EU Referendum


Brexit: a dose of realism


14/05/2021




Assuming the Indian coronavirus variant doesn't delay the process of relaxing controls, it appears that we're in for something of an economic boom, sustained by pent-up demand from the "lockdown winners".

As well as the winners, though, there are the losers – especially those who have lost substantial amounts of their earnings and have gone deeply into debt. Those in rental arrears might be particularly hard hit, with personal debt possibly acting as a drag on the economy.

Quite how this will pan out, I don't think anybody really knows. We've never in modern times been in a recovery situation from a major pandemic, which means we can apply the term "unprecedented" with some justice. Signals will be mixed and hard to read, with further complications arising from the effects of Brexit.

But where there is disruption, there is also adaptation. Firms struggling to survive can prove to be extraordinarily resilient when dealing with changes in trading conditions, and many will surmount the worst that the combined bureaucracies of the UK and the EU can throw at them.

As with the economy in general, though, there will be winners and losers and the overall effect of Brexit will depend on the balance between the two. Here signals will also be confused as the losers will doubtless make more noise than the survivors, and attract more media coverage.

Very much ahead of the game in this respect is the family-owned chemical company based in Minden, Westphalia, in northern Germany which trades under the name of Follmann Chemie, a speciality chemical company producing paints for industry and building, coatings, varnishes and adhesives, as well as printing inks for the paper and cardboard industry.

The firm, which had sales of €200 million in 2020, is being profiled in the current edition of the Financial Times, in a piece entitled: "Brexit disruption forces German exporters to think again". Costs and red tape, we are told, are pushing EU companies to seek other markets or relocate production.

Follmann Chemie's chief executive, Henrik Follmann, is unequivocal about the impact of Brexit on his firm, describing it as "a catastrophe", after it forced him recently to scrap plans to invest about £2.5 million in expand its UK factory in order to make more adhesives at the plant it bought three years ago in Andover, southern England, in order to boost exports to EU clients.

Follmann points to the extra difficulties of shipping goods both ways across the English Channel, condemning Brexit as a "nightmare", building up costs and time. "We were going to build extra production and storage to supply customers on the continent", he says, "but we delayed it and have now taken a strategic decision to cancel this and to expand in the EU instead".

The FT concedes that Follmann Chemie has had a tougher Brexit than many companies, but it doesn't tell us that the firm (according to its own website) will be investing over €42 million in the Minden location over the next few years. On that basis, the UK operation would appear to be relatively small beer.

Nevertheless, that paper argues that the firm's experience of increased costs and delays to shipments between the UK and the EU "is typical of many businesses grappling with the extra bureaucracy and pitfalls created by the new customs checks".

It points to the ONS trade figures which we covered yesterday, pointing out that, for the first time since comparable records began in 1997, the UK imported more in March from outside the EU than within it, underlining how British trade has shifted away from the bloc.

Lisandra Flach, economics professor at Ludwig-Maximilians-University, is then enlisted for a comfort quote, amounting to one of those statements of the bleedin' obvious as she says: "It is probably too soon to talk about the long-run effects of Brexit on trade, even though we have seen these big moves in the data recently, it could be that firms are starting to learn how to deal with these customs procedures".

However, it is clear that the UK has been steadily declining as a trading partner for the rest of the EU since the 2016 referendum. Eurostat calculates that its share of exports from that source has fallen from more than 17 percent since before the vote to 14 percent last year. In January and February of this year, the UK’s share of EU exports outside the bloc fell below 13 percent.

Follmann is then used to say that "some big UK clients were considering shifting some production to the EU to serve customers in the bloc", reflected in a downturn in foreign direct investment in the UK since the referendum.

Using data from fDi Markets, an FT-owned company, the paper reports that, in the five years to March 2021, the number of FDI projects into the UK was up only 12 percent compared with the previous five years. This it puts down to investment growth from North America and western Europe, the main investing regions. The level, it says, was well below the 33 per cent expansion across EU countries.

Furthermore, the number of foreign greenfield investment projects into the UK fell 40 percent in the 12 months to March 2021 compared with the previous 12 months. And while this is largely the impact of the pandemic, the drop was larger than the 30 per cent contraction registered for investment into the EU.

Flach comes bac to say that "A lot of adjustments by companies have already happened in the years before Brexit", knowledge undoubtedly gleaned from co-writing a report for the German government on the impact of Brexit.

And it looks as if Germany has been affected more than most. The country accounts for a quarter of all EU exports to the UK. Many of the small and medium-sized companies that are the backbone of Germany's export-focused economy have struggled with the extra customs checks and bureaucracy now needed to ship goods to the UK.

One of those is machine tool manufacturer Heller (picture), with its headquarters in Nürtingen, near Stuttgart in south-west Germany and production operations in the UK (Redditch), USA (Troy / Michigan), Brazil (Sorocaba) and China (Changzhou).

Says chief executive Klaus Winkler: "A lorry travelling from Nürtingen to Redditch takes twice the time and we have to put a lot more hours into all the bureaucracy", adding: "It is quite cumbersome. We had to increase the stock levels and have maintained them because it hasn't improved".

Looking at the bigger picture for the FT is Paul Maeser at the BDI, Germany’s main industry association. He says that many smaller companies had asked it for help with the new UK customs requirements. "Some of them have said they just can't cope with this, so they won't continue to serve this market", he adds.

One of the difficult issues is "rules of origin". Some of the products Follmann Chemie exports to the UK are made by third parties outside the EU, meaning they have started to incur tariffs. "We didn’t anticipate that", its CEO says. With additional shipping costs, prices to UK customers have risen 20-30 percent.

Heller has problems with its Chinese clients, which need products to be built in the EU, not the UK. The company, therefore, is having to rework its production to assemble more machines in Germany.

And, with the UK having pushed back full customs checks on some products entering from the EU until January, even some of the EU's biggest exporters are concerned that Brexit disruption could get worse.

BMW, for instance – maker of the Mini in the UK - says: "We welcome the fact that the Brexit deal resulted in a zero tariff trade arrangement, however, the additional administrative complexity has added costs to our businesses and the full weight of this will not be felt until full UK customs controls are implemented in January 2022".

Thus concludes the downbeat report from the FT, exuding a level of pessimism that we would expect from this source. But that doesn't mean that the paper is wrong to point out the problems. Disruption of our trade patterns cannot help but have adverse effects and the blind, Pooterish optimism from Johnson isn't doing us any favours.

Also published on Turbulent Times.