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Report from
Europe
Far-reaching implications of Brexit decision
The UK＊s decision to leave the EU 每 so-called ※Brexit§ -
by a narrow majority of 52% to 48% in a referendum on
23 June is already being felt in currency markets and stock
exchanges around the world. The short term economic
effects are already evident 每 a slowdown in growth,
certainly in the UK which might even dip back into
recession, and also in the wider EU economy.
The UK plays an important role in the EU. Whether it is
the share in total population, total GDP or FDI, Britain
ranks in the top three countries and Brexit has significant
implications for the whole continent. The UK is also the
EU＊s largest importer of timber from tropical countries by
a significant margin.
The political impact of the referendum result has been
profound in the UK, leading to the immediate resignation
of the UK Prime Minister while both the party of
government and official opposition has descended into
turmoil and a rancorous debate over what should come
next.
The survival of the UK as a political entity is itself
threatened as the nationalist First Minister of Scotland,
which voted overwhelmingly to remain in the EU, is now
seeking a new referendum on leaving the UK so that an
independent Scotland may be free to remain as part of the
EU.
Divisions have emerged within the EU between those
Member States and EU institutions that believe the UK
should initiate the so-called ※Article 50§ procedures (set
out in the EU＊s 2007 Lisbon Treaty) for withdrawal within
a matter of days to avoid prolonging uncertainty, and those
prepared to give the UK breathing space to allow a newly
appointed government to work through the implications
and plan for an orderly departure.
Speculation about when, or if, the UK will leave the EU
There is still speculation that the UK may never actually
leave the EU. An on-line petition has been signed by
more than 2.5 million people calling for a re-run of the
referendum on grounds that less than 60% voted to leave
and turnout was less than 75%.
The legal basis for this petition is dubious since the terms
agreed for the referendum in advance were that the
decision required a simple majority of those voting and not
a super-majority of the voting population as a whole.
A more convincing legal argument is that, as the UK is
constituted as a parliamentary democracy, MPs must still
vote to implement the referendum result which, from a
legal perspective, is only ※advisory§. A majority of MPs
may yet vote against the parliamentary motion to repeal
the 1972 European Communities Act, by which it voted to
take the UK into the EU, and thereby prevent the UK
leaving.
At this stage, the latter scenario seems unlikely. It would
be highly divisive and likely to create even deeper political
conflict and prolong the uncertainty. The statements issued
so far by both the UK government and jointly by the
leaders of the EU Member States, assume that the UK will
now act on the referendum result and leave the EU within
the two-year timeframe required once the Article 50
procedure is initiated - a move now widely expected
sometime between September and November this year.
It is possible the situation will change 每 negotiations with
the EU might prove too difficult, or the economy might
slide to such an extent, or the divisions between the
various constituent parts of the UK become so great - that
British MPs vote to try to halt the process at some stage.
In that event of course, it＊s unlikely that the rest of the EU
would be sympathetic to back-tracking, and the UK＊s
political and financial position would almost certainly be
weakened within the trading block.
Uncertainty leads to sharp economic downturn
In economic terms, the overwhelming issue is uncertainty.
There are already signs that this is leading UK businesses
and external investors to delay decisions until there is
greater clarity and there is some settling in volatility of
currencies and share-prices.
For timber importers in the UK, weakening of pound
sterling to a 30-year low against the US dollar, and a 30%
fall in the share value of the largest UK house builders
following the referendum 每 are certain to result in a big
decrease in buying. Whether this is short term or long term
depends heavily on the progress of the challenging
political processes now underway and the extent to which
the wider economy is able to ride the storm.
A key issue for the longer term is the eventual terms of
any trade deal between the EU and the UK. Once the UK
initiates Article 50, there would be a two-year window in
which the country will maintain unfettered market access
to the EU as it negotiated an exit. After that, the terms of
trade will be set in a new agreement.
The UK will be pushing for the best possible deal with the
EU and one which is almost certainly unrealisable. The
UK is likely to ask for continued participation in the EU
free market without allowing free movement of EU
citizens into the UK 每 an issue which proved highly
divisive in the referendum campaign.
The UK also wants to contribute significantly less to the
EU budget but to continue to participate in development of
technical standards and certain other decision making
bodies.
The EU has already issued a joint statement to the effect
that the UK will not be able to cherry-pick only those
aspects of the free market that they like, nor to have
continued access without allowing freedom of movement
and without paying the full costs of membership.
What is certain is that the starting positions for negotiation
are a long way apart and it will be extremely challenging
to reach a mutually acceptable agreement. In fact, many
EU officials and Member States are calling for the EU to
impose tough conditions on UK trade with the EU to
discourage leave campaigns in other EU Member States.
The UK has some points of leverage, for example with
certain German exporting industries that sell a large
proportion of product into the UK, but hardly seems to be
negotiating from a position of strength.
A likely decline in bilateral trade between the EU and
UK
It seems likely that there will be greater obstacles to UK
trade with the rest of the EU in the future and that the
value of bilateral flows will decrease. This will hurt the
UK economy more than the EU - UK＊s total exports to the
EU are currently equivalent to 13% of UK GDP while the
same figure for the EU is just 3%.
The imbalance could become even more pronounced when
it is considered that there is likely be a reorientation of
inward investment away from the UK to other European
countries as it loses its status as a gateway to the single
market.
There is particular concern in the UK about potential for
relocation of European financial firms with offices in
London - the financial sector is about 8% of Britain's GDP
and the departure of these firms would make a
considerable dent in the nation＊s tax receipts and overall
consumption and spending.
The expected decline in UK-EU trade will have less to do
with tariffs 每 which for WTO members are relatively low
across many product groups 每 including timber 每 than on
other factors such as the potential for diverging product
standards and a decline in cross-border business
integration and investment.
Immigration controls could further slow UK growth
Anticipated tighter controls on immigration into the UK
are also expected to negatively affect the national
economy, reducing access and increasing costs of labour,
both skilled and unskilled.
There is a strong consensus in the UK construction sector
that Britain＊s departure from the EU will hit
housebuilders＊ workforces hard and further slow activity
in this sector. The fear of serious economic dislocation in
this sector is highlighted by surveys just before the
referendum which showed that over 85% of UK
construction and real estate companies were in favour of
remaining part of the EU.
While the UK economy is expected to be particularly
badly affected by Brexit, the wider EU economy is also
expected to suffer. Trade is the most direct channel
through which a Brexit would hit the rest of the EU.
Looking at bilateral trade, Ireland and the Netherlands,
followed by Belgium seem to be the most exposed
Eurozone countries to a Brexit.
A report by Germany＊s IFO Institute suggests that Brexit
may have a dampening effect on the EU＊s largest
economy, even before it happens. The report notes that
German economic growth has been robust and was
heading towards a real upswing this year.
However, that upswing is now expected to be less
pronounced, due to the uncertainties many companies feel:
※projects that have anything to do with Great Britain will
be put on ice - they will wait before realising projects,
before they decide to recruit new employees, before they
carry out new investment projects§.
In another sign of the impact of Brexit on the wider EU
economy, company share values in both Italy and Spain
fell even further than in the UK in the immediate
aftermath of the referendum. These declines were fed less
by concern about the direct effects of Brexit on trade flows
than by concern about the political implications 每
particularly the potential for "populist exit contagion" in a
number of other EU countries where nationalist anti-EU
sentiment has been on the rise in recent years.
Brexit likely to slow tropical imports in the short term
From the perspective of the tropical wood sector, Brexit
will have significant implications. The UK is now by far
the largest importer of tropical timber in the EU.
If all timber-based products are included (primary raw
materials, secondary processed products and tertiary
products like furniture), in 2015 the UK accounted for
around 25% of the total value imported into the EU from
tropical countries. This compares to 15% imported into
France, the second largest EU market for tropical timber.
UK import value of tropical timber products increased by
32% from Euro 720 million in 2011 to Euro 960 million in
2015. This is in contrast to other leading EU markets for
which, during the same period, tropical timber imports
were either flat (Belgium) or declining (all others).
The expected economic slowdown in the UK on the back
of the uncertainty after the referendum result is therefore
likely to have a disproportionately large impact on the
EU＊s imports of timber products from tropical countries.
A large part of the recent growth in UK imports of timber
products from these countries has been in the form of
furniture from Vietnam, Indonesia and Malaysia 每 a trade
now likely to slow in the short to medium term.
Longer term, the prospects for tropical timber products in
the UK and the EU will be partly dependent on the speed
of underlying economic adjustment and partly on the
terms of trade agreed.
If UK recovery is relatively swift, there may be longer
term advantages for tropical timber producers (and other
non-EU timber product suppliers into the UK) if the new
arrangements lead to introduction of tariffs or otherwise
impede trade in timber products between the UK and
continental Europe＊s large and dominant wood product
manufacturing sector..
Uncertain policy implications
There are also uncertain policy implications for the timber
sector associated with Brexit. UK technical standards for
the vast majority of building products are now set at EU
level under the terms of the EU Construction Products
Regulation.
This situation won＊t change any time soon, particularly as
even after the UK has left the EU, UK manufacturers
selling any product into the EU will have to continue to
abide by EU standards. However, the UK＊s exit from the
EU would open the door to gradual divergence of UK and
EU standards for construction and other products.
The same could be said of regulatory requirements like the
EU Timber Regulation (EUTR), although again it＊s
unlikely that there will be any significant change in the
terms of this regulation in the UK in the foreseeable
future.
The UK in both the public and private sector has been a
leading player amongst EU countries to develop measures
such as the EUTR, provide political and technical support
for FLEGT and promote responsible timber procurement
policies. There＊s no reason to expect Brexit to lead to a
reduction in this level of commitment, nor a reduction in
co-operation between EU and UK agencies seeking to
address these issues.
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