HOW WILL BREXIT AFFECT IMPORTS AND EXPORTS IN SPAIN?
- The basic Brexit scenarios remain the same. The most likely short-term outcome is another extension of the date.
- The risk posed by Brexit to the Spanish economy is moderate, with the most vulnerable export markets being those of the automotive and agricultural sectors. As far as services are concerned, the greatest impact could be felt by tourism.
- According to an analysis by the Bank of Spain, the worst scenario would see the average year-on-year growth in GDP reduced by between one or two tenths.
The uncertainty over Brexit remains unchanged, as do the basic Brexit scenarios: A no-deal Brexit, Brexit with an exit agreement, or bringing the electorate back to the ballot box for either a general election or a second referendum. The likelihood of each of these outcomes varies from day to day. One way of following the fluctuations in real time is to look at the betting shops, which no longer restrict themselves to only taking sporting bets.
Last month, just after—regarding Brexit—Boris Johnson, the British Prime minister, announced that he would seek the prorogation of Parliament, the legislature approved a law to prevent a hard Brexit (one that would not have a mutual agreement with the European Union). This law granted Mr Johnson a period of up to 19 October to seal an agreement with the EU or to obtain Parliament’s permission for a no-deal Brexit. Otherwise, Mr Johnson must apply to the EU for an extension of the negotiation process beyond 31 October.
According to The Economist,the EU believes that Boris Johnson is legally bound by the law if, as expected, no agreement is obtained at the Summit of the European Council on 17 and 18 October. In effect, unless Johnson gives way, the Summit will probably devote more time to discussing the extension, rather than an agreement. It is said that the most likely outcome is that an extension of the Brexit date will be offered up to 31 January 2020 (or even until March or next summer), so that Great Britain can hold a democratic vote: either an election or a second referendum.
Meanwhile, Spain goes on weighing up what would happen if Brexit occurs, in one form or another.
Commercial balance between UK and Spain
The importance of the EU for Spanish exports is undeniable. According to the Monthly Report on External Trade published by the Ministry of Industry, Trade and Tourism, Spanish exports to the European Union (63.9% of the total) have grown by 4.6% year on year, mainly due to increased sales to France (which contributed 1.2 points to the year-on-year variation rate of total exports in July, 3.8%), Germany (0.7 points), and the United Kingdom (a contribution of 0.4 points). This last section is made up of cars and motorcycles and, increasingly, railway and road transport materials.
The special report by the Bank of Spain, Brexit, Balance Sheet and Perspectives, enables us to measure more accurately Spain’s exposure to the United Kingdom and the possible implications of Brexit.
At the end of last year, Spanish exports of goods and services to the British economy represented 3.3% of its GDP, a percentage somewhat lower than the average exposure of the Euro Zone. When the disaggregation between goods and services is taken into account, it can be appreciated that Spain’s exposure to the United Kingdom was higher than that of the main European partners in the area of services (1.6 of the GDP). Particularly in the case of tourism, the United Kingdom constitutes the main country of origin, accounting for around 20% of tourist entries and of the total spend.
In the field of non-tourist-related services, the telecommunications and financial services are the most prominent with (to a lesser extent) transport and business services, something that reflects the presence of Spanish multinationals in the British market.
As far as exports of goods are concerned, the United Kingdom is Spain’s fifth largest trading partner representing 7% of the total, according to Customs data. Sales to the British economy are primarily focused on consumer and intermediate goods. Among the branches with greatest exposure, the most prominent (within the consumer goods group) are vehicles and food, drinks and tobacco (11% and 9% respectively of the totals for both categories).
In the case of vehicles, ABC has reported that in the last year, 287,422 vehicles were exported to the United Kingdom (a value of 4,118 million euros), and only 80,000 British cars arrived in Spain, with a combined value of 1,486 million euros. The result is a positive balance for Spain of 2,632 million in 2018, but that is whittled down by the reduction in exports since the country held the Brexit referendum in 2016, when it reached 3,359 million.
he Bank of Spain study also underlines that companies exporting goods to the British market represent about 6% of the total number of exporters. However, the proportion of these businesses that have the United Kingdom as their sole international market (and who would therefore be the most vulnerable to Brexit) is much lower—around a quarter of the total.
Brexit short-term effects
The consequences of Brexit will vary depending on the final scenario, although the EU countries are already feeling the financial impact of the political uncertainty. According to Reuters, the date set for the United Kingdom’s departure from the EU coincides with the peak of the season for exports from Spain, as the end of the British summer sparks the import of greenhouse tomatoes and lettuces grown in the Mediterranean.
In the event of a no-deal Brexit, the lorries that transport goods from the commercial block will have to present documents for the control of goods, for safety and for quality—according to the information given to Reuters by the Spanish Ministry of Agriculture, Fisheries and Food. Spain has made its own preparations for exporting goods after Brexit, setting up a procedure for documents to be submitted electronically, and working in partnership with France, which last month tried out its “smart” frontier system to speed up entry to the United Kingdom. Nevertheless, ABC was told by José María Pozancos, the director of Fepex (the Spanish Association of Fruit and Vegetable Producers and Exporters), that many producers do not have these documents and processes ready and do not want to invest in the necessary software for submitting the documentation electronically in preparation for the eventuality that Brexit without an agreement becomes a reality.
Brexit effect on businesses
According to thel Bank of Spain, the information available suggests that the companies trading with the United Kingdom are, relatively speaking, the largest and most productive (in terms of added value per employee), and include those belonging to the food production and automotive sectors—something which could serve to cushion, at least partially, the potential negative impact of Brexit. On the other hand, the businesses that only trade goods with the British market are generally smaller and have lower levels of productivity than those which also have a presence in other countries.
A Brexit with a trade agreement would reduce the level of Spain’s GDP by only 0.02 percentage points after five years, a significantly reduced Brexit effect on exports because the rise in the value of the pound would, in real terms, partly mitigate the effects of the drop in demand from the United Kingdom. Brexit with no agreement, however, would reduce the level of Spain’s GDP by 0.5 percentage points, also over a five-year period, if it proceeds in an orderly manner—and rather more than 0.8 percentage points if it does not.
According to model simulations, the worst scenario of those we have considered would see the average year-on-year growth in GDP reduced by between one and two tenths. In the no-agreement Brexit scenarios, around 70% of the total impact on Spain’s GDP would stem from the direct consequences of Brexit on bilateral trade with the United Kingdom, while the remainder would result from its impact on Spain’s other EU partners.
The outcome of the Brexit process could change at any time, for the better or for the worse. That is why it is essential to mitigate the risks of the least probable scenario, and to focus on the continued diversification of markets and the competitiveness of Spanish exporters, while continuing to monitor what is happening in London and Brussels.
- ABC. Spain’s automotive industry risks 5,600 million with a hard Brexit. 26 September 2019
- Bank of Spain. Brexit, Balance Sheet and Perspectives. Occasional Paper N.1905, 2019
- BBC World. Brexit: 4 possible scenarios following the historic judgement of the Supreme Court against Boris Johnson’s decision to prorogue Parliament. 25 September 2019
- Publications Centre of the Ministry of Industry, Trade and Tourism. Monthly report on External Trade, July 2019, published on 23 September 2019
- Reuters. Spanish farmers baulk at no-deal Brexit. 10 October 2019
- The Economist. As Brexit talks founder, yet another delay looms. 10 October 2019