German firms would have to pay more than three billion euros in customs duties in the case of a hard Brexit, and UK-EU trade could be halved, a report by the Cologne-based German Economic Institute (IW) says.

Although the bulk of the consequences will impact the profit of firms, consumers in Germany could face higher prices on products as companies react to the shake-up to trade in Europe.

It came as the German government on Thursday slashed its growth forecasts for 2018 and 2019, blaming “a weaker international trade environment” for sapping the export powerhouse, AFP reports.

Gross domestic product should expand by 1.8 percent this year and next, the economy ministry said in a statement, lowering its outlook for 2018 by 0.5 percentage points and for 2019 by 0.3.

A hard Brexit arrangement is commonly seen as the UK leaving the EU's customs union  – an agreement that allows countries to set common external tariffs – and the single market, which allows free movement of goods, services, money and people in the bloc.

Initially, this would mean the UK would likely fall back on World Trade Organisation (WTO) rules for trade with its former EU partners.

“The instability and disorientation of the British negotiation position increases the risk of a hard Brexit that would cut off most ties with the EU in a more or less chaotic and sudden manner,” the report authors said.

This scenario could cause “considerably high costs on both sides of the channel,” the report authors say.

In the short term, companies on both sides of the channel could be faced with more than €15 billion of annual tariffs, and in the long term, UK-EU trade could be reduced up to 50 percent, the report estimates.

However it should be noted that Brexit is also set to provide a boost, as companies have been planning to move away from the UK to Germany. Frankfurt, the country's financial capital, is one city that will particularly benefit from this. 

Meanwhile, there are still ongoing concerns that a no-deal scenario could take place where no agreements are in place when the UK leaves the EU at the end of March next year. Politicians are hoping to finalize the terms of the increasingly bitter divorce at a two-day summit beginning next week on October 17th.

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High costs of Brexit

Assuming WTO rules are in place, the report estimates that Germany would have to pay on average 4.3 percent more for exports to the UK. For its part, the EU could impose an average tariff of 2.8 percent on British products, reports Zeit.

If the volume of trade remained the same, EU companies would incur costs of more than €10 billion per year, with German companies having to pay more than three billion euros in custom duties.  

According to the study, the British government could even impose 3.6 percent tariffs on goods from the rest of the EU and exports from Germany to the UK could fall by up to 57 percent.

The researchers believe this would hit the car industry in Germany particularly hard: Around 60 percent of the additional costs from the extra tariffs would be incurred by this sector. Germany’s auto industry is one of the country’s biggest exporters, employing around 800,000 people.

Companies in Germany are likely to react to the additional costs with higher prices and import and export products via new trade routes, the report states.

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'Horror scenario'

The IW institute said they hoped the research would help show country leaders that action was needed. In the conclusion of the report, the authors recommended that “negotiations should not only be aimed at avoiding a hard Brexit but should explicitly seek a customs union”.

“This horror scenario should drive politics towards constructive action,” warned IW researcher Markos Jung.

The UK is currently the third biggest trading partner of German firms, says IW. A total of five percent of Germany's gross domestic product is linked to trade with the UK.

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The Federation of German Industries (BDI) also expressed concern about Brexit consequences.

“A hard Brexit would be a disaster that would put tens of thousands of companies and hundreds of thousands of workers on both sides of the English Channel in great difficulty in Europe,” said Joachim Lang, managing director of the BDI. 

Meanwhile, German media reports that the government expects tens of thousands of German employees in the UK to be directly affected by the EU withdrawal.

The government gathered the data from the British Statistical Office which showed that in the years 2014 to 2016 about 80,000 German citizens were employed in Britain.