The United Kingdom (the UK) is a big importer of wood products in Europe; imports account for over 80% of all wood in the UK. Sawnwood softwood, particleboard, fibreboard and paper and paperboard are primarily imported from the European Union (the EU), notably from Sweden, Latvia, Germany and Finland.
In 2019, the wood product market has been affected by several economic and political influences, including currency fluctuations, inflated supply, the looming threat of recession, Brexit uncertainty, among others.
The pressure on prices is attributable to a boosted supply and a restrained demand amongst buyers. It seems that importers are not yet in a hurry to build up any additional stocks for the 31 October 2019 Brexit deadline; the levels of stocks remained relatively high in UK’s port terminals this summer since the anticipated earlier March 2019 deadline.
In March 2017, the UK submitted the notification to withdraw from the EU, which was followed by a complicated process of withdrawal negotiations and political backlash since the Withdrawal Agreement is yet to pass by the UK’s parliament members with only a few weeks until the 31 October 2019 deadline. The Withdrawal Agreement contains the provisions on the transition period arrangements, which would last until 31 December 2020. The current prime minister is interested in reopening negotiations on the Withdrawal Agreement, which is not viewed favourably by the EU.
The threat of no-deal Brexit has rattled the UK politics, and most recently, the UK government passed a bill to avoid no-deal Brexit by potentially extending the deadline until the end of January 2020, which does not fully guarantee a no-deal Brexit altogether as the EU is not in favour of delaying the process further. Uncertainty and speculation on the outcomes of Brexit negotiations continue to concern businesses in the whole of Europe.
Notable “No-Deal” or Hard Brexit Impacts
The hardest economic impact comes from a no-deal or “hard” Brexit, particularly for businesses that only trade within the single market in the EU without borders. Here are some challenges of no-deal Brexit on wood products trade in Europe:
Currently, there is a zero-tariff rate for wood products in the EU. After a no-deal Brexit the UK and the EU need to trade according to the World Trade Organisation (WTO) Most Favoured Nations (MFN) rules while they negotiate another trade deal.
Other countries with preferential access to the UK wood product market (through or from the EU) would no longer have the same advantage and would face the same MFN tariffs as their competitors. On the other hand, countries with higher tariffs to the EU market could benefit from possibly lower MFN tariffs to the UK market.
UNCTAD assesses that countries more integrated with the EU will most likely experience losses in their exports, while others with higher tariffs, such as the United States of America and China, can benefit more from MFN rates. This might not directly affect wood products trade per se, since the UK government has stated that in the case of no-deal Brexit most tariffs will be abolished for the EU goods coming to the UK, which was also expressed in the 13 March 2019 draft tariff document for the new tariff regime under no-deal Brexit. This draft law would ensure the EU wood product suppliers’ continued competitiveness in the UK market. The UK has already reached few continuation agreements once it leaves the EU with some non-EU countries, notably with Norway in which there are zero-tariffs on wood products.
The EU, on the other hand, does not have to remove the upcoming no-deal MFN tariffs. The average MFN applied tariff by the EU in 2018 for wood and articles of wood overall was 1.7%.
EUTR and FLEGT
The UK is interested in a smooth Brexit transition in terms of timber trade; thus, the UK has pledged to incorporate the EU Timber Regulation (EUTR) and the EU Forest Law Enforcement, Governance and Trade (FLEGT) regime and its licensing rules in the UK’s statutes post-Brexit.
Nevertheless, in a no-deal scenario, imports from the EU and the European Economic Area (EEA) to the UK and vice versa would need due diligence to demonstrate that they are importing legally harvested timber. As a result, the UK might no longer be viewing the EU as one, and likely some countries (e.g. which trade more with Russia) would be considered to be having far more risk under EUTR terms than others, increasing overall administrative costs and procedures, and impacting existing trade relations and supply chains.
Moreover, the UK will not automatically recognise organisations carrying out due diligence based in the EU or the EEA if the no-deal Brexit is reached. The EU Commission has also already announced that organisations based in the UK will not be accepted as well.
The UK would also implement their own UK CITES regulation (Convention on International Trade in Endangered Species of Wild Fauna and Flora). Timber with a permit under the CITES is compliant with the requirements of EUTR; thus, the UK, the EU and the EEA businesses importing wood products covered by an import permit from CITES will not need to conduct due diligence verifications.
Rosewood tree in Senegal (Appendix II of the CITES)
The UK also aims to ensure FLEGT licenses continue to be recognised in the UK in a no-deal Brexit scenario. For instance, Indonesia and the UK already agreed to the continued recognition of FLEGT licences after Brexit.
The requirements for product standards will be altered. For example, a revised CE marking for wood products would be required for the UK’s exports to the EU verified by the EU Notified Body, and vice versa. Initially, all existing European harmonised standards will become UK designated standards. This will mean that immediately following the UK’s exit from the EU, both the EU and the UK standards will be identical. In the longer term, however, the EU and the UK legislation could begin to deviate post-Brexit, which can cause specific implications on technical standards, e.g. for building products.
No-deal Brexit will likely cause border checks and delays, increasing costs for freight and storage, and slowing down delivery times. Storage space has been limited recently, as importers have stocked up as a contingency measure against no-deal Brexit, which is placing the logistical and financial burden on businesses, many of which are small and medium-sized enterprises.
Many experts expect that the UK’s economy will not benefit in any Brexit scenario, at least short term. Hard Brexit would be the worst option economically, reflected in a possible recession and weakening pound. An economic slowdown would likely reduce wood product demand and the EU’s exports to the UK. Experts expect that the UK would reduce their wood product consumption in general, e.g. sawnwood consumption could decrease by 1-2.1% by 2030, wood-based panel consumption could decrease by 2.9–6.1% and paper and paperboard consumption could decrease by 1.9–4.1%.
The whole process has already been causing a slowdown in the UK economy, particularly in the construction sector, despite remaining housing demand. The timber supply is essential to meeting the demand in the UK construction sector. Approximately 90% of the timber used to build homes in the UK is imported from the EU.
Suppliers from the EU are already experiencing a slow-down in their exports to the UK. According to the Association of German Woodworking Industries (HDH), Brexit discussions had already driven a decrease in exports in recent years. The German furniture-industry association VDM (Verband der Deutschen Möbelindustrie) is expecting a worst-case scenario of a reduction of up to 25% in German furniture exports to the UK post hard Brexit, while the Netherlands is expected 20% decline in wood product exports.
The EU and the UK have announced several guidelines and preparatory measures in the meantime. For instance, the UK government stated that in the case of a no-deal, they would introduce postponed accounting for import VAT on goods brought into the UK. Also, according to the UK government, there will be a one-year period of awareness-raising to allow businesses to adjust to any new obligations.
Individual European producers are not so confident in the UK's preparedness. The German HDH is more sceptical in the UK's readiness for the potential increase in customs checks, advising European suppliers to set up additional storage capacity to safeguard deliveries. Nevertheless, European suppliers are encouraged to maintain a good relationship with the UK customers, thinking of a long-term approach, despite the short- and medium-term challenges of hard Brexit.
With so much uncertainty on the outcomes of Brexit, European wood industry is doing its best to maintain an adaptive strategy for a smooth transition in trade. The UK remains a trusted trade partner for many European timber companies, which seem to be committed to maintaining a good relationship despite foreseen challenges. The UK also views the EU as a significant market and have recognised their strong relationships with European wood product suppliers. One example of good faith between both markets is the ongoing cooperation between the UK Confederation of Timber Industries and the European Confederation of Woodworking Industries on upcoming challenges to timber and bioenergy trade between the UK and the EU.
Regardless of good intentions, the impacts of hard Brexit on wood trade in Europe are not negligible. Suppliers and importers on both sides are in various states of preparedness, and further guidance and cooperation are needed to mitigate the worst of hard Brexit costs.
In anticipation of continued long-term trade partnerships between the UK and the EU, Indufor can provide services to address the potential challenges and possible opportunities of Brexit for your businesses. Indufor offers the necessary tools and forest industry consulting expertise to help businesses in developing new market strategies and feasibility studies, improving supply chain management and existing operations or engaging in acquisition or divestment. Indufor’s goal is to increase the value of its clients’ assets and operations, whether they are forests, biomass resources or manufacturing plants.
Indufor is a global leader in Natural Resources Management, Investment Advisory, and Strategic Industrial Development consulting. We support our customers to compete and grow in international markets. Indufor has own offices in Finland, New Zealand, Australia and the US, and representation in China. We have close to 40 years of experience in more than 100 countries. Our services support our clients to make the world more sustainable and greener.