Issue Briefs

May Be Brexit Will Not Be So Hard: UK-EU Trade Overstated

May Be Brexit Will Not Be So Hard: UK-EU Trade Overstated

By Gabriel C. Unruh

October 3, 2017

As Brexit negotiations continue, much news has been swirling about the UK’s ability to economically rebound from the consequences of a potential “hard-Brexit.”  Even a Brexit which still places the UK somewhat in the European Union will come with trade restrictions which will significantly limit UK trade volumes with EU states.  But, what if some of this pain could be quickly diminished once UK imports and exports flow directly to and from UK ports, as opposed to passing through EU ports?

Some historical and recent data suggests that UK-EU trade may be overstated, giving way to a potentially strong argument for the UK to grow and cultivate trade deals outside the EU.  So how exactly is UK-EU trade overstated?  It’s all about shipping.

The Rotterdam Effect

In 2014, UK exports to the Netherlands were worth about £23 billion.  Although direct trade with the Netherlands is clearly existent, there is data to suggest that much of these UK “exports” are then re-exported elsewhere. Rotterdam is a global transshipment hub. This means that any good which may be on route to another final destination outside the EU, will be first and finally recorded as an export to the Netherlands if it travels to Rotterdam first.  Exports, however, are not the trade flow subjected to this documentation.

One popular example of the Rotterdam effect is UK imports of oil from Saudi Arabia.  Unless proper adjustments are made through the Office of National Statistics, oftentimes Saudi oil transported via Rotterdam is counted as trade between the Netherlands and UK, instead of trade between Saudi Arabia and the UK.

An analysis published by the UK in 2013, reported that if only 50% of goods trade with the Netherlands was counted as EU trade, then only 46.5% of UK exports and 50.6% of imports are with the EU.  This is compared to the actual statistics which places the numbers at 50.5% for exports and 54.5% for imports.

This decreases the UK’s trade dependence with the EU by about 4% when reducing these trade values, only with the Netherlands, by half.  The actual value of goods that are re-imported or re-exported through Rotterdam is unclear; but what is clear is that many goods do end up being classified (perhaps incorrectly) as goods traded with the EU.

Beyond Rotterdam

Rotterdam is by far the largest European port and is among the largest in the world, but it is not the only major port in Europe.  A 2011 list of ports by cargo tonnage ranked 7 EU ports in the top 50 in the world. All these ports are in continental Europe.  In fact, there are no UK ports in the top 10 European ports by tonnage, the largest one, at number 12, being the port of Grimsby and Immingham.  The port of London is next at number 17 (82 globally).

When we look at the 2015 ranking by number of containers, the numbers are less bleak for the UK but the first two European ports (Rotterdam and Antwerp, 11.5 million TEU’s, 9.4 million TEU’s respectively) still massively surpass their closest UK equivalent, the port of Felixstowe (4 million TEU’s).

What this reveals is a current fundamental reliance on continental European ports along the Northern range for UK trade. This heavy reliance may explain the overstatement of UK-EU trade numbers.  Assuming that even a fraction of activity from these leading continental European ports is in-fact a UK re-import or re-export, the actual UK-EU trade data could be much less significant than what is generally assumed.

What’s good for now, is bad for later

The economic repercussions of a “hard Brexit” are quite clear.  Aside from trade with the EU, the UK will have to overcome steep obstacles with trade barrier de-harmonization, and state-to-state trade negotiations.

However, if we are acting under the same assumption about the over statement of trade with the EU, then a “hard-Brexit” would mean that established trade patterns with non-European partners would surely have to adjust.  This adjustment comes at a considerable risk and expense to the UK, but it is one which can be solved with smart government planning.

Assuming that, post Brexit, the UK’s trade partners will ship goods directly to the UK, we can expect that we will see massive public and private investment in UK ports, with the goal of upgrading facilities so that they will be able to handle a much larger volumes of goods.  In a normal economic cycle, this type of infrastructure investment would be a catalyst for strong economic growth. In the case of Brexit, it will mitigate the impact of what could be a devastating economic impact.

For this reason, the UK government would be smart to begin investing in these ports now. For countries like China and Saudi Arabia, shipping their goods into Europe and then from there to the UK would be met with expensive trade barriers should the UK leave the harmonized single market.  The UK must develop the facilities that will encourage these trade partners to ship directly to British ports in three ways:

  1. Investment in larger, more efficient ports
  2. Lower trade barriers which allow the UK to become a global re-import, re-export nation
  3. Economic incentives to international shippers which dissuade them from stopping all business in the UK

Conclusion

For the UK, the Rotterdam effect may be key to selling the idea that trade flows will not sharply decline post-Brexit.  Certainly, legitimate UK trade volumes with the EU will decrease, but with the uncertainty of overstated figures due transshipment through the EU, we can expect the fallout to be less severe, once shipping channels are realigned.

This realignment, however, can be expected to be costly both for governments and private business.  For the UK to pull this off, Britain will need to invest in its largest ports, and offer the best comparative incentives for trade with their largest non-EU trade partners.  This is essential to have a successful post-Brexit, especially in the case of a hard-Brexit where continental European shipping ports become too expensive, due to higher trade barriers and costs.

As Brexit looks more and more like a game of poker, Theresa May’s government would do well to show this card to the EU.  Investing in these ports and shipping companies will help the UK economy. However, assuming that Britain will be able to attract larger trade volumes to its ports, these new trade routes could hurt some of the largest EU port cities both in terms of volumes and revenue. As they negotiate with London, the EU authorities should be aware that in a post-Brexit environment Europe may lose some advantages if the UK will be able to trade directly with the rest of the world.

GabrielUnruh-e1498071845311-300x300Gabriel Unruh is a Fellow with the Global Policy Institute, writing on finance, trade, and economic issues. Unruh is a corporate strategist specialized in audit/operations, corporate development, M&A, and geopolitics. He is a Business Analyst, reporting to the executive team, at Ambulnz, a disruptive, technology and ambulance service company that is transforming the medical transportation industry. He also serves as an at-large member on the National PTA Board of Directors. His experience includes work in Washington, DC for Senator Roy Blunt, and time working for a former Fortune 500 company. Unruh is actively involved in many philanthropic initiatives at the higher education level. He graduated with honors from the American University School of International Service, and is an active alum, having served on multiple university committees including the CFO’s committee on Social Responsibility, Business Practices, and Services.

 

The views and opinions expressed in this issue brief are those of the authors and do not necessarily reflect the official policy of GPI.