Case study: Assessing the impact of Brexit on the logistics sector?

As the political deadlock in Westminster over the UK's withdrawal from the EU continues, A2 Global examines the implications of the Brexit impasse on the logistics sector.

Summary

  • Despite earlier signs of a possible compromise, entrenched positions and diverging political motives mean that the UK's main political parties are unlikely to bridge their differences
  • Theresa May's resignation as Prime Minister increases the possibility of a no-deal Brexit, which becomes more likely if a pro-Brexit member of the ruling Conservative Party becomes Prime Minister
  • Such a scenario will have far-reaching implications on supply chains, and illustrates the existing infrastructure constraints in the UK, which will amplify the impact of customs controls on goods
  • Concerns expressed by leading industry bodies remain unaddressed, despite contingency planning

Brexit uncertainty set to continue, posing a key risk for businesses

After a series of votes in parliament failed to produce a majority for Prime Minister Theresa May's proposed deal, the EU granted the UK a Brexit extension, delaying the date it withdraws from the bloc until up to 31 October. The UK was originally set to depart on 29 March but was granted an extension by the EU on 21 March. The latest extension was granted on condition that the UK participated in the European Parliament elections or risk leaving the EU on 1 June. This extended deadline led to bilateral negotiations between the ruling Conservative Party and the opposition Labour Party to seek a Brexit compromise, which ended without an agreement. Facing considerable pressure from members of her party and the prospect of a fourth defeat in parliament, May announced her resignation on 24 May, triggering a leadership contest. At present, the main contender is former foreign minister and pro-Brexit figure Boris Johnson, who warned that the UK will leave the EU on October 31, deal or no deal. Johnson has repeatedly criticised the inclusion of the Northern Ireland backstop a type of insurance policy in the event of a no-deal Brexit in the agreement, which critics claim could keep the UK in the customs union indefinitely. As A2 Global noted in December 2018, the election of a prominent Brexiteer, who is less likely to seek compromise, will harden the UK's negotiating stance toward the EU, increasing the prospect of a no-deal exit. Conversely, a Conservative prime minister with moderate views on Brexit, such as Jeremy Hunt, could try to extract more concessions from the EU, while also promising voters a referendum on remaining in the EU or supporting an amended deal.

Brexit and the logistics sector

The logistics sector is among the sectors most likely to be impacted by the UK's planned departure from the EU. Key issues for the sector will be the potential introduction of tariffs and customs controls. Existing conditions under the EU customs union As an EU member state, the UK is part of the EU customs union. This means that no duties are paid on goods moved between EU countries, and that all members apply a common tariff on goods imported from outside the bloc. In addition, once goods enter the EU, there are no additional customs checks or duties to pay. The total value of trade between the EU and third countries  both imports and exports amounted to EUR3.5 trillion in 2016. As a member of the customs union, the UK benefits from about 40 trade agreements the EU has with over 70 countries, providing beneficial market access. Conditions under the withdrawal agreement Under the deal brokered between May and the EU in November 2018 , the UK will enter a transition period after exiting the bloc, during which time there will be no additional checks on goods moved between the two markets. A free trade agreement is meant to be negotiated in this time, which will set out the future trade relations, including the cross-border flow of goods.

No deal Brexit, customs controls and knock-on effects

The decision to ask Brussels for a Brexit extension on two occasions highlights May's concerns over the economic and political ramifications of a no-deal Brexit. Despite this, such a scenario remains a possibility, especially if a pro-Brexit contender emerges as the new Conservative Party leader. Over 50 per cent of all 4.5 million heavy goods vehicles (HGVs) that transit through ports in the UK each year pass through the Port of Dover, in Kent. According to government-commissioned research conducted by University College London, just 70 seconds of customs checks per vehicle could lead to traffic jams lasting six days. About 30 per cent of food consumed in the UK is imported from the EU, and a range of products will likely become more expensive in the event of a no-deal Brexit. This scenario also poses considerable risks to logistics managers who handle significant quantities of fresh foodstuffs and other perishable goods. These will be particularly affected by the introduction of customs controls, leading to likely delays at entry points. Retailers are likely to encounter difficulties ensuring regular supplies of the diverse range of products many currently offer. Another industry that will face severe disruption in the event of a no-deal Brexit is the car manufacturing sector. Tariffs on imported vehicles, which could face duties of 10.8 per cent, will make cars much more expensive for consumers. Moreover, the large quantities of imported components used in the production process mean that additional processing time at customs will lead to an increase in costs for UK-based manufacturers. Similarly, UK-based companies manufacturing car parts which are exported to mainland Europe will also be impacted by tariffs and customs controls at EU ports. In Northern Ireland where the only land border between the EU and the UK is located new customs checks pose a risk to integrated supply chains and threaten to destabilise the fragile 1998 Good Friday Agreement, which ended decades of sectarian violence. Businesses in Northern Ireland reliant on imported products from across the border in Ireland could also lose access to, or be forced to pay higher prices for, vital goods.

Government's contingency plans fall short of expectations

In February 2019, hauliers and freight forwarders expressed concerns that the UK government's plan to introduce a simplified customs process known as Transitional Simplified Procedures in the event of a no-deal Brexit would do little to address delays at Dover. Meanwhile, the EU has plans in place for its own contingency measures in the event of a no-deal Brexit; these will likely have a considerable impact on UK exporters. Under a list of measures published on 25 March, the bloc will allow UK-based road transport firms access to the EU for a limited period of time, if the UK provides reciprocal measures for EU haulage companies. Overall, this will mean additional costs for suppliers, and longer product delivery times. UK businesses will have to adapt delivery schedules to meet these challenges. Repeated warnings and alarming reports by industry bodies illustrate anxiety that the UK government plans fall short of effectively coping with the regulatory requirements and operational risks linked to existing infrastructure constraints. These shortcomings will be amplified in a no-deal Brexit scenario.

Port capacity and infrastructure constraints

The impasse over Brexit has shed light on the UK's reliance on some ports for UK-EU trade, while also highlighting concerns over the viability of current infrastructure to cope with the introduction of customs checks on goods from the EU. A key element relating to the possible introduction of customs controls is infrastructure that links UK ports to warehouses and major urban centres. Increased congestion on both sides of the Channel will highlight infrastructure constraints at ports and associated roads. One of the key reasons why Dover is the UK's principal port for roll-on/roll-off ships, specifically built to carry vehicles used for cargo transport, is its geographical proximity to some of the EU's largest ports. For example, the journey time from Rotterdam to the Port of Felixstowe, in Suffolk, is about seven hours considerably longer than the journey time between Dover and Calais, which is about 90 minutes. Shifting supply chains to Felixstowe for just-in-time goods will also be more expensive. 

While the Port of Felixstowe has said that it plans to increase roll-on/roll-off capacity by 40 per cent through a multimillion-pound investment, this will likely take time to demonstrate material benefits. There is also bound to be opposition from local communities to the increased volume of traffic and the associated disruption. Officials at the Port of Dover have warned that delays of just two minutes in processing vehicles could cause traffic jams stretching 27km. In January 2019, the government gave Kent County Council GBP29 million for infrastructure improvements, including resurfacing existing roads and providing a holding area for HGVs at the now-closed Manston Airport, 32km north-east of the Port of Dover, ahead of the UK's exit from the EU. Any significant investment to upgrade road infrastructure and capacity at ports will probably not translate into tangible benefits in the six-month outlook. The large number of potential outcomes arising from the Brexit process makes it harder for the UK government to provide a more focused response. This in turn means that concerns consistently raised by trade bodies and industry figures remain largely unaddressed. Some businesses view stockpiling products as a solution to cope with anticipated strains on supply chains. However, given that many warehouses across the UK are currently at full capacity coupled with the overall shortage of warehouse space this is unlikely to be a sustainable option in the long term. A customs union One possible outcome arising from the current impasse in Westminster is for the UK to remain in a customs union with the EU; this would effectively mean that there would continue to be no checks on goods transported between the UK and EU. The Labour Party has supported the option of the UK remaining in a customs union with the EU. Indeed, a key reason for the breakdown in the cross-party talks was Labour's insistence on a close economic alignment with the EU. However, this scenario is highly unlikely, as the frontrunners for the Conservative Party leadership are vociferously opposed to customs union membership. The prospect of a customs union will improve if the Labour Party wins power or if a new Conservative Party leader decides to openly endorse close alignment with the EU.

Forecast

While the delay has provided a temporary reprieve for businesses, the lack of clarity over Brexit and risk of customs controls mean that European businesses could expand existing plans to shift supply chains from the UK to mainland Europe, threatening UK-based commercial interests. Subscribe to read the full article