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12.09.2019

Hard Brexit and the consequences for the Austrian export economy

  • The trade in goods between Austria and the United Kingdom totalled 7.1 billion euros in the previous year. Austria's exports amounted to 4.2 billion euros, with imports at 2.9 billion euros
  • The most important goods traded between the two countries are vehicles and machinery
  • The introduction of customs duties in the event of a hard Brexit would primarily affect the Austrian car industry
  • British demand for foreign goods and services generated value added of 4.4 billion euros in Austria in the previous year

Following recent Brexit-related events in Great Britain, there is now less likelihood of Great Britain exiting the EU on 31 October without a deal. On the other hand, there is a very high chance of an early general election in the UK before the end of the year. Although it is not possible to make a reliable forecast of the election outcome, a realistic scenario would be a majority for the Conservative party under Boris Johnson, possibly through an alliance with the new Brexit Party. With this election result, it is highly probable that there would be a hard Brexit within a short time. As a consequence, the sword of Damocles continues to hang over the EU in the form of a disorderly withdrawal. An analysis by UniCredit Bank Austria reveals that each of the sectors and federal states in Austria would be affected to varying degrees by a hard Brexit. 

Only 2.3 per cent of total foreign trade with Great Britain
In 2018, the trade in goods between Austria and the United Kingdom amounted to 7.1 billion euros or 2.3 per cent of Austria's total foreign trade. This positioned the UK as the eleventh most important trading partner for Austria. "With exports worth 4.2 billion euros and imports of 2.9 billion euros, Austria obtained a robust trade surplus with Great Britain last year", states UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: "When broken down by sector, automotive industry exports worth more than one billion euros are by far the most important Austrian exports to the island nation." This means that more than 7 per cent of Austrian vehicle exports go to the UK. The machinery and electrical industries follow with a respectable gap, with exports at 770 and 336 million euros, respectively. 

Car industry most affected by new tariffs
If a hard Brexit occurs on 31 October 2019, customs duties will again become due on trade between Great Britain and the EU. The maximum tariff rates per product group and other trade barriers are defined in the regulations of the World Trade Organisation (WTO). Great Britain wants to avoid a price shock due to the new tariffs on imported goods in the event of a no-deal exit. For this reason, during a transitional period, tariffs on the majority of imported goods will be set at zero. "In this temporary tariff regime, Austrian exports to Great Britain will be subject to customs duties amounting to around 65 million euros, or 1.6 per cent of total exports", estimates UniCredit Bank Austria Economist Robert Schwarz, adding: "Austrian vehicle exports, with average customs duties of 6 per cent or 60 million euros, will bear the lion's share." The figures are calculated on the basis of Austrian exports to the United Kingdom from the previous year. 

Yet it is also possible that Great Britain will levy the maximum tariffs permitted under WTO rules on its imports. Under this tariff regime, customs duties amounting to 175 million euros would have applied to Austrian exports in the previous year. In this case, too, the most severe effect would be felt by the automotive industry, at 80 million euros. 

For imports of British goods into the EU, a hard Brexit means that the same tariff level applies as that applicable to imports from countries with which the EU has not concluded a free trade agreement, such as China. If these tariffs had been applied to Austrian imports of goods from Great Britain in the previous year, this would have resulted in additional charges of around 100 million euros, or 4 per cent of total imports. The automotive industry is also affected most severely with regard to imports. It would have to bear half of the import duties, equivalent to 50 million euros, followed by the machinery industry at 11 million euros. 

Federal states affected by Brexit in different ways
Austrian federal states would be affected to different degrees by a hard Brexit. "55 per cent of Austrian exports to Great Britain come from Styria and Upper Austria, whose areas of strength lie in the automotive and machinery industries", emphasises Schwarz. The proportion of regional foreign trade (imports + exports) with the United Kingdom relative to regional product output ranges from 4 per cent in Styria to only 0.7 per cent in Burgenland. 

The British demand for foreign goods and services generated value added of 4.4 billion euros in Austria in 2018, equivalent to 1.1 per cent of GDP. Around 40,000 jobs in Austria are affected by British demand, either directly or indirectly. In this case, too, there is a large gap between the federal states. While British imports of goods and services from Vorarlberg generate value added of 1.6 per cent of regional product output, in Burgenland the figure is only 0.8 per cent. 

Nevertheless, Brexit not only brings risks for the domestic economy but also opportunities. Styria, for example, could be a beneficiary if some sections of car production are relocated from Great Britain to other countries, or if companies currently purchasing preliminary products from the UK prefer suppliers from an EU country in the future. 

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Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria 
Robert Schwarz, Tel.: +43 (0) 5 05 05-41974;
Email: robert.schwarz@unicreditgroup.at