Tuesday, 9 April 2019

Manufacturing and Germany's Conundrum.

Having read today that we will likely stay within the confines of the EU regulatory network for perhaps another year. That's provided we take Benzodiazepines or some other form of bad boy behavioural suppressant, in order that we do not disrupt the day to day business. For me when dissenting voices such as Marine LePen are ordered to undergo psychiatric assessment. Now we are told to pay up and shut up. One has to ask is Mikael Gorbachev correct in his statement “The European Union is the Soviet Union in Western Clothes?”

Impacts on Manufacturing

Most notably the car Industry.  The UK exports of cars and parts is equal to 12% of our GDP of which half of that heads to the EU. But, this is not the whole story, the UK imports far more from the EU by way of cars and car parts than we export to them, only with the rest of the world we have a surplus. 

The car industry is dominated by oversupply, which means prices are already under pressure. It is also important to note that the UK is 13th on the list of countries that are car manufacturers, it may also come as a surprise Germany is 3rd, after China and Japan, followed by Korea, India, the United States, Brazil, France, Spain, Russia, Mexico, Iran – and the UK, which is in thirteenth place.

Car companies have for a long time been shifting their manufacturing capacity to emerging markets. If you read my blogs about Asia you will know that Indonesia offers shop floor workers at a third of the price of China for example. Given the glut of manufacturing, the pressure on prices it's no surprise if some of our manufacturing shifts. This will depend on two areas. 1) The EU look to devastate the German car Industry by making UK exports to the EU more difficult which in turn impacts German manufacturers as the UK is their largest market. This would be folly! 2) The whim of the manufacturers and their desire to use Brexit as the reason to get their bad news out. Much like Jo Moore as she pushed the then labour transport minister to publish councillors excessive expenses during the 911 terrorist attack. That's perhaps an extreme analogy but I'm sure you understand where I'm coming from.

In terms of our relationship with German car manufacturers there has been talk of an FTA to ensure German jobs are protected. If the EU continue on this path then my guess the German government will break ranks with a bilateral agreement, this is too important a lobby group from German industry to allow the bureaucrats a free ideological reign, particularly as a recession looms.

If no agreement comes then the UK will face “Common External Tariff”, 10% on cars and 5% on components. That would present an interesting conundrum for Germany should the UK apply the same rules, given we run a car industry deficit. For sure this would devastate Mercedes, BMW, VW etc. at a time when German manufacturing are squeezed by recession. Such tit-for-tat measures would be foolish for both sides. The UK needs to be open to import from the ROW, under WTO we can not remove tariffs from one WTO supplier and apply them to another. The UK needs to buy more cheaply to start the benefits of leaving the EU. However, at a consumer level it could easily be seen that a boycott could emerge should Germany or the EU slap CET tariffs.

Of course, I relate only one side of the argument the tariffs and free flow of cars and parts. But the other side perhaps equally important is the supply chains. Supply chains that our manufactures rely on, “just in time manufacturing” here could well be an issue, tariffs at borders, extra paperwork, slower movement etc. But, even here we have a “silver lining” as in such a scenario this would form the catalyst for manufacturing to rise within our shores, supply chains could be homegrown.  A renaissance; like a phoenix rising from the 70s ashes.

The automobile industry due to its size is a special case  but there is a wider issue. It has been argued that once the UK leaves the EU, particularly if it follows a policy of zero tariffs on imports from the rest of the world as well as the EU, the doomsayers claim its other manufacturing  sector would be hit heavily. It has even been suggested that the UK’s manufacturing sector could collapse, project fear perhaps. In fact, there are no reasons why UK manufacturing cannot thrive after Brexit, even after a declaration of unilateral free trade (UFT). However, it is important to note that UK manufacturers are enjoying a bonanza with the pound depreciation. Even if, tariffs are applied across the EU these have been more than offset by the pound's depreciation.

Thank you once again for reading my ramblings, if you have comments or wish to add or contradict this story please comment below. Thanks!

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