The UK Government has finally triggered article 50 and started the two-year process of leaving the European Union. We take a look at the key implications, challenges and uncertainties facing the UK logistics sector now that Brexit is happening and there is no turning back.
In her speech to parliament on 29 March, Theresa May accepted that Brexit will mean consequences for the United Kingdom. “We know that we will lose influence over the rules that affect the European economy,” she said. “We know that UK companies that trade with the EU will have to align with rules agreed by institutions of which we are no longer a part. We accept that.”
The Government may accept that, but it may not be so easy for the logistics sector to accept the next two years of uncertainty and volatility, with a clear picture of post-Brexit trading arrangements with the EU still a long way off.
What will our trading relationship with the EU look like after Brexit?
Theresa May says she wants the UK to have a “deep and special partnership with the EU”, but nobody knows what our trading relationship will look like when the final deal is done. The complexity of the different possible outcomes can’t be underestimated, but here are a few existing models that show how our relationship could shape up:
- Norway is in the European Economic Area (EEA). As such, it has almost full access to the EU Single Market. In return, it accepts free movement of people and enacts all EU laws, while contributing to the EU budget.
- Switzerland has around 100 bilateral arrangements with the EU. It takes on certain aspects of EU legislation, including free movement of people, and makes some contributions to the EU budget in exchange for access to the Single Market. It is part of the Schengen Area, so it has no passport or border controls with EU Member States, and the Dublin Regulation, which determines the EU Member State responsible for asylum seeker applications.
- Turkey is outside the EEA but has been in a Customs Union with the EU since 1995 for industrial goods, although not for agricultural products, services or public procurement. Turkey implements the EU’s industrial standards and has been a candidate country to join the European Union since 1999.
- Canada has almost completed negotiating its own mammoth bilateral trade deal with the EU. CETA, or the EU-Canada Comprehensive Economic and Trade Agreement, is expected to increase two-way trade in goods and services, help create jobs and grow economies on both sides of the Atlantic. The EU and Canada began negotiations in 2009 and the deal still isn’t finalised eight years later.
- Russia currently trades with the EU according to WTO (World Trade Organisation) rules. This is what the UK would face if it left the EU without a trade agreement similar to the Norwegian or Swiss models. The UK and EU would charge each other the same import duties they levy on any WTO member without a free trade agreement. Think Tank Open Europe has estimated that 35% of UK goods exported to the EU could face import duties of over 4%, with cars, food and textiles particularly vulnerable.
What effect will tighter border controls have on logistics?
One of the main worries about Brexit for the logistics sector is the time delay likely to be caused by tighter border controls. Lorries, ferries and cargo ships currently travel across the EU with little or no inspection. Unless the Government negotiates a free trade agreement before the two-year withdrawal period is over, the UK will find itself outside the European Single Market and Customs Union and border controls will have to change in a hurry.
“Our ferry ports, and the border in Ireland, need to have arrangements that allow trucks to move freely away from border areas,” said Richard Burnett, Chief Executive of the Road Haulage Association (RHA). “Simply using current customs practices and applying them to UK/EU traffic risks delays of biblical proportions which would strangle growth and hurt the entire economy.”
Other industry leaders agreed. “Border checks and customs checks could create queues and increase costs,” Pauline Bastidon, head of European policy at the Freight Transport Association, told the CBI Business Voice. “We calculate delays cost £3.20 per truck per minute. Multiply that by whatever the delays are and you can see the picture.”
Busy cargo port Dover is likely to be a flashpoint for severe delays, as it lacks the infrastructure and has no room to expand to make extra checks of the 2.6m trucks passing through each year. Customs checks at Dover could bring gridlock to the south-east of England, with lorries forced to queue for up to 30 miles in Kent to get across the channel, according to The Guardian, quoting senior transport industry figures.
The industry is worried about a repeat of ‘Operation Stack’ in summer 2015, when a French ferry workers strike led to 7,000 trucks blocking the motorway from Dover to Maidstone. According to the RHA, businesses lost £21m in stock from traffic delays and emergency traffic management cost the Kent economy £1.5m a day, with stretches of the M2 turned into enormous lorry parks.
Eurotunnel, which caters for 1.6m lorries a year at its Euroshuttle transporter, will also struggle to expand. Spokesman John Keefe told The Guardian, “On one side of Eurotunnel we have an area of outstanding beauty, so you can’t build to the left, and on the right we have the motorway.” But it’s also about the time-compressed nature of today’s supply chain. “There are no warehouses any more, everything is about ‘just in time’,” Keefe said, which means that goods arrive only shortly before they are needed to reduce warehousing costs. Any delays in the system could cause knock-on effects across supply chains and have a serious effect on UK trade.
The UK car industry is a particularly vulnerable sector, as it’s connected to a pan-European supply chain where components are constantly in transit between the UK and EU and are delivered just in time for assembly.
Do UK Brexit negotiators really understand the supply chain?
The Confederation of British Industry and the Freight Transport Association have urged the Government to simplify customs procedures in any Brexit deal, fearing that Britain’s EU negotiators will not appreciate the complexity of supply chain relationships between Britain and Europe.
This danger has been highlighted by industry expert Professor Alan McKinnon in his blog. He believes that understanding of today’s supply chains is very limited. Consumers, just like policy makers, don’t consider where their goods actually come from because just-in-time logistics across the Single Market works pretty well, but that could quickly change after a hard Brexit. Supply chains are what the European Single Market is all about, according to McKinnon. They cross multiple borders and bind together a continental-sized economy that offers huge economies of scale. This works in an EU without borders, tariffs or custom checks, but if barriers are reintroduced at UK ports and airports, supply chains will become stretched to breaking point.
Despite what he calls “glib reassurances from Government Ministers”, Mckinnon predicts that Brexit will cause a “major shock” to logistics systems that have taken decades to refine, but will have to be unpicked in a headlong rush if we are to continue trading effectively with our biggest market, the EU.
What logistics changes are British businesses already making?
According to The Wall Street Journal, British grocery supplier G Fresh Ltd has already adjusted its supply chain to prepare for Brexit. The firm now packs its trucks from Spain more tightly and bypasses distribution centres to cut rising import costs, as businesses across the UK start planning their strategic responses to Brexit. These moves have been accelerated by a sharp decline in the pound, which has boosted demand for UK exports but driven up the cost of imported goods, supplies and components for many British companies. While operators like G Fresh are changing distribution operations, industrial parts maker Corrotherm International Ltd has accelerated plans to open a new factory in France to avoid any new customs costs, the WSJ said.
Will hauliers suffer a serious driver shortage?
The road haulage industry is heavily reliant on foreign workers, with at least 60,000 lorry drivers from Eastern Europe, according to the RHA. It said as early as October last year that overseas drivers were either returning home or staying at home because the falling value of sterling meant their wages were less when converted into their home currency.
It’s hard to say what will happen over the next two years, but the pound’s continued slide is hitting all three of the haulage industry’s key cost areas: fuel, trucks and wages.
Keeping the skies open is as important as road and sea (and just as complicated)
Industry leaders have called upon the Government to secure open skies agreements with both the EU and the US as soon as possible. The UK’s existing open sky agreement with the US was signed as part of its EU membership, so a bilateral deal will need to be negotiated quickly.
The UK’s airlines will certainly still want access to the EU internal market for air transport, but like everything else about the Brexit negotiations, this won’t be straightforward. While it could easily be guaranteed by the UK joining the European Common Aviation Area (ECAA), this would mean accepting all EU aviation laws and securing the agreement of existing members, who may be slow to welcome the UK and its dominant low-cost carriers and other airlines.
Currently, EU membership guarantees Britain intra-EU air traffic rights as well as rights with countries outside the EU, which have been negotiated at EU level. Most important of these is the EU-US Open Skies Agreement, which allows EU and US airlines to fly between the two territories. It also allows US airlines to operate intra-EU flights, although EU airlines don’t have the same rights in the US.
To maintain the status quo, the UK will need to consider several options:
- Negotiate entry to the EU-US Open Skies Agreement in the same way as a country like Norway. This is likely to be the favoured option of UK carriers, but will come with strings attached.
- Set up a new bilateral agreement with the US. This would be more limited and could not cover flights between Paris and the US, for example.
- Negotiate new bilateral agreements with non-EU countries, to replace the open skies arrangements it currently benefits from as an EU member. This would be a huge administrative burden and a headache for the UK aviation industry, but may be necessary.