Brexit risk for French exporters (Note)

News: On June 23, 2016, the British voted in favor of Brexit, signaling their desire to leave the European Union (EU). EU members would like the United Kingdom to begin the official process of leaving the EU as soon as possible. However, once initiated, the procedures would take two years to complete, according to the Treaty of Lisbon. Beyond the uncertainty this creates, French exporters of goods could be affected depending on the various post-Brexit outcomes.

Different impacts and scenarios over time

The United Kingdom is one of France’s leading trading partners: 6.8% of French exports of goods and merchandise are destined for the United Kingdom, making it France’s leading trading partner outside the euro zone. French exporters could therefore be affected by Brexit:

1. In the short term : The uncertainty surrounding this unprecedented situation has had, and will continue to have, a negative impact on financial markets, with several potential consequences: high market volatility, falling stock markets, depreciation of the pound sterling/appreciation of the euro against the pound, and a decline in business and consumer confidence. In the United Kingdom, these various factors could cause businesses (postponement of capital expenditure) and households (decline in consumption due to negative wealth effects[1] and precautionary savings) to adopt a wait-and-see attitude. A decline in imports of French goods could then be expected.

2. In the medium term : Short-term factors will affect economic activity and contribute to a decline in UK growth. The decline in GDP will likely be strongly linked to the extent of the depreciation of the pound sterling. In the event of a sharp fall in the pound (e.g., more than 12% by early 2017), combined with a probable rise in inflation, British consumers will see their purchasing power decline and the price of exported goods, particularly from France, is likely to increase. This decline in private consumption would then have an impact on imports of goods[2].

3. In the long term : Upon leaving the EU, the UK will have to renegotiate free trade agreements (FTAs) with its European partners in order to avoid paying nearly £5.6 billion annually in customs duties. It is therefore difficult to imagine that the United Kingdom will not find a solution to this issue, given that Europe accounts for more than 50% of its export markets. The most likely scenario is that the United Kingdom will reach an agreement to regain access to the single market, either through a multilateral agreement like Norway currently has, or through bilateral agreements like Switzerland. However, such negotiations would likely take a long time to set up, and reaching an agreement would also take time. The uncertainty surrounding the outcome and terms of a new agreement could then hamper trade between the UK and its trading partners and force French exporting companies to adapt while they wait.

Uncertainty and falling demand from British households, or even falling corporate margins, would be the main causes for concern for French exporting companies. However, not all sectors will necessarily be affected.

Exposure to Brexit by sector

The chart below shows the sectors that could be affected by the risk of Brexit[3]. The more a sector exports its goods to the United Kingdom, the greater the risk appears to be, as may be the case for the beverages and tobacco sector (12% on average of total exports to the United Kingdom between 2010 and 2014), food (8.3%), and chemicals (7.2%).

However, it is possible to look at the problem from another angle, namely in terms of the existence of significant markets in the rest of the world and the ability of sectors to increase their export volumes, which is a sign of competitiveness.

· Sectors with modest exposure to Brexit risk: The sectors located in the upper right-hand corner of the graph are those where export momentum is strong and global demand is, on average, more dynamic. As a result, sectors such as food and energy appear to be less exposed to Brexit risk and could find other outlets given strong global demand. This is also the case for the beverages and tobacco sector, but to a lesser extent given the significant share of exports to the United Kingdom.

· Sectors with moderate exposure to Brexit risk: The sector in the upper left corner includes « sub-sectors » that export animal or vegetable oils and non-monetary gold production. These sectors benefit from very strong global demand and a below-average share of exports to the United Kingdom (6.1%). By increasing their propensity to export, these sectors would be able to find outlets without depending on British demand.

· Sectors with medium exposure to Brexit risk: The manufacturing sector, located in the bottom right-hand corner, has high exposure to the UK market (7.7%) and, despite stronger export growth, faces below-average global demand. Without a rapid FTA agreement, this sector could encounter more difficulties in terms of outlets outside the UK.

· Sectors with high exposure to Brexit risk: The sectors in the bottom left are not very dynamic in terms of exports and do not benefit from particularly strong global demand. This situation is more worrying for sectors such as metals and chemicals, given their exposure to the UK market (6.9% and 7.2% respectively). While the wood and paper sector appears to be slightly less affected (only 2.2% of its exports go to the UK), the machinery and equipment sector is also exposed to Brexit risk.

Conclusion

While French companies will initially focus their attention on the economic situation in the United Kingdom in order to assess the potential impact on their exports, it is the negotiations on the FTA that will generate the greatest expectations in the longer term. The risk of Brexit will not necessarily affect all sectors, but those that are heavily exposed to the UK market without benefiting from very dynamic global growth for their products.