DynaMarkets Monitor - The build up to Brexit
With it appearing more and more likely that the United Kingdom will be leaving the Brexit transition period with no deal, the focus on the island nation’s supply chains, port infrastructure and shipping capacity will become ever stronger. In 2019, the United Kingdom’s ports handled 486.1 million tonnes of goods, up 1% from the previous year. Trade with the European Union accounted for 41% or 196.9 million tonnes of this total, far more than any other individual trading partner.
The various studies that have taken place since the referendum result in 2016 have forecast that extensive delays, queues and other logistical disruptions would impact the sector significantly under a No Deal scenario. Yet, in the build up to a No Deal scenario, under the weight of increased traffic flows generated by the confluence of various logistical patterns the British port system is under a massive amount of stress. And the post-Brexit red tape has not yet come into effect! Across the whole economy, 2020 has been a year like no other and through the third quarter and into the fourth, the impact of Brexit stockpiling, Covid-19 pandemic consumer behaviour, the changing inventory management practices and the ongoing question of whether retail outlets need to stock up for reopening under whatever tier they are or not.
Unfortunately, so much talk in relation to the post-Brexit trade deal or lack thereof, has focussed on tariffs. Tariffs are rightly an important element, but it must be remembered that if a deal is agreed to lower or abolish tariffs altogether, there is a set of qualifying criteria for said lower tariffs. Rules of Origin regulations are a common example but this is just one element of an extensive process which begins at the factory or at the farm and continues through every single layer of the supply chain, adding complexity and more importantly, paperwork, at each level. The EU single market has, in the opinion of the author, been characterised as a free trade deal throughout the Brexit process. While this is true to a certain extent, it is far more than that. The regulatory harmony it creates between a number of the world’s largest and leading economies is unlikely to be replicated within the coming decades or perhaps longer. And this is why the framing of the post-Brexit trading relationship as a “free-trade deal” matter is well wide of the mark.
As we have seen in recent weeks with the signing of the RCEP deal and in previous years with the EU-Japan deal, the EU-Canada deal and others such as the US-Mexico deal, the proliferation of free-trade agreements is occurring around the globe. At their heart, free-trade agreements are about eliminating barriers to trade, whether these be tariffs or non-tariff measures, and in essence, they are about convergence. This convergence is about harmonisation, mutual recognition or even mutual adoption of production and trading practices which allows countries to open up their markets without the threat of unfair competition undermining domestic production, employers and workers. Brexit is the opposite. Brexit is about divergence. Whereas under other FTAs, trade barriers will be gradually removed as countries move closer across a range of regulatory and economic fields, barriers will be (in many cases slowly) removed. With Brexit, barriers between UK-EU trade will gradually be erected if one or both sides diverge from the current, non-existent, trade barriers.
From a maritime perspective, throughout the Brexit negotiations much has been made of the importance of the Dover-Calais route, which accounted for 23.43 million tonnes of the UK’s trade in goods in 2019, almost all of it with the EU. The spokesmen of other major port groups have often said that there is considerable container capacity existing elsewhere around the UK that could be utilised to take pressure off the short-sea ro/ro routes. Right now that is looking highly unlikely. While the period of exceptional volumes may subside, the friction in the supply chain is likely to emanate from other areas, a tightness in the amount of ECMT permits issued to hauliers, non-UK drivers not coming to the UK amid concerns about the likelihood of queues given many are paid by kilometre and not per hour. Following the well documented testing of the French post-Brexit port operations, the delays have not subsided, as one industry insider active in freight forwarding stated, “Both travelling from and into the UK has been terrible. it has been taking around 3-4 hours to cross into France (usually around an hour from check in the landing in France). From EU-GB it is even worse, on average taking around 4-5 hours to cross. the main ferry routes are checking in around 5hrs in advance of when you arrive to sail. North sea sailings are fully booked well in advance as well.”
The source went further to state that “there is a great shortage of drivers willing to travel to the UK. Due to the huge delays on the channel crossings, it is not financially viable for them to wait in 6-7hr delays when they could be loading for other destinations. At the moment drivers will be loading around 2 import loads per week due to these delays (from Northern France, Belgium & NL) , when usually they could be doing 4-5 per week”. The queues are said to have generated significant concerns about the safety of drivers amid an increase in migrant attempts to enter the lorries while sat stationary.
Finally, in regards to the new regulations, the source stated that “We have had a number of our British sub-contractors who have been unable to obtain the necessary permits to continue UK-EU trading. Luckily this has been extended to June but who knows after that what they will do if they are refused again. They will either be stuck doing UK domestic work, which is likely to become extremely competitive as a number of hauliers are unlikely to get the necessary permit, or they will be forced to close”. Further concerns were raised about the number of potential permits being offered, with some hauliers who have been operating over 30 years declined.
Elsewhere, it has been noted at container ports that vessels have avoided berthing as landside delays build and containers are not picked up. In practical terms, the ongoing issues at the UK’s container ports have led to major operators diverting vessel calls (Evergreen), changing the port call itineraries (2M Alliance), higher freight rates, and the restriction on potential import orders (CMA CGM).
Post-Brexit, once the current exceptional volumes and issues with container availability subside (with some carriers suggesting this may not be until the Chinese New Year), the friction will emanate from elsewhere, be it customs formalities, reduced productivity among freight forwarders in dealing with the necessary documentation, a shortage of drayage availability or other areas well documented elsewhere, the friction will remain. Overall, the magic bullet of avoiding congested ro/ro shipping lanes with extra container capacity at other ports does not appear to be a viable option, at least in the short-term. Eventually supply chains, capacity and trading practices will adjust but the current disruption could be set to stay for a prolonged period.