The build-up to Brexit and the state of global trade
As Brexit gets ever closer, we talk trade, tariffs and tough negotiations with James Hookham, Secretary General of the Global Shippers Forum
In an increasingly unsure and turbulent international trade environment, Reuters Events: Supply Chain talked with international trade expert, James Hookham, Secretary General of the Global Shippers Forum. He gave us the lowdown on the critical decisions coming down the pipeline that will alter the face of international trade and what you need to be preparing for.
Q: Where do we stand with Brexit negotiations?
The working assumption of the British Government and for most businesses is that there will be a ‘hard’ border between the EU and UK (except for Northern Ireland) from midnight on 1 January 2021, when the Transition Period is due to end. On that date the UK will commence trading outside of the European Customs Union and the EU Single Market and will effectively become a third-country trading with the EU on the terms prescribed by the World Trade Organisation (WTO).
The negotiations currently underway are intended to produce a new EU-UK Trade Agreement that may ameliorate some or all of the WTO conditions but both sides are saying this is likely to be only on matters of detail and on the scale and scope of tariffs, etc.
Although the UK is promoting a ‘No Tariffs, No Declarations’ outcome similar to the EU-Canada deal, the price set by the EU (regulatory alignment, ECJ jurisdiction, state aid rules, etc) seems to be impossibly high for the UK to concede politically.
Any business reliant on UK-EU trade should assume a ‘No Deal’ outcome and just be grateful if anything less does actually emerge. Northern Ireland trade is different and will take more time to explain.
Q: What would a ‘hard Brexit’ entail?
A ‘hard’ border means full Customs declarations, regulatory checks and increased inspections for all movement of goods between the UK and the EU. These are no different to the controls encountered when goods are traded with countries outside the EU but the costs and management challenges for business (and border agencies) will be to adapt the high-throughput, interconnected, multi-country supply chains and enforcement regimes developed over 25 years of ‘frictionless trade’ to work with the new controls – both the physical interventions and the new digital documentation requirements.
Unless covered off in a new trade deal, there will also be additional overlays arising from requirements to produce Safety and Security Declarations, acquire goods vehicle permits for vehicles, and satisfy Country of Origin requirements for goods made with ‘foreign’ parts or ingredients.
On 13 July the UK Government published its ‘Border Operating Model’ that sets out what will need to be done, by whom, at what stage and by what means (although much detail still needs to be decided). At the same time the Government announced that some of the requirements for UK imports would be delayed until later in 2021 to give industry (and probably them) time to adapt. Brussels is adamant that full EU border controls will apply from 1 January, no exceptions. As a result, there are plans to carefully manage traffic flows and queues in Kent.
The bottom line is that things will change at the UK-EU border at the end of the year, so get ready now!
Q: What about UK-global trade?
Brexit also has implications for traders outside the EU too. The Government published its new Global Tariff in May that will replace the Union Customs Code for all UK-bound goods. Many UK-bound shipments are shipped via continental ports and airports and will become subject to new Transit controls from next year. The UK is also planning to introduce a new Customs Declaration System which will eventually handle all UK imports and exports. Many nations currently trade with the UK under EU trade agreements, so their status needs to be clarified (or rolled-over) before the end of year.
Q: What other protectionist measures are being considered or coming into force?
Some we know about, but may get worse. Others are threatened and are yet to appear. These include In no particular order: US-China tariff wars; US-EU trade sanctions, arising partly from the Airbus-Boeing state subsidy dispute; China-Australia tensions; collapse of the WTO as a functioning arbiter of trade disputes; Intra-Middle East tensions plus further US-Iran sanctions.
Then there are other measures seemingly benign or beneficial in their aims, but which affect trade indirectly: the proposed EU Green Tax and other climate change policies, food safety standards; invasive pest controls; anti-slavery and anti-money laundering controls, trade in endangered species and new taxation polices (e.g. the tax on digital services, VAT on e-traded goods). Not to say that these shouldn’t happen but businesses will need to make sure they are understood, implemented and complied with.
Q: Is trade becoming more protectionist and nationalistic or less so? What regional differences are evolving?
More so. See above. Few disputes are genuinely ‘regional’. Trade is so ‘global’ that regional effects soon ripple out. Supposedly national ports and airports are served by global shipping lines and airlines (think Hong Kong), many countries are on transit corridors or are transport hubs (e.g. the South China Sea). Look how the closure of Chinese ports in February (due to a supposedly local health issue) affected the routing and costings of global shipping lines and airlines. And that was before Covid went global.
Q: How will changing trade stances impact costs?
The costs of greater protectionism will be directly manifested as higher Customs duties and fees for border checks. However, it is the indirect costs that are the more pervasive and more insidious, ranging from higher inventory (working capital) costs because of stock being held at the border; compliance costs for meeting new regulatory and documentary requirements; and higher overheads from monitoring and reacting to a rapidly changing landscape.
To that you can add in higher insurance, legal and accountancy costs arising from the need to evidence compliance and conformity.
Then there are the real risks of getting it wrong: fines and sanctions for trading with proscribed countries or their representatives, black-listing by government procurement agencies; credit-rating impacts and shareholder confidence.
Ultimately global trade just gets more difficult to do and fewer businesses will bother, especially SMEs without the management bandwidth and working capital to handle all this ‘friction’.
Ultimately, and this is a personal view, it is not possible to sustain a planet of 7.6 billion people beyond subsistence level without global trade. So, despite all this, I remain optimistic but it will get worse before it gets (economically rationally) better.
This will be assisted by massive developments in digitization of trade documents, proliferation of e-trading, the traceability and trackability of goods, micro-manufacturing, and energy efficiency improvements prompted by climate change policies, to name but five.