In March of last year Article 50 of the EU Treaty was invoked by the UK Government and thus the Brexit process began to unfold. Since then, the British Government and the European Union have been trying to establish common ground on what the post-Brexit world looks like. Never in the 61-year existence of the EU – formerly known as the EEC – has any member attempted to leave the Union. So, it’s not surprising that the negotiations to date have been fraught, looking at times more like a protracted stand-off between both sides than a genuine attempt at trying to understand each other’s point of view.
The British government says it wants to secure and negotiate a bespoke free trade agreement with the EU, but just what that looks like remains unclear. The UK has been a divided nation since the outcome of the Referendum in June 2016, with many different tones of ‘hard’ and ‘soft’ Brexit and a sizeable ‘Remain’ contingent who don’t want to leave the EU at all. The EU member states’ position is clearer, insisting on the ‘Four Freedoms’ established by the 1957 Treaty of Rome i.e. free movement of goods, capital, services and people.
The recent proposals from the British government for a sector-by-sector approach towards a trade deal were roundly trashed by the EU negotiator, although the ‘cliff edge’ feared by most businesses in the UK has been postponed.
Neither side of the table want the negotiations to fail. Yet even with the transition period deal agreed recently, along with negotiating guidelines for the next phase of Brexit trade talks, the future remains murky, not least for food, farming and fisheries, which have rightly received considerable attention within the Brexit debate.
The EU currently supplies 31% of the UK’s food and is a huge trading partner for Britain’s £110+ billion a year food and farming industry, which employs one in eight people in the country. As noted in a Parliamentary Report of 18 February, the EU is the UK’s single largest agri-food trade partner, accounting for 60% of exports and 70% of imports.
Over the years, a complex web of perishable logistics routes and services have sprung up to support this food trade, including UK landbridge operations for Irish exports and imports with mainland Europe. So, what does the future hold for perishable logistics post-Brexit and how is it affecting business today?
Taking the pulse on perishables
To take the pulse of the market. Cool Logistics surveyed many different players involved in UK-EU fresh and frozen perishable logistics, including producers, exporters, marketers, freight forwarders, logistics service providers, carriers, ports and retailers, as well as technology providers.
Speaking at the 21st Global Cold Chain Association conference in Antwerp during February, Chris Sturman, CEO of the Food Storage & Distribution Federation (FSDF) did not mince his words about the different political factions in the UK, stating bluntly: “It’s chaos.” Nevertheless, he acknowledged, the politicians have a duty to deliver the will of the UK people.
Taking a birds-eye view of the UK economy, prospects have been downgraded dramatically compared with a year ago. Many economists now predict no more than 1.5% growth in 2018 for the UK compared with the Eurozone average of 2.5 % in 2018 and 2.0 % in 2019.
Unfortunately, it is very difficult to obtain any reliable sector-specific forecasts for temperature-controlled trade and logistics. However, given the increase in inflation from just above 1% in 2016 to 2.6%, much of which is down to so-called food inflation, there have been few signs of importers and logistics service providers being able to pass on rising costs, including exchange rate-related costs, to UK retailers.
Observers agree that the pound having dropped massively in value compared with the Euro has been an important reason for this, although the competitive pressures the UK retail scene is currently facing from rapidly increasing e-commerce also bears weight.
The UK relies on imports for 50% of its food, 31% of which comes from within the EU
Critically, the UK relies on imports for 50% of its food, 31% of which comes from within the EU. The percentage for fresh produce is even higher. Meanwhile, there are no signs that exports of perishables from the UK have been able to benefit from the lower value of the pound.
Not surprisingly there was a consensus amongst most respondents to the Cool Logistics questionnaire, as well as most individuals spoken to directly in confidence, that so far Brexit has had little effect. The prevailing mood is that of uncertainty, with a mixture of fatalism, bafflement and rising anger peppered with some seeds of optimism.
For most perishable shippers and logistics service providers interviewed, Brexit is treated at best as a ‘nuisance factor’ and at worst just another source of challenge and disruption in day-to-day operations of handling fresh produce, fish, meat, prepared foods and other products requiring temperature control.
The rain in Spain
Small Spanish fresh produce exporters seem to be most worried about Brexit and this despite the fact the UK has not yet left the Union. Yet early signs of a divergence in trade flows towards other markets are beginning to take shape. China is clearly regarded as the buyer of last resort and possibly India for European perishable products.
Spain is the largest fresh produce exporter worldwide, exporting 12 million tonnes in 2017 and it is also the leading supplier to the UK. “There is a lot of talk in the Spanish fresh produce sector [about the new trading conditions post-Brexit] which in itself adds to fears”, said Oliver Huesmann, CEO of Malaga-based Fruit Consulting. “Nobody knows what charges will be levied,” he added. In the current climates, many producers simply don’t know what to do: should they continue to service the UK or find new markets?
The first shock came when sterling dropped its value over the last 16 months, with some producers witnessing a decline of up to 20% in real sales, although this may also have been due to other reasons such as severe frosts in January 2017.
Many producers – and this applies to Spain and other EU nations – are small traders or medium-sized companies which do not have the necessary infrastructure, human resources, language and IT skills to keep up to speed with current and evolving regulations and other exporting practicalities. And once the UK is out of the EU, it will become a ‘proper’ export country, just like India or China. “Most Spaniards are used to dealing with intra-European sales. They have never heard about real exports, customs declarations and incoterms,” Huesmann observed.
Clearly, trade with the UK will continue, especially amongst those companies already familiar with exporting overseas or companies that have very good trade relations with UK buyers. However, Huesmann is one of a growing number of observers reaching the conclusion that the UK is no longer sufficiently attractive as a market and producers will therefore look elsewhere. Any company keen to exploit foreign markets should perhaps look at developing global markets where prices may be far more attractive, he believes.
Other fresh produce countries such as the Netherlands, another top exporter of fresh vegetables, and Belgium, a leading exporter of frozen vegetables such as chips, carrots and frozen beans, are also becoming jittery about the prospects of trading with the UK in the future. However, some of them may not wish to say so openly at this stage.
Companies inside and outside the EU not currently trading with the UK may also think twice about becoming involved in handling fresh or frozen produce business with Britain.
“The UK has been never a priority for us and I guess it won´t be in the short and middle term,” said Christian Quintela, Logistics Director of SanLucar, an international fruit and vegetable suppliers headquartered in Valencia, Spain
Gung ho about WTO?
Supporters of Brexit in the UK have been vociferous about the opportunities presented by new trade deals with over 160 countries belonging to the World Trade Organization (WTO), arguing that this will outweigh the potential loss of dealing on a zero-tariff basis with the EU 27.
According to current EU law, the UK cannot conclude trade deals within or outside the EU, although it appears according to the latest available information that the UK will be able to start negotiating trade deals during the transition period, i.e. from April 2019 onwards. So far, no country has come forward offering the UK a hand of friendship and recent trips by the UK Prime Minister to India and China have not borne fruit.
Reactions from one fruit trader in India and one of the big seven perishable logistics service providers countries in Pakistan were quite typical: no interest, at least not for the time being. Their focus lies in developing their domestic markets and possibly two-way trade with China, instead.
An important obstacle for anybody interested in investing in UK fruit production is the perception of high labour costs in the UK. There are also increasing concerns that Britain will not be able to source labour from within the EU after the transition period. Net migration between the EU and the UK has already plummeted since the outcome of the Referendum.
In fact, freight logistics, transport and cold store operations in the UK have been affected by a shortage of labour for a very long time. “The UK is currently 50,000 drivers short, with over 350,000 staff working in the logistics, warehousing and distribution centre sourced from within the EU,” said Chris Sturman of FDSF.
According to the FSDF, 14,000 trucks a day enter the UK at present, arriving mostly via Dover by either ro-ro vessel or Eurotunnel. Approximately 15% of this total is hauling foodstuffs, including perishables. 90% are non-UK registered, 1,890 of them being refrigerated vehicles. Critically, 90% of trucks return empty to the Continent, so there is virtually no return cargo from the UK.
Customs concerns, inland clearance
What the UK Government and the business community ideally want are tariff-free goods trade, minimal customs formalities at land, sea and air borders as well as regulatory equivalence and mutual standards recognition for access to goods and services.
However, once Britain is no longer part of the EU many operators who have not already done so must also register for Authorised Economic Operator (AEO) status, Robert Hardy, Commercial Director at Invicta Oakland, a European supply chain integrity specialist, told the recent Global Cold Chain Alliance conference.
Based on the Customs-to-Business partnership introduced by the World Customs Organisation (WCO), AEO status authorises operators for customs simplification (AEOC), security and safety (AEOS) or a combination of the two. Currently there are only 600 logistics operators in the UK with AEO status. This is much lower than for example Germany where there are nearly ten times as many operators equipped with such licenses allowing them to trade not just with companies within the EU but with third countries as well.
Sturman warned that in future the UK will have to be able to process 300 million customs declaration a year and that the British customs trading system may came under strain unless a viable solution is found. Meanwhile Hardy argues that clearance could increasingly take place inland at warehouses and that this may reduce the pressure on ports and the risk of huge backlogs building up on either side of the Channel.
If the UK wants to continue to trade with the EU and the rest of the world, considerable investments from both the public and private sectors in Britain are needed in future. EU governments and industry will also feel the impact. Not surprisingly, the latter baulk at the suggestion that more border inspection and customs clearance staff may be needed in the future through no fault of their own. After all, it’s the UK that has voted to leave the EU.
Figures in the tens of thousands of additional border inspection staff will reportedly be needed in the post-Brexit world. Alternatively, companies wishing to trade will have to invest massively more in automated customs declaration, data processing etc. This will include staff on both sides of the Channel in all the major ro-ro gateways such as Calais and Dunkirk and in container ports such as Rotterdam, Antwerp and Zeebrugge.
This is likely to cause major disruption and frustration.
More cost and consolidation ahead
Given the lingering shortage of labour in the logistics sector, increasing consolidation is very likely, Hardy believes. “It is an interesting idea that Brexit could bring mergers and acquisitions – truth is it probably will – simply because the strongest will see the opportunity sooner and take action to gain market share.” He adds that inland ports are the key, but this requires large customs guarantees and that will only be for those that can tie up capital this way whilst trying to expand at the same time.
Cabotage, currency fluctuations and migration regulations post-Brexit are all pointing to the fact that the cost of logistics, including perishable logistics, will go up. Just consider that in the current manufacturing process of a single refrigerated truck, components cross borders within the EU up to seven times. The new customs system promised by the UK Government will therefore have to be “ready first time out of the box and robust without any glitches,” Sturman concludes.
Alex von Stempel, Managing Director, Cool Logistics Resources
Additional research & reporting by Rachael White, Director, Cool Logistics Resources