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MDA Technologies 3/2016

MDA Technologies 3/2016

The “ -Story” Sushen

The “ -Story” Sushen Doshi For the past few months everyone from industrial to financial sector has been talking about the much fancied term “Brexit”, or a British exit from the European Union. So what is Brexit, and what are its implications for the industrial sector? T he European Union - often known as the EU - is an economic and political partnership involving 28 European countries. It began after World War Two to encourage economic co-operation, with the idea that countries as trade partners, are less likely to go to war with each other. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country. It is possible to set up a business or take a job anywhere within it. The idea was to boost trade, create jobs and lower prices. But it requires common law-making to ensure products are made to the same technical standards and imposes other rules to ensure a “level playing field”. On June the 23 rd , all eyes were glued on Britain and its citizens. British citizens voted on a referendum to decide the fate of United Kingdom, whether the UK should leave or remain in the European Union. More than 30 million people voted and the result was a ‘Brexit’, with 52 % opting to leave the EU against the 48 % who voted to stay in the EU. With the exception of London, almost all regions in the UK voted to leave, including Britain’s engineering heartlands. Britain is the second largest economy in the EU behind Germany and without the Brits, the EU’s economy will shrink almost by 2.5 trillion Euros. So it is needless to say it has some very serious effect on all sorts of industries involving Britain and the EU. Author: Sushen Doshi, correspondent India for MDA Technologies “Brexit” impact on German mechanical engineering sector The German mechanical engineering industry has a particularly high level of exports; in 2015 itself this sector had 77 % of its sales abroad, with almost 45 % of all the industry’s exports going to the EU countries and generating roughly 70 billion Euros. In the rankings of its major export markets, the UK comes behind the USA, China and France but ahead of Italy and the Netherlands. With an export volume of € 7.2 billion in 2015, the UK is the mechanical engineering industry’s fourth-largest export market. In 2015, Germany was the biggest supplier of machinery to the UK, ahead of the USA and well ahead of China. This export dependent sector is reliant on a stable political environment in Europe. The results of the June 23 rd referendum had all the mechanical engineering firms in Germany concerned about the negative consequences of the United Kingdom leaving the European Union. With the vote to leave the EU, trade in mechanical engineering products and services with the UK would be made significantly more difficult. This is evident even in the first quarter of 2016, where machinery exports from Germany to the UK have already fallen by 4 % to about € 1.7 billion. For export-oriented companies, fragmentation of Europe is a nightmare scenario. Another major impact would be on Germany’s auto industry. German Automobile companies are worried that a potential trade dispute between Europe and Britain in the aftermath of a Brexit NEWS AND MARKETS

could put British production sites at risk. The German auto industry alone has 100 production sites in Britain including suppliers. If there were a trade conflict between Britain and the European Union, the damage would be enormous. It would be a serious setback for the industry and would surely result in some production sites relocating. What are Britain’s alternatives to continue trade with the EU? As an EU member, UK companies are able to trade with the EU on a tariff free and quota free basis. By deciding to leave the EU, first of all Britain will have to negotiate new trade deals with EU. During these negotiations for a new trade deal, there is nothing to stop Brussels seeking to impose a higher tariff on all UK exports coming into the EU. The UK can, of course, threaten tit-for-tat tariffs on EU made products say for example German automobiles and components, but it means consumers on both sides suffer. There is also the risk that the EU will impose quotas, which limit the amount of goods and services that can be sold into Europe. With Britain’s withdrawal from full membership of the EU, there would be a number of potential options for managing its trading relationships: n Membership of the European Economic Area like Norway n A customs union, similar to the one the EU has with Turkey n A bunch of bilateral agreements like the ones between Switzerland and the EU n A free trade agreement such as the ones EU has with countries like South Korea and South Africa n Trade with the EU under WTO rules 1. The Norway option: If Britain joined the European Economic Area (EEA), British firms would have access to EU’s single market and would continue to benefit from its trade deals with other countries. But Britain would have no say over EU’s trade policy, and it would still have to abide by EU regulations while enjoying very little input into the drafting of those regulations. In fact, the UK could face increasing regulatory costs and administrative costs due to lack of representation. 2. The Turkey option: A customs union of the kind that Turkey has with the EU, this arrangement is not really a ‘union’, as tariffs are decided by Brussels. Here as well, the UK would have no input into EU trade policy but would have to comply with it. And British-based manufacturers would have to comply with EU product standards and regulations anyways. 3. Swiss-style: A relationship based on bilateral negotiations and agreements would be inherently more palatable for the British. Switzerland’s relationship with the EU rests on a series of bilateral sectoral agreements. Switzerland has free trade in goods, but it has no agreement with the EU on services. Swiss access is limited to those parts of the EU services market for which they have brokered sectoral agreements with the EU. The UK’s financial services industry would face a serious challenge as its Swiss counterpart; The UK would be free to negotiate bilateral trade agreements with non-EU countries, but these could prove less of a benefit than they appear. 4. A free trade agreement: The UK could leave the EU and sign a free trade agreement with it. There is a good chance that the tariffs levied by the EU on British manufactured goods would be zero. However, the deeper the trade agreement, the more EU regulation the UK would have to abide by. British manufacturers would certainly have to continue to comply with EU product standards and technical specifications in order to sell their goods to other EU countries. But at best that would only give Britain the same level of access that it currently enjoys. 5. Trade with the EU under WTO rule: The UK would not have to comply with EU regulations, but it would face the EU’s Common External Tariff (CET). For example, food imports are subject to an average EU tariff of 15 %, while car imports face a 10 % tariff, and car Concerns about Brexit SHORT-TERM CONCERNS: n Slump in sales, n Increase in costs due to tariffs, n Increased time from factory to market due to heavy regulations and certifications, n Withdrawal of companies and investments n Years of negotiations on how both sides will proceed leading to uncertainty LONG-TERM CONCERNS: n Deterioration of Europe as an industrial and investment location n Risk of EU disintegration n Pressure on the Eurozone components, 5 %. Under this scenario, manufacturing and exports could be hit hard. Restrictions on free movement of engineers and scientific researchers There are great concerns about the effect of Brexit on the engineering industry, also in regard to free movement of engineers and scientific research funding. Already there is an engineering skills shortage in Europe and Brexit would further limit the number of professional engineers that could come and contribute to UK’s economy, this would surely affect the wellbeing of UK’s engineering industry. Even the research sector will take a big hit. Science is an area where the relationship between the UK and the EU was particularly beneficial. Not just because scientists won billions of Euros of research funding but free movement of people in the EU made it easy for scientists to travel, collaborate and share ideas with the best in Europe and for companies and universities to access top talent from Europe. Affecting the trans-Atlantic trade relations as well Britain’s next step is starting the long process of setting up new trade agreements, worldwide and with the EU. Trade agreements being negotiated, like TTIP with the US, are now more complicated. The Transatlantic Trade and Investment Partnership - or TTIP - currently under negotiation between the EU and United States will create the biggest free trade area the world has ever seen. Quitting the EU means the UK would not be part of TTIP. It would have to negotiate its own trade deal with the US. Affecting the overall investment climate VDMA, the German mechanical engineering federation is concerned that a ‘Brexit’ would cause further deterioration in the investment climate in Europe. The Brexit will cost Europe as an industrial location a great deal of confidence among investors. Markets were given a small taste of this in the hours following the ‘Brexit’ announcement. The Deutsche Boerse in Frankfurt, the biggest financial market in the Eurozone, saw its DAX index fall by 9.98 % as markets opened. Other stock indices plummeted, and the pound fell below the 1.35-dollar level for the first time since 1985. German companies, their associations and banks are worried as talks about incalculable consequences continue. The EU must now contain the damage and keep the period of uncertainty as short as possible. z Photograph: Dirk Schaar MDA Technologies 3/2016

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