Wednesday, February 15, 2017

Impact of Brexit on Exports– it’s about prices so far but watch out for those airplanes

The release today of the December 2016 External Trade figures saw a number links to Ireland’s export performance and the UK referendum on the EU back in June - notably Brexit wipes half a billion euro of Irish exports to Britain.

While it is true that our goods exports to Great Britain were lower by €496 million in 2016 the link to the referendum is less clear-cut.  And with goods imports from Great Britain falling by €1,354 million our net external trade position with Great Britain actually improved by €858 million in 2016.

External Trade with GB

The reason why imports are lower this year is largely related to refined fuels and natural gas. 

Up to November 2015 we imported €1.7 billion of refined fuels, whereas up to the same point in 2016 these imports were €1.1 billion.  The average price per tonne of these fuels fell from €500 to €385 with the quantity of these exports falling by ten per cent.  In 2015, 82 per cent of refined fuel came from Great Britain; in 2016 this fell to 72 per cent.  Imports from the United States filled the gap rising from six per cent to 11 per cent of imports in this category.  In total we imported three per cent more refined fuels by volume for 28 per cent less by value. 

We only import natural gas from Great Britain and the volume of gas imports are down 33 per cent in 2016. In value terms natural gas imports fell €1 billion to €0.6 billion.  It is these movements in refined fuels and natural gas that account for most of the improvement in Ireland’s balance of trade with Great Britain.

However, it is exports to Great Britain that are primary interest.  Since the shutting down of the “missing trader” VAT scam in 2002 Ireland’s goods exports to Great Britain have been remarkably stable. In 2003, Irish goods exports to GB were €13,488 million; in 2016 they were €13,314 million, just one percent higher in 13 years.

Good Exports to the GB

The half a billion drop seen in 2016 is not unusual but it is worth looking a little closer at the categories which are the source of this decrease.

External Trade with GB by Category

On its own SITC 7 – machinery and transport equipment – experienced a fall equivalent to more than three-quarters of the total fall in goods exports to Great Britain.  We only have the detailed data to November but most of the fall in this category is down to two sub-components:

  • SITC 79: Other transport equipment (including aircraft)
  • SITC 75: Office machines and automatic data processing machines

In the 11 months to November 2015, we sold 41 wide-bodied aircraft (SITC 792.40) with a value of €501 million to Great Britain.  To the same period in 2016 wide-bodied aircraft sales numbered 32 for a value of €266 million.  This represents a drop in exports of €235 million and is largely down to a small number of decisions taken by an even smaller number of aircraft leasing firms.

For SITC 75 the culprit appears to be storage devices (whether or not with the rest of a system), i.e. SITC 752.70.  Up tp November 2015, we sold €263 million worth of these devices to Great Britain, with exports of €221 million recorded in 2016 – a drop of €42 million.  And this may be a price effect.  In the first 11 months of 2015 the number of units sold was 68,000 while that actually increased to 78,000 in 2016.  So almost half of the drop in the value of goods exports to Great Britain can be attributed to wide-bodied aircraft and the decreasing cost of digital storage devices.

However, while we might be able to dismiss the fall in SITC 7, the drop in food exports to Great Britain is likely to be of real significance.  These exports were down €221 million or 5.5 per cent in 2016 though it should be noted that overall food exports had their best ever year in 2016 and exceeded €10 billion for the first time.

Food Exports since 2000

And it is also the case that the poor performance of food exports to the UK was evident right from the start of the year, though did accelerate markedly around the middle of the year (i.e. post the referendum on the EU).

Cumulative Change in Food Exports to GB
However, whatever export losses were experienced with Great Britain were, in aggregate terms at least, more than offset with increases elsewhere.  The most significant of these increases were in exports to the US and China.  Food exports to the US rose €144 million (up more than 50 per cent in the year) while food exports with China rose €207 million (a rise of almost one-third).   This €351 million rise in food exports to these two markets more than offset the €221 million reduction in sales to Great Britain.

The biggest increase in food exports to China was “Food preparations for infants, for retail sale, or flour, meal, starch or malt extract” (SITC 098.93) which one assumes contains baby formula.  Up to November these exports to China rose to €444 million in 2016 from €305 million the previous year.  It not clear what the extra sales to the US actually comprised.  Exports in the food category “Other food preparations, nes” (SITC 098.99) to the US rose from €37 million to €123 million in the first eleven months of 2016.

So, at an aggregate level, increased food exports to the US and China are offsetting the fall in good exports to Great Britain but it is not clear that the value added from these exports are accruing to Irish residents.  We don’t know who is selling the powdered milk to China and we don’t even know what it is that we are selling more of to the US. 

But a more pertinent question is to determine what exactly it is we are selling less of to Great Britain?  We can answer that using Trade Statistics figures and here are the outturns to November 2016 compared to the same period in 2015 for the three-digit SITC food categories. By November 2016 food exports to Great Britain were running €171 million behind what they had achieved the previous year.

Food Exports to GB by Category

The biggest drop is the €66 million decrease in category 017 other meat, with the majority of this relating to poultry, where exports to Great Britain fell by €47 million.  The next largest category is the anomalous 098 for items not classified elsewhere and within this is 098.93 - food preparations for infants - where exports to GB fell by €40 million.  These  

After those two there was a €34 million drop in cheese exports and a €20 million drop in butter exports through a combination of lower price (possibly via the exchange rate) and slightly lower quantities.  The only other category to show a decline of more than €10 million was that for cocoa and chocolate.

There aren’t too many categories showing increases and the only notable increase was for beef or veal which was up €42 million in the first 11 months of 2016 compared to the same period in 2015.  However, this 6 per cent increase in value should be considered in the context of an 18 per cent increase in volume.  Beef exports to GB rose from 127,000 tonnes to 155,000 tonnes.  Thus, the price per ton of beef exported to GB fell from €5,400 to €4,700. 

If fact if we look at the prices across all categories the price pressures are clear.

Food Exports Prices to GB by Category

The prices are measured per tonne of goods exported in each category so is rather crude.  But the pattern is clear.  Prices are down.  The price of beef exports to Great Britain are 13 per cent lower, cheese prices are nine per cent lower with mushroom prices six per cent lower.

Weighted by the value of export sales in 2016 the average price of food exports to Great Britain are eight per cent lower in 2016 compared to 2015.  This is likely the result of fixed prices in sterling translated into lower euro receipts.  In markets with tight margins this may not be sustainable.  So maybe with these pressures, something like this is merited.  And all this without the UK having actually left the EU.