Brexit prep adds to cargo costs

Brexit prep adds to cargo costs

Leaving the EU without an agreement on whether the UK will remain in the European customs union would result in customs checks for all foreign goods and massive backlogs at UK cargo gateways. Photo credit: Shutterstock.com.

The UK’s slow-motion exit from the European Union continues to confound businesses on both sides of the English Channel as they struggle to prepare for an outcome that remains undetermined.

Faced with this uncertainty, businesses have been preparing for months for a worst-case Brexit scenario: leaving the EU without a deal in place. According to the latest IHS Markit Business Outlook survey, a large proportion of UK manufacturers and producers in Ireland and Germany are already quite advanced in their post-Brexit preparations.

The survey asked manufacturers and service providers across Europe about their plans to address the impact of Brexit. Comments from goods producers exposed widespread frustration at the difficulty of formulating plans given the uncertain outcome of UK-EU negotiations, according to Pollyanna De Lima, principal analyst at IHS Markit.

She said a broad range of views was cited in relation to the likelihood of no-deal disruption to business operations, with some respondents noting that price volatility was the main concern, while a sizeable minority expressed the hope that any supply chain issues would only prove temporary.

Deal or no deal?

The UK was scheduled to leave the EU March 29, but the deadline has now been extended to April 12 to give the UK more time to get a withdrawal agreement through its legislature. So far, the UK Parliament has made no progress in finding a withdrawal agreement acceptable to all parties, and the possibility remains that the UK will leave the EU without a deal.

A no-deal Brexit will see the UK exit both the single market that allows the free movement of people across borders, and the European customs union that allows the free movement of goods among the EU’s 27 member states. Should the UK leave the customs union, all goods traveling between Europe and the UK will require customs declaration and inspection.

Shippers and forwarders on both sides of the Channel warn such a change would create massive delays at the busy ferry ports of Calais in France and Dover in the UK. The EU is the UK’s largest trading partner, accounting for 44 percent of its exports and 53 percent of all British imports.

In the IHS Markit survey, several firms cited plans to mitigate transport delays by building safety stocks and bringing forward purchases where possible. But apart from increasing the carrying cost burden for companies, the strategy can only work in the short term. Unlike on the trans-Pacific last year where front-loading of Chinese imports to get ahead of the US tariffs brought forward seasonal shipments, much of the products the UK trucks in from Europe are consumer goods and perishables that cannot be stored for long.

While shippers count the cost of their inventory, Northern Ireland continues to be the greatest complication in the Brexit process. Because the Republic of Ireland is in the EU, once the UK withdraws, the border between Ireland and Northern Ireland will become the de facto border between the UK and Europe. Lawmakers have yet to come up with a workable solution for how to make it a “soft” border, ensuring a free flow of goods between the island’s two regions.

Given this, it is unsurprising that some Irish producers polled said they had already sourced European alternatives to replace British suppliers, while others noted worries about the potential impact of a hard border on their domestic economy. A number of Irish manufacturers highlighted complications in planning for the unknown, citing concerns over sudden changes in transportation costs, additional administrative burdens, and tariffs.

In Germany, producers have been stockpiling UK goods and increasing efforts to search for new suppliers, according to the survey findings. Respondents from the UK primarily highlighted difficulties in making formal post-Brexit plans due to a lack of clarity regarding the UK’s continued involvement in the European single market and customs union.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.