Brexit: Assessing the Potential Impact on Global Wood Products Industry

On June 23rd, 2016, the United Kingdom (UK) voted to end its membership with the European Union (EU), creating widespread uncertainty in global financial markets; the S&P 500 fell 3.59% in the U.S., the FTSE 100 fell 3.15% in Britain, and the DAX index fell 6.82% in Germany. These bearish reactions reflect larger concerns that may contribute to reduced growth of the UK economy including increased uncertainty about future levels of household income, a deteriorating terms of trade, and a discouragement to invest among UK firms. Together, these factors may lead to reduced consumption, production, trade, and value added within the British economy. Furthermore, Britain’s exit means the EU loses economic power as Britain represented 16.2% of the EU’s economy in 2015; an important implication as the EU will likely remain Britain’s most important trading partner

Screen Shot 2016-08-30 at 1.15.32 PMThe forest products industry may be vulnerable to such developments. Wood products are normal goods, such that declines in relative income negatively affect consumption. Furthermore, the industry is an increasingly complex market, as wood products are interlinked and traded internationally to capture comparative advantage. As a result, economic shocks within the EU are likely distributed across wood product markets and regions, as observed in recent renewable energy policies within the EU and the UK. Nonetheless, the impact on the forest products industry has the potential to be significant as the UK relies heavily on imports. In 2014, the UK had a net trade deficit of $2.2 billion in lumber, $0.8 billion in wood pulp, and $1.4 billion in wood based panels. Clearly, declining consumption and an eroding terms of trade will affect the UK wood products industry, and may have implications in international markets (See Fig. 2).