Nottingham, 11 June 2021
Thank you for your very interesting letter from the 28th May. Yes, indeed, it is a busy period – though not all work is Brexit related. And if I were to reflect on the recent news headlines, Brexit has indeed been on the back pages; though with the G7 meeting in Cornwall that is no more. G7 mood music included the failed UK/EU Partnership Council meeting between David Frost (the UK’s Brexit Minister) and Marcos Decovic (the European Commission’s Vice-President). The UK is calling for more common sense and risk-based approaches from the EU to controls between Great Britain and Northern Ireland. The reason given for this demand is that the UK “underestimated the effect of the protocol on goods movements to Northern Ireland, with some suppliers in Great Britain (GB) simply not sending the products because of the time-consuming paperwork required”. The EU’s predictable response was that the UK ‘s assertions about inflexibility are not true. The challenge is that mitigating operational solutions have not yet been put into place effectively.
This is an old trade facilitation problem in so far that solutions must be fit for purpose and can take a long time to bed-in. Inevitably, there is the cost of having to meet regulatory requirements – e.g. in the form of a customs declaration for trade between GB and the EU or a Vehicle Movement Declaration for trade between GB and Northern Ireland (NI). But it does not stop here (literally – sorry for the pun). There are also the implementation costs – not just those incurred by government, but those of the private sector who need to become familiar with the new arrangements and make appropriate changes and investments into their own compliance systems. Since many businesses that have been caught out never traded internationally before, the learning curve is steep.
It does not help, that we are still in the early days. The form and shape of UK trade policy and subsequent regulatory ambitions is not yet clear. The details of the anticipated UK-Australia Free Trade Agreement are much awaited and may lend clarity about the extent to which the UK might depart from current EU type standards and practices. Veterinary, Health and Quarantine controls and standards are particularly sensitive – especially if they make arrangements between the UK and EU or GB-NI even more complex. I will be watching this space in order to draw conclusions about the UK’s likely direction of travel – and willingness to depart from EU defined regulatory regimes.
Others are watching, too. The USA’s president Joe Biden, prior to landing in the UK for the G7 summit, made it very clear to the UK government that the Good Friday Agreement should not be put at risk. The challenges of safeguarding the all-island economy, while also mitigating the need for control between GB and NI is an extreme example of how effective border management arrangements and compliance operations are tied into trade and wider security policy. Addressing this from a political angle is tricky since the operating environment for businesses depends on set regulatory requirements (which currently, in the absence of a UK trade policy are ill defined), effective and tested compliance systems (especially IT), and investments by the private sector to develop supporting services. The latter, as you highlighted in your letter, in part depends on the scale of anticipated operations, the nature of competition, and the depth of the relationship between logistics service providers and their customers. And as you highlighted – the risks for logistics service providers are significant – to which I would add that those that do respond to the challenge will (as we can observe) charge a hefty premium.
Meanwhile, I have an anecdote to share that highlights yet further business dynamics. Last Friday I treated myself with a visit to my local fish monger. I don’t do this often, since the shop can be expensive (especially when I get carried away). Somehow, the best fish – in the recent past – would end up as a premium product on continental markets … not in Nottingham, where I live. No more! This time my fish monger was selling Cornish lobsters at just £15 and beautifully fresh line caught squid for under £10 per kg. Along with a very fresh seabream we had a most luxurious seafood BBQ … an experience that I have traditionally associated with continental holidays, not my back garden. It appears to me, based on this recent shopping excursion, that some fisherfolk are now actively seeking new markets closer at home – people like me, in the middle of the UK and deprived of proximity to the sea. No doubt, fisherfolk are exposed to lower margins and need to develop new business models! I’ll be buying more fish…
Of course, as you highlight, Covid-19 related disruptions are playing havoc to trade and border operations, too. This might be compounded by the fact that in the UK, in preparation for “normality” (much of the population has had at least one vaccination dose and many the required two) we find ourselves short of labour. Sectors particularly effected, next to hospitality, include logistics.
Reflecting on our ambition to untangle the cost of cross-border operations, it might be worth starting out with a model that describes the processes before Brexit and a model that describes the processes (with all their limitations) as they currently stand. We can then unpack the costs that are static (e.g. fees and charges) next to those that are more dynamic in nature. This might be a hobby horse of mine, but all too often the assumption is that trade compliance costs are static and akin to a trade tariff. Yet, I do find that many costs are dynamic and dependent on other variables, such as the scale of operations and the level of service provided by intermediaries. This in turn is dependent on regulatory developments (e.g. Brexit, sanctions, trade remedies), opportunity costs (e.g. forgoing the UK market because of lower hanging fruit elsewhere) and market failures (e.g. Covid-19 interventions). You could also add the positive impact of technology and innovations, and not forgetting the adoption of trade facilitation policies. Brexit – and other recent events – is demonstrating at first-hand how dynamic border economics (if we can call it that?) are. Plenty of food for thought…
I look forward to your next letter.
All the best,
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