Brexit’s impact on Lithuanian exports

Export Club: BrexitApril 26, VilniusThomas Notten Senior analyst

Enterprise Lithuania

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

Negotiations on the Brexit deal should be finalized before the end of October

Brexit referendum

Teresa May prime minister

Article 50 triggered

Conservatives lose parliamentary majority

Formal negotiations with EU start

Parliament got guarantee of a vote on final Brexit deal

First negotiation phase ended: agreement reached on

"Divorce bill", Irish border and EU citizens' rights

Agreement reached on transitional period, status of EU

citizens and fishing policy

Negotiations should be completed

Brexit day

Transition period ends

23-Jun-2016 13-Jul-2016 29-Mar-2017 8-Jun-2017 26-Jun-2017 13-Dec-2017 13-Dec-2017 19-Mar-2018 31-Oct-2018 19-Mar-2019 31-Dec-2020

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

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 € 314.2 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

Source: Eurostat and Enterprise Lithuania Research and Analytics Division calculations

0.3%

0.6%

0.8%

1.1%

1.2%

1.5%

1.5%

1.6%

1.9%

2.0%

2.2%

2.4%

2.7%

3.2%

4.1%

6.5%

0.0% 2.0% 4.0% 6.0% 8.0%

Lithuania

Italy

Croatia

Bulgaria

Greece

Latvia

Germany

Belgium

Poland

Hungary

Czech Republic

Portugal

Netherlands

Slovakia

Ireland

Cyprus

Trade balance of goods and services to the UK as a ratio to GDP, %

▪ 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

Customs checks will lead to additional administrative and logistical costs

Source: KPMG, Impact of non-tariff barriers as a result of Brexit

Source: Statistics Lithuania and Bank of Lithuania

Lithuania exports goods and services to the UK for around € 1.3 billion

€ 794.7 million € 132.3 million € 394.9 million

Exports of servicesRe-exportsDomestically produced exports

(“Made in Lithuania”)

Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

Non-oil “Made in Lithuania” exports to the UK growing slower than average

0

200

400

600

800

1000

1200

1400

2013 2014 2015 2016 2017

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

“Made in Lithuania” exports to the UK dominated by traditional products

Furniture21.3%

Plastics and articles thereof

10.4%

Fertilizer8.3%

Wood and products of wood

7.5%

Clothing and clothing

accessories6.0%

Other goods46.4%

Structure of "Made in Lithuania" exports to the UK in 2017, %

▪ The UK is the 6th 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

Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

But high-technology exports to the UK are growing

Chemistry65.2%

Electronics-telecommunications

19.9%

Aerospace7.0%

Scientific instruments5.1%

Other high-technology products2.8%

Structure of domestically produced high-tech exports to the UK in 2017, %

0

20

40

60

80

2013 2014 2015 2016 2017

Domestically produced high-tech exports to the UK, € million ▪ 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: Bank of Lithuania and Enterprise Lithuania Research and Analytics Division calculations

The majority of exports of services to the UK consists of transport services

Transport services53.7%

Business services11.0%

ICT services10.6%

Travel services6.3%

Manufacturing services

6.1%

Other services12.4%

Structure of exports of services to the UK in 2017, %

0

100

200

300

400

500

2013 2014 2015 2016 2017

Lithuanian exports of services to the UK, € million

▪ The UK is the 6th 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 3rd largest market for exports of Lithuanian ICT services

Export growth to the UK of strongly exposed products show mixed results

▪ The development of exports of product groups to the UK that are heavily dependent on the UK market shows no clear trend

Source: Statistics Lithuania and Enterprise Lithuania Research and Analytics Division calculations

Exported productExport 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 89.7 19.0% -7.7%

Dog or cat food for retail sale 26.9 28.7% 6.4%

Ammonium nitrate 23.1 31.7% 4.8%

Wooden windows and window

frames 20.7 36.7% -10.3%

Furnishing articles of cotton, not

knitted or crocheted 18.8 20.6% -6.4%

Cereal based food preparations 14.9 56.7% -5.6%

Articles for interior furnishing, of

cotton 13.8 76.6% -3.8%

Prepared or preserved fish 12.0 17.6% 14.2%

Total 822.9 4.7% -3.4%

No large swings in the exchange rate in recent months

Source: European Central Bank

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

Pound sterling (GBP) versus the euro (EUR) currency exchange rate

23 June 2016

Brexit referendum

Source: Statistics Lithuania, Bank of Lithuania and Enterprise Lithuania Research and Analytics Division calculations

Exports of financial services, leather and apparel most exposed to the UK

▪ 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

32.8%

21.7%

13.1%

11.6%

9.9%

9.7%

9.1%

9.0%

8.7%

8.3%

8.0%

0% 5% 10% 15% 20% 25% 30% 35%

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

Chemicals and chemical products

Share of exports to the UK in total exports of that sector in 2017, %

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 value-added 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

Source: Enterprise Lithuania Research and Analytics Division: Lithuania in Global Value Chains: The Role of Exports in Economic Growth in 2000–2014

Manufacture of furniture10.5%

Wholesale trade9.6%

Land transport8.1%

Manufacture of food products, beverages and

tobacco6.6%

Warehousing6.1%

Manufacture of chemicals

5.6%Manufacture of textiles, clothing

and leather4.6%

Manufacture of refined petroleum products

4.3%

Manufacture of wood4.0%

Other sectors40.5%

Structure of value-added exports to the UK in 2014, %

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

Source: Eurostat Comext and Enterprise Lithuania Research and Analytics Division calculations

Category

Export value

to UK in 2017

(€ million)

Export value to

UK under WTO in

2017 (€ million)

Price

increase

Agricultural and food products 148.5 168.5 13.5%

Textiles and clothing 101.8 112.3 10.3%

Transport equipment 8.2 8.6 4.9%

Chemicals and plastics 227.5 238.3 4.7%

Metals 50.0 51.7 3.4%

Machinery and equipment 65.3 66.8 2.3%

Mineral products 23.9 24.4 2.0%

Wood and furniture 250.0 253.0 1.2%

Other goods 51.7 52.3 1.1%

Total 927.0 975.9 5.3%

Note: calculations conducted with export data that includes re-exports

Thomas Notten

Senior analyst

+370 61238657

t.notten@verslilietuva.lt

https://www.verslilietuva.lt/analitika/

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