The crucial services exports, manufacturing exports and imports, the arts & entertainment industry, fishing industry… it’s a mess.
By Nick Corbishley, with a little help from his father Peter Corbishley. For WOLF STREET:
This article — the first installment of a two-part series — explores some of the dark sides of Brexit that have emerged so far. It is not intended to reopen any debate about the 2016 referendum or the negotiations over 4 years between the EU and the U.K. which culminated in the Withdrawal Act and subsequently the Trade Deal. Its focus is on the current short-term effects, though they may become medium-, if not long-term ones. Time will tell. The second installment in a few days will look at some of the isolated bright spots that are beginning to shine through.
Brexit began in earnest 50 days ago, on January 1, with the entry into force of the EU–UK Trade and Cooperation Agreement. It is — at least to my mind — the first ever trade agreement that actively seeks to slow down the flow of trade between the two signatory parties. And the costs are mounting for companies on both sides of the English Channel, particularly the British one. And the benefits remain largely elusive. This is no great surprise: Brexit is a process, not an event, and it will take time for most of the benefits of separation from the EU to feed through. Many of the costs, meanwhile, are of immediate impact, although some will no doubt fade as companies adapt to the new procedures.
The UK’s fishing industry is one of the hardest hit sectors, despite the disproportionate attention the sector, which represents just 0.5% of the economy, received in the final stages of negotiations. Prior to Brexit, about 80% of fish caught in the U.K. was exported to the EU. But on January 1 the industry started to unravel. In no time fishing ports from Scotland to Cornwall were up in arms about border delays and unanticipated changes in regulations, causing fish to be left rotting by the roadside or deliveries to be aborted.
The arts and entertainment industry, which is worth an estimated £111 billion to the U.K. economy each year, is hurting. According to the Creative Industries Council, it employs over 2 million people. Already hammered at home by Covid-induced lockdowns and social distancing rules, which led to the closure of cinemas, theaters, art galleries, and museums, and to the cancellation of live events, tours, and festivals, the industry woke up on January 1 to discover that the Brexit deal has made it almost impossible for British bands, artists, or musicians to resume touring in Europe, even once Covid has died down.
In some EU countries, work visas are now costing UK workers hundreds of pounds. The rules also mean that, once visas have been purchased and paperwork completed, a truck can only make one delivery stop in one country, plus an interior move within that country, and an additional move to just one other country before returning home. The result? Touring and festival hops become untenable. The only way forward for a UK haulage company serving the industry is to relocate to the EU. If they go, so, too, could lighting companies, sound companies, and video companies.
Manufacturers are also running up against major obstacles, as they discover that the UK government’s claim that the trade deal with the EU guaranteed zero-tariff, zero-quota trade between the two partners is not entirely true. Those protections only apply to goods traded between the EU and UK that originate from whichever side exported them. The rules of origin included in the trade deal aim to ensure that goods imported from, say, India into the UK can’t be sold on to the EU tariff-free. Complying with these rules is notoriously hard – especially for processed agricultural or industrial goods, which typically include ingredients or components from around the world.
Non-tariff barriers — largely consisting of regulatory barriers that are arguably the biggest obstacle to international trade these days — were not adequately addressed by the trade deal. With Britain now formally outside the bloc, customs checks and formalities now apply, which can be time-consuming and burdensome. Exporters now have to navigate inspections, safety regulations, and a vertiginous mountain of paperwork. Customs bureaucracy has also caused some freight forwarders to reject contracts for delivery of goods into the UK.
Some business owners say that Brexit is an even bigger problem for their business than the economic impact of Covid-19. According to Scottish Engineering CEO Paul Sheerin, “all those who export goods are suffering” as a result of Brexit. “Problems are myriad, predominantly involving availability of logistics capacity and increased costs”.
Peter Cowgill, chairman of JD Sports, one of the UK’s biggest retailers, said the red tape and delays in shipping goods to mainland Europe meant “double-digit millions” in extra costs. Because JD Sports imports many of its goods from East Asia, those goods then incur tariffs when they go to its stores across Europe. He said the company may open an EU-based distribution center to ease the problems. Other large companies are thinking of doing the same.
Large multinationals like JD Sports can just about cope with the new UK-EU trading rules, but many small independent businesses that can’t afford to set up shop in the EU are drowning in red tape. The Federation of Small Businesses says the profits of many small firms are being wiped out by the new, additional post-Brexit costs.
Sarah McCartney, the owner of a fragrance company called 4160 Tuesdays, pinned her hopes on sales to the EU after the loss of domestic sales due to lockdown. After a month, however, she realizes that, whether sourcing raw materials from abroad or dispatching products to the EU, additional forms need completing and new customs rules and VAT regulations mean extra costs. All her 60 products are now officially illegal in the EU. To make them legal would also require a legally appointed ‘responsible person’ and an outlay of £60,000.
“We’ll find a way to make it all work eventually, but until we understand the VAT issues, there’s no point,” she wrote in The Guardian.
Many other companies appear to be adopting a similar approach. Others are sending out their products, only to have them halted at one of the EU’s external borders. Hauliers have also been tangled up in reams of red tape. Many firms are having to completely overhaul their logistics process and relearn everything from scratch.
It’s still too early to know with any real precision just how badly this is impacting UK exports to the mainland. But the initial signs are not encouraging. In early February, the Road Haulage Association (RHA) said loads on lorries going through British ports to the EU had fallen by as much as 68% in January 2021 compared to January 2020. More than half of the companies reporting a drop in exports blamed the deterioration on Britain’s departure from the EU, according to IHS Markit.
But there are signs that the pressures may already be lifting. In the second week of February the rejection rate for cargo shipped from France to the U.K. dropped to the lowest level since November, reported logistics company Transporeon.
The impact on the UK’s all-important services exports is even more difficult to measure. Services represent more than 80% of the UK economy, and the EU is by far the UK’s largest services export and import market. Yet the TCA offers little support for services beyond including standard market access and the non-discrimination obligations that are typical of modern EU free-trade agreements. This is mainly due to the fact that the most important trade barriers in services are regulations, not tariffs.
One of the most exposed sectors is the UK’s financial services industry. On January 1, 2021, UK financial firms lost blanket access to the EU under the single market passporting regime and are now reliant on Brussels granting regulatory equivalence to its financial services sector. But the EU has so far only offered temporary equivalence in two areas, for derivatives clearinghouses and to settle Irish securities transactions.
The continued absence of regulatory equivalence is putting pressure on companies to shift their European operations to the mainland, or to countries that already have equivalence with the EU such as the U.S. The biggest beneficiaries have included Amsterdam, which recently drew headlines by overtaking London as Europe’s largest share trading center in January 2021, as well as Frankfurt, Paris, and New York. The UK’s share of the Euro-denominated swaps market has also decreased, from 40% in July 2020 to 10% in January 2021.
But there are a few silver linings for the City of London, as well as certain sectors and businesses on either side of the English Channel. But that will be the subject of my next article, on the short-term and potential long-term benefits of Brexit. It will probably be shorter than this one. By Nick Corbishley, for WOLF STREET.
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