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It is a myth that Brexit has damaged UK German trade

uk german trade
Written by Catherine McBride

The German Finance Minister recently told the BBC that the UK was buying fewer German goods because of Brexit trade ‘obstacles’. However, a review of the trade data shows this is not true. While the Finance Minister’s claim that large German multinationals such as VW and Mercedes are having trouble completing UK EU compliance forms is just silly.

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The German Finance Minister, Christian Lindner, complained in a BBC interview in October, that the British were not buying enough German goods. Lindner believes this is due to trade ‘obstacles’ caused by Brexit and offered the UK a ‘standing invitation’ to talks aimed at reducing ‘obstacles in the daily life of German corporations’.

The BBC’s economics editor, Faisal Islam, seems to have added some dubious ‘facts’ to the written article apparently to support Lindner’s claims. The German Chamber of Industry and Commerce believes that German exports to the UK were 14.1% lower in 2022 than in 2016; that the UK had slipped from Germany’s 3rd most important export partner to eighth; and that EU car exports to the UK had nearly halved in number – declining in value by £8.6 billion.

These ‘facts’ may be true, but they were not caused by Brexit.

COMTrade data for UK German trade from 2003 and shows the high point of UK imports from Germany measured in Pounds Sterling was in 2017, so UK imports continued to increase after the Brexit referendum. But when German exports to the UK are measured in Euros, as the German Chamber of Industry and Commerce presumably does, the high point is 2015, before the Brexit referendum. The UK and Germany continued to trade as EU members until the end of the Transition Period, 31 December 2020. The fall in UK German trade, whether you think it started in 2015 or in 2017, cannot have been caused by Brexit.

Between 2003 and 2020, the UK has bounced between being Germany’s 3rd largest goods export market and its 5th largest. But as the US has been Germany’s largest export market since 2015 and China has been Germany’s second or third largest market since 2017. It seems incredible that the BBC would try to blame the change in the UK’s position on Brexit. Neither the US nor China is in the EU.

Inversely, from the UK’s perspective, twenty years ago Germany was the UK’s largest goods import supplier while China was only 5th and Norway was 11th. Now China is by far the UK’s largest goods supplier, followed by the US, Germany is third but only just above (non-EU) Norway. This change has nothing to do with Brexit. The US and Norway are just selling what the UK needs – natural gas and liquid natural gas. While China supplies us with almost everything else.

Although Germany was only overtaken by China as the UK’s largest import supplier in 2020, this may have been because of the Rules of Origin in the UK EU Trade and Cooperation Agreement (TCA). Rules of Origin require goods to have a set proportion of their value added in the countries that are signatories to a trade agreement. This stops countries not party to the trade agreement benefiting from its market access. So, goods manufactured in China for German companies must now be counted as UK imports from China, not as tariff-free imports from Germany.

ONS trade data by import type and by country does not support the BBC’s dubious ‘fact’ about UK car imports from the EU, either. Total EU car exports to the UK, when measured by value, only fell by 18% between 2019 and 2022, not by ‘almost half, while German car exports to the UK were up 8%. German cars made up 45% of total UK car imports in 2022 while in 2019 they were only 40%. This may explain why the BBC changed Lindner’s argument from concern about low German goods exports to concern about total EU car exports.

Removing the Rotterdam Effect from trade data

Before Brexit, the Rotterdam effect often caused UK trade with the EU to be overstated by incorrectly recording imports as products of the ports where they were landed, rather than products of the country where they were made. The TCA’s rules of origin prevent this from happening now.

Removing the Rotterdam Effect may explain the sudden and 82% drop in UK car imports from Belgium which was matched by a sudden increase in UK car imports from China, South Korea, Turkey, Mexico, the US, and Japan.  In 2019, UK car imports from China were less than £400 million but jumped to £3.6 billion in 2022, an increase of more than 800% in three years.

However, not all of the reductions in car imports from Belgium will be due to more accurate trade reporting. Ford, Opel, Volvo, and Audi have car production facilities in Belgium, and all suffered from a semiconductor shortage in 2021 and 2022. A problem that also plagued UK car production.

Lindner’s pessimism about UK imports from the EU appears to be unnecessary. Comparing the latest quarterly trade figures for UK car imports in the first half of 2023 to the first half of 2022, imports from the EU were £2.8 billion higher. This included a £2.5 billion increase in UK car imports from Germany. Even imports from Belgium were higher, although by less than $200 million.

Trade ‘obstacles’, what trade obstacles?

Incredibly Lindner believes Brexit trade ‘obstacles’ have been the reason for lower UK-German trade since 2016. But UK-EU trade compliance didn’t change until the end of the Transition Period. And even then, they didn’t change very much. The UK and the EU have a tariff-free and quota-free trade agreement. Admittedly, companies now have to complete customs declarations when they trade with the EU but most UK-EU trade is done by multinational companies who are used to completing trade paperwork.

Germany’s major exporters to the UK include: Volkswagen, Daimler, BMW, Bayer, Aldi, Adidas, BASF etc. These companies complete trade compliance forms every time they trade with the rest of the world. They have no problems with paperwork when selling BMWs in Brisbane, Mercedes in Mumbai or VWs in Vermont so why would Lindner believe they have been bamboozled by TCA compliance when trading with the UK?

That said, we may need to tweak the TCA Rules of Origin for EVs

Lindner also taunted his BBC interviewer by correctly stating that he was powerless to change the TCA’s local content rules for electric cars and batteries. Until the end of this year, up to 70% of an Electric Vehicle’s (EV’s) battery can be made from non-originating material but still be counted as a UK or EU product. Electric vehicles can be made using 60% non-originating material. In 2024 and 2025, the requirement reduces to 50% for batteries and 55% for EVs. Then at the end of 2026, the requirement decreases to 30% for batteries and 45% for EVs. At the moment neither the UK nor the EU is in a position to meet these requirements.

However, the TCA is scheduled to be reviewed before 2026 when this matter will be addressed by EU and UK trade negotiators. When these content requirements were agreed, the negotiators couldn’t have foreseen how Covid lockdowns and high energy prices would delay the process of increasing domestic battery capacity and EV production. As the UK buys more than twice as many cars (by value) from the EU as it sells to it, not changing these requirements will hurt EU car manufacturers, especially German manufacturers. So, it will be surprising if these requirements aren’t changed.

Trade reflects a country’s comparative advantage and economic health

But if car imports aren’t the problem that Lindner suggests, are any UK imports from Germany falling? Yes, but again, they are unlikely to be caused by Brexit trade friction. For example, UK imports, from all countries, of road vehicles other than cars (intermediate) were £2.7 billion lower in 2022 than in 2019. German imports made up £1.2 billion of the total. But lower UK imports reflect the UK’s lower economic need for intermediate transport vehicles rather than Brexit trade friction. Lindner will be happy to know that Germany still supplied approximately 30% of the UK’s imports in this sector in 2022, as it did before Brexit.

More recently UK imports of German chemicals fell by just under £600 million between the first half of 2022 and the first half of 2023. This was the largest fall of any industry sector during this period. Extremely high gas prices caused by sanctions on Russian gas after Russia invaded Ukraine have forced the German chemical industry to cut its production. The world’s biggest chemical company, Germany’s BASF, has closed its ammonia and fertilizer production in Ludwigshafen and is planning further cuts to its German production by 2026. However, BASF is expanding its operations in China. If Germany no longer makes chemicals, the UK won’t be able to import them, irrespective of Brexit.

In the long run, all trade is dependent on the economic prosperity of your trading partners. German GDP has been almost stagnant since the second quarter of 2022, consequently, UK exports to Germany were lower in 2022 than in 2019 and are expected to remain low in 2023. But our finance minister is not trying to blame this on Brexit trade friction.

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About the author

Catherine McBride