Opinion: Brexit’s Effects on Global Forwarding Industry

This Opinion piece appears in the Nov. 14 print edition of Transport Topics. Click here to subscribe today.

Brexit is a term used a lot these days, but what is it really? How could it affect the forwarding community? The answers to those questions are only just beginning to surface.

Bruno

British voters made the decision to leave the European Union, based mostly on emotion, without fully grasping the consequences. Now that Brexit is a reality, we can expect important changes to the flow of trade into and out of both Great Britain and the remaining E.U. member countries.

Change was immediate after the vote. David Cameron, the British prime minister who initiated the Brexit referendum, stepped down. After a brutal political fight, Theresa May took his place, pledging to follow the will of the voters, even though she was firmly in the “stay” camp.

The value of the U.K. pound dropped 11.7% the morning after, sinking to a three-decade low against the U.S. dollar. The cost of imports increased proportionately for British importers. In all likelihood, the drop will continue to swing the trade balance from imports to exports over the next few months.

While negotiations haven’t even started yet, other U.K. divisions — such as Scotland and Gibraltar, which voted overwhelmingly to stay — are already talking about seeking their independence in an effort to maintain the advantages they enjoy under their current E.U. membership.

When Britain negotiates its formal departure, they will no longer be part of the E.U. duty-free zone. Each shipment from there to any E.U. member country will have to clear customs and duties, and value-added tax most likely will be assessed. The exact amounts will be part of future negotiations.

The effect of this process will be dramatic for companies with manufacturing facilities or distribution warehouses in the U.K. that had been used as gateways into the European market and its millions of consumers. Costs will increase, reducing the competitiveness of these products.

Many American firms established locations in the U.K. because they are more familiar with operating in an English-speaking environment. These companies will be forced to relocate within the zone, necessitating the movement of equipment, capital and personnel, as well as the adjustment to a new set of cultural and social standards.

To counter this adjustment, the U.K. most likely will offer additional tax incentives, but you can bet that countries with major European ports — such as Antwerp, Belgium, and Rotterdam, Holland — are already knocking on their doors with similar deals. Even Switzerland is gearing up, and it’s not even an E.U. member but has easy access to the zone.

The outflow will result in a reduction in the importance of the British seaports and airports and a subsequent increase in trade to North Europe.

Are those major ports already operating at capacity? Do they have the capability of absorbing the additional work? That remains to be seen. There are already reports that carriers, such as British Airways, will start reducing the number of flights from the United States to London and other major cities in anticipation of a reduction in business travel and cargo volumes. This will squeeze air cargo space into the major U.K. hubs and necessitate a quick increase by the E.U. carriers. It may take a while for their infrastructure to catch up.

Great Britain also had special approval within the Union to trade directly in euros, which will almost certainly be rescinded. The effects on rates and the ease of exchange for corporations operating in the U.K. could be dramatic, making their currency holdings and purchases more complicated and expensive.

To start the formal “leave” process, the U.K. must invoke Article 50 of the Treaty of Lisbon, originally designed to make the E.U. more democratic, but no one ever anticipated something like this. It is clear that the new prime minister does not intend to take that step before the end of the year.

David Davis, a Tory, has been appointed Britain’s secretary of state for exiting the European Union. Despite May’s promise to deliver a statement outlining the details of the government’s strategy for leaving and the type of trade relationship it will seek to maintain with the E.U., Davis was heckled in the House of Commons in early September for still not having one.

The recent G20 summit was May’s first international meeting since the vote — and it was not an easy one. President Obama warned that the U.K. would not be a priority for any U.S. trade deal. Japan issued a 15-page letter warning of dire consequences and confirming that Japanese companies with headquarters in the U.K. would move them to the continent if E.U. laws no longer apply in Great Britain. In her statement to the summit, May predicted Brexit would damage the economy and that there would be difficult times ahead.

The U.K. will pay a high price for making such an important decision without being aware of the consequences, and we as forwarders should be prepared for the changes it will bring.

Bruno is the senior vice president of strategic projects at ICAT Logistics. She brings more than 25 years of experience in international logistics and leads the effort to grow the company’s presence in key markets across Europe, Asia and South America.