What BREXIT Holds in Store for Global Shipping?

By July 7, 2016 Article, Events No Comments
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^ Shipping is a Potent Instrument of Globalization

Image Courtesy of Atiketta Sangasaeng at http://www.shutterstock.com/pic-120091477/stock-photo-businessman-selecting-lane-on-the-large-world-shipping-routes-map.html?src=SXBnvoxSKpjzya00Tsjkmw-1-19  

Contradictory Forces at Play

On June 24, 2016, Britain woke up to a sunny morning. Quite a contrast to the rainy, foggy, and somewhat bleak previous day. For on June 23 when, in a referendum, 51.9% of the British voters decided in favor of the UK exiting the European Union (EU).

United Kingdom (UK in orange) & the European Union (EU in dark blue) Image Courtesy of Furfur at https://commons.wikimedia.org/wiki/File:EU_Single_Market.svg  Retrieved From https://en.wikipedia.org/wiki/File:UK_location_in_the_EU_2016.svg

United Kingdom (UK in orange) & the European Union (EU in dark blue)
Image Courtesy of Furfur at https://commons.wikimedia.org/wiki/File: EU_Single_Market.svg
Retrieved From https://en.wikipedia.org/wiki/File: UK_location_in_the_EU_2016.svg

Stock markets across the world plummeted even as the pound tanked to its lowest value in three decades. Appalling, considering that the pound was once the reserve currency of the world.

What is more, BREXIT has stoked the fire of speculation of another economic slowdown. Now, the thumb rule in international economics is one economic slowdown every eight years. The last slump was the meltdown of 2008 we have not yet recovered from.

For a history enthusiast, BREXIT represents a contradiction. Because it was a predominantly British endeavor of the late nineteenth century that stimulated the first wave of globalization through the steam ship.

It so happened, Britain was the leading industrial power of the time. The Industrial Revolution or the unprecedentedly large use of machines had skyrocketed her production capacity.

She therefore needed a continuous supply of raw materials to keep the industrial apparatus firing on all cylinders. And, she needed assured markets to sell the produce. Overseas colonies could provide both.

Renaissance, enlightenment, and the explorer’s zeal had already prodded European powers in venturing into the farthest corners of the globe. Most went there in search of spices and soon realized that it was a better idea to colonize these lands to ensure continuous supplies.

Now, in order to reach far flung colonies, these powers needed a faster and more reliable mode of transport than the sailing ship, one that heavily depended on planetary winds for its motion.

Steamship Introduced the First Wave of Trade Globalization in 1870-1913  Image Courtesy of Morphart Creation at http://www.shutterstock.com/pic-217932490/stock-photo-floating-houses-the-steamship-russian-mnccypn-vintage-engraved-illustration-journal-des-voyages.html?src=IJ-vHuJjNa0APmuHaZWvjQ-1-18

Steamship Introduced the First Wave of Trade Globalization in 1870-1913
Image Courtesy of Morphart Creation at http://www.shutterstock.com/pic-217932490/stock-photo-floating-houses-the-steamship-russian-mnccypn-vintage-engraved-illustration-journal-des-voyages.html?src=IJ-vHuJjNa0APmuHaZWvjQ-1-18

This necessity invented the steamship and then came the first wave of globalization. By the way, the need to transport raw materials and finished goods on land prompted the design of the steam-powered railway.

Characterized by the free flow of knowledge, resources, goods, and services across international borders, globalization is a phenomenon wherein events in one part of the world leave behind consequences in other areas as well.

Former Secretary General of the United Nations (UN), Kofi Annan fittingly summed up present day environment when he said arguing against globalization is like arguing against gravity.

Globalization expands the avenues for trade and commerce by throwing open the larger global market to the producer. Markets, that may offer better returns than local, regional, and national ones.

Plus, globalization provides more rewarding, international employment opportunities for skilled manpower. All this propels the productivity of human and material resources to optimum levels. And, the real driver of long term economic growth is productivity gain.

In 2004, economists Scott Bradford and Robert Lawrence had estimated that the world would be 7% poorer if we had tariff walls of the 1930s type i.e. in the absence of multinational organizations such as the World Trade Organization (WTO), the EU and the like.

Good economics is not necessarily bad politics as they sometimes say in the corridors of power when distributing freebies. Commercial integration creates a vested interest in staying united.

For example, the political unification of Germany in 1870 was preceded by the formation in 1834 of the Zollverein, a customs union of German states that managed tariffs and economic policies.

Irked by the lack of U.S. support during the Suez Crisis of 1956, France, West Germany, Belgium, Italy, the Netherlands, and Luxembourg signed the Treaty of Rome in 1957. This created the European Economic Community (EEC), a customs union. Britain joined in 1973.

By 1979, the economic growth rate of Britain surpassed that of France and Germany. This was in marked contrast to its slower growth rate of the pre-1973 era. The Maastricht Treaty of 1992 established the European Union (EU). With Britain, it presently includes 28 members.

Clearly, BREXIT runs against the current wind of globalization. But, there can be a silent undercurrent that runs contrary to the mainstream. Sometimes, the undercurrent suddenly betrays its presence and surprises everyone. .

Map: Anglo-French Invasion of Suez Image Courtesy of the United States Army Retrieved From https://en.wikipedia.org/wiki/File:1956_Suez_war_-_conquest_of_Sinai.jpg

Map: Anglo-French Invasion of Suez
Image Courtesy of the United States Army
Retrieved From https://en.wikipedia.org/wiki/File: 1956_Suez_war_-_conquest_of_Sinai.jpg

In 1980, Alvin Toffler composed the futuristic book The Third Wave. While outlining he first two production revolutions viz. the agricultural and industrial revolutions, he cautioned against the impending third one – the information technology revolution.

Warned, because it would radically alter the relations between the consumer and the producer. This will create a new class, the prosumer – one who produces as well as consumes.

Such a phenomenon will restructure the traditional concepts of family, corporate hierarchical frameworks, and the relations between nations and people. Decentralization would be the new mantra that runs against the wave of integration sponsored by globalization. Note, decentralization.

But what is all this conceptual discourse doing in a discussion on global shipping? Shipping is one of the four ingredients of globalization the other three being trade liberalization, communication, and international standardization.

Anything that affects globalization ends up influencing global shipping and the other way round. In this context, trade liberalization too is important because BREXIT will make it tougher for Britain and the rest of Europe to trade with each other.

BREXIT & Global Shipping

International shipping transports over 90% of the globally traded merchandise. Shipping also transports more than 90% (by volume) of EU’s external trade and over 51.5% (by value in 2014).

EU (minus Britain) hosts some of the world’s largest container ports viz. Antwerp, Rotterdam, and Hamburg. A total of 1,200 EU ports employ 110,000 directly while supporting three million indirectly. Four of the world’s five largest shipping companies are located in the EU.

Again, EU is Britain’s largest trading partner purchasing 45% of the latter’s exports and supplying 53% of its imports. More than three million jobs in the UK directly and indirectly depend on exports to the EU.

How Britain Voted – Yellow For BREXIT, Dark Blue Against BREXIT Image Courtesy of Mirrorme 22, Nilfanion, TUBS, & Sting Retrieved From https://en.wikipedia.org/wiki/File:United_Kingdom_EU_referendum_2016_area_results_2-tone.svg

How Britain Voted – Yellow For BREXIT, Dark Blue Against BREXIT
Image Courtesy of Mirrorme 22, Nilfanion, TUBS, & Sting
Retrieved From https://en.wikipedia.org/wiki/File: United_Kingdom_EU _referendum_2016_area_results_2-tone.svg

Shipping directly employs 240,000 people in the UK in ports, ship broking, transportation, and marine insurance while adding £10 billion ($14.2 billion) to the coffers of the UK economy.

Some EU laws directly become the laws of the member nations. In some cases, this process is indirect. The EU issues directives and the member nations make laws to adopt them. Decisions by EU courts and other organs of the EU also influence the legislation of member nations.

Laws concerning the following sectors are especially important for shipping:

  • Trade, Business, and Migration
  • Contract Terms
  • Competition
  • Dispute Resolution
  • Employment

Trade, Business, and Migration under the EU’s single market is free – goods, services, people, money, and businesses can move freely across international borders without bothering about customs, tariff, bureaucratic, technical, and legal barriers.

Such free zone has expanded trade, lowered prices, and offered more choice to consumers. BREXIT may reverse this process of facilitation and revive the retrograde practices of the bad old days.

UK businesses may find operating in the EU to be slower and more expensive. The same applies to companies from EU members operating in the UK.

Contract Terms of time and voyage charters will have to be refreshed because the definition of EU in contract signed before BREXIT will no longer apply – the EU is one member short now. This introduces additional complications, disputes, uncertainty, and delays.

Competition laws of the EU govern permissions to mergers and investigations of cartel activity. BREXIT means mergers between British and EU companies will require dual approvals. Investigations will be similarly complex and cumbersome.

Dispute Resolution may be another headache because two set of laws may govern it – those of the EU and those of the UK. This goes against the current system of uniform laws.

The present mechanism also allows automatic enforcement of court verdicts across the EU, something that minimizes legal hassles and delays because you don’t have to get the same verdict pronounced from various courts.

Employment laws of the UK are largely based on the EU regulations. BREXIT means the terms of employment for non-UK nationals working in UK will change. And so will the terms of employment for UK nationals working in the EU.

Shipping is among the most globalised of industries and employs an international workforce. Two separate set of employment laws will make it harder for EU companies to hire UK nationals. So too for UK shipping companies hiring those from EU member states.

Then there is the issue of currency exchange rate fluctuations. More than 40% of shipping traffic passing through British terminals comes from the EU. Exchange rate changes add uncertainty and may lower this traffic.

Finally

Already plagued by the Chinese slowdown, the global economy is hard pressed and badly in need of a booster dose. Being among the most representative indicators of the global economy, international shipping too is in the midst of its worst slowdown.

In all probability, BREXIT will further dampen the pace of growth of European and global shipping as well as of the global economy. For, the UK has to take the slow, long, and winding road of renegotiating trade agreements.

In the meantime, we can as the old English adage says: keep calm and carry on.

For more such analytical content on the reciprocal linkages between international shipping, globalization, and the global economy, visit our blog.

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