Brexit s impact on Lithuanian exports. Export Club: Brexit April 26, Vilnius Thomas Notten Senior analyst Enterprise Lithuania

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1 Brexit s impact on Lithuanian exports Export Club: Brexit April 26, Vilnius Thomas Notten Senior analyst Enterprise Lithuania

2 Content Brexit timeline Possible future trade regimes Incentives for a trade deal Administrative and logistical costs Lithuanian exports to the UK Exposure of Lithuanian sectors to the UK The impact of possible WTO tariffs on prices

3 Negotiations on the Brexit deal should be finalized before the end of October Brexit referendum Formal negotiations with EU start Agreement reached on transitional period, status of EU citizens and fishing policy Brexit day Article 50 triggered Parliament got guarantee of a vote on final Brexit deal 23-Jun Jul Mar Jun Jun Dec Dec Mar Oct Mar Dec-2020 Teresa May prime minister Conservatives lose parliamentary majority First negotiation phase ended: agreement reached on "Divorce bill", Irish border and EU citizens' rights Negotiations should be completed Transition period ends

4 What are the possible outcomes of the trade negotiations? The UK presented its vision on a future trade deal, perceived by the EU as cherry-picking The ability to conclude trade deals by it own is seen as one of the benefits of Brexit With the current British stance, the EU opts for a classic free trade agreement, such as with Canada UK government pressured by parliament to consider forming a customs union Source: Slide presented by Michel Barnier, European Commission Chief Negotiator, to the Heads of State and Government at the European Council (Article 50) on 15 December 2017

5 Economic and demographic incentives for a trade deal Although running a trade deficit with the EU, 44.3% of UK exports of goods and services are destined for the EU amounting to billion Several EU economies are heavily dependent on exports to the UK and seek for a continuation of smooth access to the UK market European manufacturing industries do not want their value chains interrupted (i.e. automotive industry) The UK is projected to become the most populous country in western Europe in 2060, making it an attractive future market for EU exporters Trade balance of goods and services to the UK as a ratio to GDP, % Cyprus Ireland Slovakia Netherlands Portugal Czech Republic Hungary Poland Belgium Germany Latvia Greece Bulgaria Croatia Italy Lithuania 4.1% 3.2% 2.7% 2.4% 2.2% 2.0% 1.9% 1.6% 1.5% 1.5% 1.2% 1.1% 0.8% 0.6% 0.3% 6.5% 0.0% 2.0% 4.0% 6.0% 8.0% Source: Eurostat and Enterprise Lithuania Research and Analytics Division calculations

6 Customs checks will lead to additional administrative and logistical costs In the case of a free trade agreement or no deal scenario, the following non-tariff barriers will have to be taken into consideration by Lithuanian exporters: General customs formalities: increase in costs Sector-specific market access requirements (i.e. veterinary and phytosanitary requirements) UK customs and regulatory authorities currently do not have sufficient capacity to conduct controls and inspections required by the future trade regime. This will likely lead to delays, possibly resulting in value losses on shipments of perishable goods (i.e. meat, dairy) Supply chains might need reorganization and redirection to other countries IT investments required for trade with third countries Quality standards might become different after Brexit, possibly leading to double costs Source: KPMG, Impact of non-tariff barriers as a result of Brexit

7 Lithuania exports goods and services to the UK for around 1.3 billion Domestically produced exports ( Made in Lithuania ) Re-exports Exports of services million million million Source: Statistics Lithuania and Bank of Lithuania

8 Non-oil Made in Lithuania exports to the UK growing slower than average Lithuanian exports of goods to the UK, million Re-exports Domestically produced exports of energy products Domestically produced exports, excluding energy products Excluding energy products, the Lithuanian produced export value to the UK increased 4.7% in 2017, while to all countries the export value increased 12.8% Fertilizers, rapeseeds and plastics contributed most to export growth to the UK Steep declines in exports to the UK have been reported in clothing and clothing accessories, wood and products of wood, fish and pastry Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

9 Made in Lithuania exports to the UK dominated by traditional products Structure of "Made in Lithuania" exports to the UK in 2017, % Other goods 46.4% Furniture 21.3% Plastics and articles thereof 10.4% The UK is the 6 th largest export market for domestically produced exports 5.1% of made in Lithuania exports are destined for the UK Exports to the UK are quite well-diversified, with the 5 largest categories making up only a bit more than half of total exports Fertilizer 8.3% Clothing and clothing accessories 6.0% Wood and products of wood 7.5% Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

10 But high-technology exports to the UK are growing Domestically produced high-tech exports to the UK, million Structure of domestically produced high-tech exports to the UK in 2017, % Other high-technology products 2.8% Scientific instruments 5.1% Aerospace 7.0% Electronicstelecommunications 19.9% Chemistry 65.2% High-tech exports to the UK grew 18.4% in 2017 The UK is the 4th largest export market for domestically produced high-technology exports 7.8% of made in Lithuania high-tech exports are destined for the UK High-technology products have a share of 8.8% in total made in Lithuania exports to the UK The chemistry category mainly consists of polyethylene terephthalate (PET) Lithuania exports considerable amounts of radar and navigation equipment to the UK Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

11 The majority of exports of services to the UK consists of transport services Lithuanian exports of services to the UK, million Structure of exports of services to the UK in 2017, % Other services 12.4% Manufacturing services 6.1% Travel services 6.3% ICT services 10.6% Business services 11.0% Transport services 53.7% The UK is the 6 th largest export market for Lithuanian services 4.7% of Lithuanian exports of services are to the UK Most transport services exports to the UK are road freight transport services Advertising and market research services are most important among business services Lithuania also exports considerable amounts of ICT and manufacturing services The UK is the 3 rd largest market for exports of Lithuanian ICT services Source: Bank of Lithuania and Enterprise Lithuania Research and Analytics Division calculations

12 Export growth to the UK of strongly exposed products show mixed results Exported product Export value to UK in 2016 ( million) Share of UK in total exports in 2016 Export value growth in 2017 Wooden furniture other than for office, kitchen or bedroom use % -7.7% Dog or cat food for retail sale % 6.4% Ammonium nitrate % 4.8% Wooden windows and window frames % -10.3% Furnishing articles of cotton, not knitted or crocheted % -6.4% The development of exports of product groups to the UK that are heavily dependent on the UK market shows no clear trend Cereal based food preparations % -5.6% Articles for interior furnishing, of cotton % -3.8% Prepared or preserved fish % 14.2% Total % -3.4% Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

13 No large swings in the exchange rate in recent months Pound sterling (GBP) versus the euro (EUR) currency exchange rate 23 June 2016 Brexit referendum Source: European Central Bank

14 Exports of financial services, leather and apparel most exposed to the UK Share of exports to the UK in total exports of that sector in 2017, % Financial services Leather and related products Wearing apparel Other manufactured goods Furniture Textiles Maintenance and repair services Wood and of products of wood ICT services Manufacturing services 0% 5% 10% 15% 20% 25% 30% 35% 32.8% 21.7% 13.1% 11.6% 9.9% 9.7% 9.1% 9.0% 8.7% 8.3% The exposure of Lithuanian exports of goods and services to the UK is 3.7%, made in Lithuania exports are exposed for 5.1% and exports of services for 4.7% Financial services exports have the highest exposure to the UK, followed by exports of leather and related products and wearing apparel Exports of land transport services are only for 3.3% exposed to the UK Chemicals and chemical products 8.0% Source: Statistics Lithuania, Bank of Lithuania and Enterprise Lithuania Research and Analytics Division calculations

15 The UK generates 1.3% of GDP through value-added exports From our analysis of global value chains we estimated that in 2014 (latest year for which data is available) around 1.3% of Lithuania s GDP is a result of valueadded exports to the UK Most value added exports to the UK are generated by furniture manufacturing, wholesale trade, land transport services, food manufacturing and warehousing Structure of value-added exports to the UK in 2014, % Other sectors 40.5% Manufacture of wood 4.0% Manufacture of refined petroleum products 4.3% Manufacture of furniture 10.5% Wholesale trade 9.6% Land transport 8.1% Manufacture of food products, beverages and tobacco 6.6% Warehousing 6.1% Manufacture of chemicals 5.6% Manufacture of textiles, clothing and leather 4.6% Source: Enterprise Lithuania Research and Analytics Division: Lithuania in Global Value Chains: The Role of Exports in Economic Growth in

16 Prices of Lithuanian exports in the UK in a no deal scenario In the case no deal will be reached, EU-UK trade relations will fall under the WTO trade regime WTO tariffs are especially high on agricultural and food products and textile and clothing In a scenario with WTO tariffs in place Lithuanian products would lose competitiveness vis-à-vis local British producers Even with a no deal scenario, Lithuania s furniture industry is little affected Category Export value to UK in 2017 ( million) Export value to UK under WTO in 2017 ( million) Price increase Agricultural and food products % Textiles and clothing % Transport equipment % Chemicals and plastics % Metals % Machinery and equipment % Mineral products % Wood and furniture % Other goods % Total % Note: calculations conducted with export data that includes re-exports Source: Eurostat Comext and Enterprise Lithuania Research and Analytics Division calculations

17 More information Thomas Notten Senior analyst

18 Thank You!