What do Brexit and COVID-19 mean for UK ports, distribution and manufacturing?

Overview

We spoke with Stephen Carr, Group Commercial Director of Peel Ports, and discussed how Brexit and COVID-19 could reshape the "distribution map" of the UK and increase UK manufacturing activity. We also examined the opportunities and challenges of the UK Government's freeports proposal.

Brexit: the impact on distribution

Stephen suggested there may be a shift away from the current model of heavy reliance on roll-on roll-off traffic transporting goods via the Channel ports towards greater use of unaccompanied freight – which was far more common before the EU removed its internal border controls on goods in 1993. This probably wouldn't work for perishable products such as food, where short journey times are key to ensure maximum shelf-life. However, it would be viable for non-food sectors which also rely on "just in time" supply chains; sectors such as manufacturing depend on it, primarily because it keeps the need for storage space at factories to a minimum. For such businesses, the key issue is that the goods are presented when they are needed (and if the journey takes longer, that is not a problem, so long as this has been factored into lead times for delivery).  

Brexit is likely to prompt a shift away from ro-ro traffic to unaccompanied freight

A further view on distribution was that short sea shipping of unaccompanied freight could be adapted for "just in time" delivery in certain sectors and could well be attractive to business as a more reliable alternative to the Channel ports (where the additional red tape resulting from the UK's departure from the EU Single Market and Customs Union would tend to increase the potential for delays and could also result in a reduction in capacity - see this briefing). For reasons explained below, there may also be a move away from business activity based on "just in time" models.

Redrawing the distribution map of the UK

This shift towards unaccompanied freight would probably see more UK-EU trade being handled by East coast container ports such as Felixstowe or Immingham. Even ports on the West coast, such as Liverpool (operated by Peel Ports), are already seeing an increase in traffic from the EU.

NEW ROUTES / MODES OF TRANSPORT

Stephen gave the example of the new weekly Liverpool to Santander ro-ro ferry service, which has proved popular with hauliers from the Iberian peninsula. He thought its success had been driven partly by concerns over Brexit and partly by the fact that COVID-19 had resulted in numerous cancellations and delays of sailings at the Channel ports; although the overall journey time was longer, hauliers (particularly those from Southern Europe) appeared to value the reliability/absence of delays and the shorter time spent behind the wheel of their vehicle. Indeed, some UK businesses have even moved away from road haulage altogether for some aspects of their supply chain; major super-market chains, for example, have started using the rail network to transport many of their products which are currently sourced in Spain.

The impact of COVID-19 on supply chains

Stephen noted that COVID-19 had highlighted the vulnerability of supply chains to disruption (whether from events such as pandemics or delays produced by Brexit-related border red tape). This may prompt a significant number of businesses to look at bringing more activity back to the UK. In particular, there may be scope for businesses in some sectors to reduce their reliance on "just in time" models (which are particularly vulnerable to delay) by switching towards the bulk import of raw materials/components/ingredients and then carrying out processing operations in the UK to produce final products.

A shift towards more trade with non-EU countries

Brexit might encourage this trend because it allows the UK to determine its own trade policy, which could give rise to opportunities/incentives to import more products in bulk from non-EU countries. Stephen noted that some of the changes which could drive this change are coming in from January 2021 (see textbox).

TARIFF REDUCTIONS FROM JANUARY 2021

From 1 January 2021, the UK will apply its own Global Tariff to its trade with other WTO members – which it will be free to do as a result of leaving the EU Customs Union (since the latter requires it to adhere to the EU's Common External Tariff). Out of almost 12,000 tariff lines, tariffs are being reduced or removed on just over 2000. In some cases, the reductions are quite substantial e.g. in the order of 10% or more. Most obviously, this should make it cheaper to import certain goods.  Where the goods in question are raw materials or intermediate products, it may also make it more attractive to carry out processing or manufacturing in the UK.  Although economic assessments do not suggest a dramatic effect on the UK economy as a whole, there are likely to be certain sectors where these reductions will have a positive impact and could encourage new economic activity.

This combination of Brexit-related changes and the impetus provided by COVID-19 to improve supply chain resilience could help to support the UK Government's "levelling up" agenda by "rebalancing" economic activity away from the South East towards areas in the North. In the longer term, Stephen also thought that outside the EU, there was more chance of the UK managing to reach a trade deal with China.

Freeports are coming (like it or not!)

Stephen acknowledged the controversy and scepticism about the UK Government's proposals for freeports, particularly the claims made in relation to tariff suspension/inversion (see textbox below). However, he made the following points:

  • Freeports will offer a range of benefits, including tax and planning advantages – so the advantages are not purely customs/tariffs-related and it is likely that some businesses will find the overall package attractive;

  • He thought the "branding" advantages of freeports were underestimated; for example, it was evident from discussions with US investors that "freeports" was a well understood concept, whereas the customs procedures referred to in the textbox below were not;

  • Like it or not, freeports are almost certainly coming – the policy was promoted by the current Chancellor of the Exchequer when he was a backbencher and responsibility for its oversight has been transferred to the Treasury. In particular, they are seen as a way of rapidly bringing about a rebalancing of economic activity towards less well-off regions of the UK.

WHAT IS TARIFF SUSPENSION/INVERSION?

Tariff suspension is where goods are brought into a country and held in a secure warehousing facility; tariffs are only paid when the goods leave the warehouse and are dispatched to e.g. retail outlets for sale. In the US, freeports are commonly used for this purpose as it helps retailers to manage their cashflow when building up inventory ahead of busy periods such as Christmas (as they do not have to pay tariffs at the point of arrival).

Tariff inversion is where goods which would ordinarily be subject to relatively high tariffs are brought into a country without the obligation to pay tariffs immediately (tariff suspension) and then processed or manufactured into another product, on which tariffs are lower.  Tariffs are only levied when the final product leaves the freeport (or it is re-exported and tariffs are only paid on arrival at the country of import).  Again, this is a common rationale for use of freeports in the US.

A common critique of freeports is that existing customs procedures allow for both tariff suspension and (to a degree) tariff inversion (outside freeports). For example, tariff suspension can be achieved by storing goods in a bonded warehouse.  Meanwhile, tariff inversion can be achieved by taking advantage of inward processing relief.

But making freeports a success will be challenging

Stephen commented that implementing the freeports policy will be complex and challenging. For example:

  • Ports/coastal areas may not always be the best place for storage or manufacturing facilities (and in some cases may not even have room for it) – so the extent of the hinterland included within the freeport zone would need to be flexible enough to include areas which were suitable for such developments (and would welcome it).

  • Some candidate areas for freeport status straddle a number of local authorities; there is a risk that they will have different views on how far the proposals will benefit them, absent formal mechanisms for arbitrating between them or ensuring that areas which are subject to extra burdens (e.g. in terms of traffic or costs) will share in the economic benefits of the freeport.

  • Development costs are likely to vary considerably across the country, with some areas needing to make extensive use of brownfield sites (which are typically more expensive) and some even needing to consider release of land from areas of greenbelt (which is likely to be controversial).

About Peel Ports

Peel Ports is a longstanding client of Travers Smith LLP the second largest port group in the UK, owning or operating 8 ports and handling 70m tonnes of cargo per year. It carries c.13 per cent. of the UK’s total port traffic. The group’s operations comprise ports and ancillary services that benefit from a broad variety of customers and handle a diversified range of cargoes from a number of key locations in the proximity of major conurbations including Liverpool, Manchester, London, Glasgow, Dublin and Norwich. In particular, they are the largest operator in the north west region of the UK.

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