as part of the "divorce bill". The original plan was to have these issues resolved and to start negotiations over a trade agreement by October. This has now been postponed to December at the earliest.
The remaining 27 countries have at least agreed to begin preparations for trade talks with the United Kingdom, which at this point is mainly a symbolic act. Of course, it is still possible that the EU and the UK will find some solution to the Brexit problem by March 2019. However, the prospect of a hard Brexit has become very realistic.
Barriers for exporters and investors
For European mechanical engineering companies, barriers to trade between the United Kingdom and the rest of the continent would be a serious problem. In 2016, the remaining 27 states sold machinery to a value of 20 billion euros to the UK. The trade volume in the other direction is 11 billion euros. In addition to that, there would be effects on supply and value-added chains. 217 mechanical engineering companies in the UK are controlled by a parent company based in the EU, while 239 companies on the continent are controlled by a British investor.
Though these figures are unlikely to drop to zero in the case of a hard Brexit, the effects on trade will still be significant. Firstly, there will be immediate hurdles should the UK leave the Customs Union. Even without new customs duties, companies are facing additional costs due to customs handling requirements.
Secondly, there is the risk of varying standards or differing interpretation of regulations by the EU and the UK in the long run. A British departure from the European Union will most likely include an exit from the EU Single Market and an end to the jurisdiction of the European Court of Justice. Realistically, both sides will make their own rules, which will make exports complicated and costly.
VDMA has issued a detailed position on the consequences of Brexit on mechanical engineering companies. From an industry point of view, it is clear that an agreement on future relations between the EU and the UK is needed.
Limited time and little room to maneuver
However, the question of how hard Brexit will be is not only dependent on political will. Even if the EU and the UK start to focus more on real issues instead of political power games, an agreement on a Brexit deal might be hard to conclude.
First and foremost, there is the time factor. When the United Kingdom formally issued their withdrawal from the EU, experts warned that the 2019 deadline would be extremely tight for negotiating a comprehensive agreement on future relations. Now, given the little progress made so far, it seems that the goal is even further out of reach.
The British Prime Minister Theresa May has already proposed a transition period of two years to soften the impact of Brexit - an idea VDMA generally supports. However, it is highly unclear how such a transition period would be legally and politically designed, and if such an intermediate phase would indeed make matters more complex. On this topic, May did not table concrete proposals and rather urged the EU to be "creative".
This leads to the second critical question: is there in fact any possibility of a satisfactory compromise? Thus far, there has been a huge gap between the expectations of the European Union and the ones of the United Kingdom. Some imagination is indeed required for what a possible agreement will entail.
The EU insists on the entity of the four freedoms: the free movement of goods, capital, services and labor. Should a country not respect one of the four freedoms, it should not benefit from the other three. For this reason, there is little desire within the European Commission to facilitate Britain with access to the European Single Market if the UK, on the other hand, closes off its labor market to EU citizens, for example. The concern is that if Great Britain gets away with cherry picking, other countries might make similar requests too.
The British government, on the other hand, has made many promises to its citizens that contradict the view of the EU. The UK not only wants to leave the EU, but also the Customs Union and an end the jurisdiction of the European Court of Justice. It aims to conclude its own trade agreements and impose a tighter control of the flow of immigrants from EU countries. Unless one of the two parties is prepared to give in and abandon their position, there is little room to maneuver for the negotiators.
Warnings from industry
As a consequence, industry is becoming increasingly concerned about the outcome of the Brexit negotiations. When British Prime Minister May met with business representatives on November 13, European associations urged for more focus within the Brexit talks, especially on the British side. The Federation of German Industries (BDI) made it clear that they agree with the European Commission's approach to first negotiate the terms of Brexit before talking about future trade relations: "The unity and development of the European Union has the highest priority for German industry," said the BDI in a statement after the meeting.
In the end, it is uncertain how many more meetings will take place between business representatives and Theresa May. Since the disastrous election in June when the Conservatives lost their majority in government, May is now Prime Minister by default. There have even been doubts raised within her own party of whether she is the right person to push through Brexit. If the Brexit negotiations continue to stall, a crisis within British domestic politics seems only a matter of time. This would merely be another detour in the already confusing Brexit odyssey.
VDMA European Office | VDMA position paper (PDF) | EURACTIV.com: "The engineering industry is critical to EU and UK" | VDMAimpulse 04-2017: "Brexit - an accident continuing to happen" | VDMAimpulse 04-2017: "The days after Brexit - a scenario" | VDMAimpulse 04-2017: "Do we need more European integration or less?" | VDMAimpulse 02-2017: "The future of europe: Five options, no alternative"