Even just a few months before the UK exits the EU, there's no clarity as to what future trade ties between the two sides will look like. German industry bodies warn a hard Brexit would be disastrous for businesses.
The United Kingdom is scheduled to leave the European Union by the end of March 2019, but negotiations over how to manage the departure and future UK-EU trade relations have been anything but smooth.
Last month, tensions erupted between the two sides at a summit in Salzburg, where the EU roundly rejected British Prime Minister Theresa May's plan for close economic ties after Brexit.
Technical discussions resume in Brussels this week, with both sides racing to bridge their differences over the toughest issues of the Irish border and future trade ties.
In case both sides fail to resolve their disagreements, it could likely result in a so-called "hard Brexit," meaning Britain would tumble out of the European bloc without any trade deal in place.
A hard Brexit would cut off most UK ties with the EU in a more or less chaotic and sudden manner. Such a situation would be a disaster for tens of thousands of companies and workers on both sides, warn German industry associations. A no-deal Brexit would likely result in the UK and the EU introducing tariffs and non-tariff barriers (NTBs) on each other's products.
Slapped with extra tariffs
In a report published on Tuesday, the Cologne-based German Economic Institute (IW) estimates that in the short run, tariffs amounting to over €15 billion ($17.17 billion) could be levied in the event of a hard Brexit. In the long run, it said, UK-EU trade could be reduced by up to 50 percent.
Germany and the UK will bear the largest tariff burden, said the IW study. "Additionally, in the short run, NTBs might imply an additional burden of up to €14.6 billion for UK companies and up to €25.8 billion for EU companies."
The study also pointed out that the German and British automotive industries would be affected particularly hard. "One-fifth of all tariff revenues collected by the UK would be paid by the German automotive industry; the British automotive industry would have to pay one-third of all duties collected by the EU," it projected.
The automotive sector employs some 800,000 people in Germany and is the country's biggest exporter.
About 5 percent of Germany's gross domestic product depends either directly or indirectly on trade with Britain, IW said, making it the third-biggest trading partner for German firms. "That could dramatically change in the foreseeable future," the IW study said. The UK, meanwhile, could see its companies — particularly in the financial and legal sectors — totally cut off from the EU.
Making tough adjustments
The Federation of German Industry (BDI), one of Germany's most influential lobby groups, also said on Tuesday that a breakthrough in Brexit talks was needed at the EU summit on October 17-18.
May's Brexit plan seeks to establish a UK-EU free trade area for goods and agricultural products, while taking her country out of the single market for services
"Otherwise there is the risk that Europe slides into a disorderly Brexit, and that would cause a huge crisis," BDI Managing Director Joachim Lang warned.
A hard Brexit would cause huge difficulties for tens of thousands of companies in Europe and hundreds of thousands of employees in Britain and the European Union, Lang said at a news conference in Berlin.
He noted that many companies were preparing for a hard Brexit and some wanted to suspend production in Britain from April as delivery routes could not be secured. Lang said some firms were also moving their headquarters from Britain, adjusting their legal frameworks and looking for new transport routes.
A British exit from the EU without any proper succession plan in place would be a disaster, Lang stressed, adding that trade would be "immensely affected." The likelihood of this happening is increasingly worrying companies, said Lang.
'Moment of truth'
May's Brexit plan seeks to establish a UK-EU free trade area for goods and agricultural products, while taking her country out of the single market for services, which accounts for around 80 percent of the British economy. The aim is to ensure free trade with the bloc and maintain an open border between the UK's Northern Ireland and EU member Ireland.
But euroskeptics in her party want May to drop her proposals to keep the UK's industrial and agricultural goods under EU single market rules. They instead want her to negotiate a Canada-style free trade deal with the EU.
Canada's deal with the EU, known as CETA, removes nearly all tariffs on industrial, agricultural and fishery trade, but does not oblige Canada to contribute to the EU budget.
Last month, EU leaders also rejected May's proposal for future economic ties. The bloc has so far remained united in its position that the UK will not be allowed to cherry-pick aspects of EU membership.
Against this backdrop, the upcoming EU summit has been characterized by the bloc as a "moment of truth" in the divorce talks.
The first sign of any common ground will come on Wednesday, when EU negotiator Michel Barnier will present the first draft of his proposed statement on post-Brexit economic and security ties to ambassadors of the EU's other 27 member states.
sri/uhe (AFP, Reuters, AP)