One argument that surfaces regularly in the comment section, and echoes views voiced often by British pundits and politicians, is that the UK has considerable bargaining leverage against the EU because the EU won’t want to lose access to UK demand. The example routinely cited is the auto industry, that Germany can’t possibly stand the loss.
We’ve argued against that regularly because, among other things, many of the “exports” to the UK are in fact intermediate parts where the UK provides additional value added or final assembly for goods that will be sold in Europe. The reason for locating production in the UK is that it is still in the EU, but it has more permissive labor laws than other EU members.
I’ve done some quick looking for breakdowns and have not found any good research yet. However, Lambert saw an important story in the Guardian on precisely this issue, that of the importance of the UK to the German auto industry. It focuses on Bavaria, the most exposed region. This is the bottom line:
The problem is that German car manufacturers no longer build all their cars in Germany, and even if they do, they do not necessarily build them with fully “German” parts.
In other words, German automakers are the ultimate multinationals, and even for German automakers, the value added in Germany is much lower than superficial analyses would lead you to believe. For instance, when auto parts are exported from Germany to the UK, the value of the import as recorded in the UK is the transfer price from Germany to the UK. But that auto part in turn had components that were made outside Germany, so that “German” price considerably overstates the impact the German economy if that sale were to go “poof”.
Moreover, the fact that a large chunk of these imports are for ultimate export means that portion of the manufacture can and will be shifted elsewhere, albeit at considerable cost and inconvenience to foreign carmakers.
As a result, again from the Guardian story, it would be hugely disruptive to shift production out of the UK:
[Tobias] Nickel [Dräxlmaier’s head of corporate communications] likens trade relations between Britain and Germany to the onboard systems that his company produces: complex, hand-thatched strings of colourful cables that come in billions of variations. “British and German manufacturing are so deeply intertwined, untangling these ties is basically impossible,” he said. “In the 1950s, maybe, but not now. You can bake English bread using only English flour. But you can’t make English cars from English parts. It’s impossible.”…
At Bavaria’s Chamber for Industry and Commerce the main fear is that Britain leaving the EU will lead to more bureaucracy. When Bayern Munich travels to Moscow for a football match, the chamber currently has to issue them with a Carnet ATA, an international customs document that certifies the country of origin and confirms that the team will return its coach, shirts and boots after the match rather than selling them outside the single market.
If Britain were to end up radically breaking trade ties with the EU, [Frank] Dollendorf [director of economic affairs for the Bavarian Chamber for Industry and Commerce] fears that his trade body would end up having to spend approximately one extra day a week processing documents of this kind. Medium-sized, or Mittelstand, companies without their own tariff department, he said, would be hit especially hard.
As a result, both Nickel and Dollendorf make clear that they will press hard against erecting trade barrier against the UK. But their views are nowhere as widely shared as you would think, even among the Mittelstand companies that have long been the engines of German economic success:
A majority of medium-sized and large companies indicated support for the EU taking a hardline stance against Britain after the referendum, with 56% saying they were in favour of the advantages of EU membership being revoked for the UK.
The study also shows 58% of German business and political leaders surveyed said they believed an exit from the EU would do “massive damage” to the UK economy, while 77% believed the referendum outcome would only have “minor consequences” for the German economy.
And that view holds true even in the auto industry:
David Davis, the British minister in charge of Brexit negotiations, argued in a recent article on Conservative Home that Britain could import more tariff-free electronic parts from Asia in the future, boosting its manufacturing base and eventually exporting cars rather than importing them from Germany.
Confronted with such an argument, Dräxlmaier’s Nickel remained calm. “Britain has to understand that it can’t produce a Rolls-Royce on its own. It would really surprise me if the UK would sacrifice its last remaining industry on the altar of Brexit.”
Time to wake up and smell the coffee.