Calls for cool, calm reflection amid fears over long-term instability
SHIPPING’S status as an international, dollar-denominated sector has left few seriously questioning the industry’s ability to weather the economic storms blowing through the post-Brexit markets.
But we are now at the beginning of an extended period of costly uncertainty that will cast a long shadow over business decisions for years to come.
Forecasts seem futile in the face of such a rapidly changing landscape, but best estimates in the immediate aftermath of Britain’s shock decision to leave Europe suggest that it will take at least a percentage point off the UK’s growth rate over the coming year.
It seems unlikely that this will remain a contained case of local trouble and the Eurozone will also feel a dent in its GDP.
But if the financial markets were feeling wrong-footed on Friday it was nothing compared to the stunned response from the British political establishment.
The departing UK Prime Minister David Cameron took a huge gamble and lost. In the opinion of Lloyd’s List, the UK is diminished and divided as a result.
What happens next must be carefully managed.
The UK Chamber of Shipping’s call for “cool heads” and a period of calm reflection over the next few months should be taken seriously by both sides of the political debate.
A commitment from the UK government to not immediately invoke Article 50 was a welcome one, and there should be no rush to do so for Mr Cameron’s successor, whoever he or she may be.
A great deal now depends on the kind of trade deal Britain can negotiate with the EU and how quickly, but that process is fraught with dangers.
The EU as an institution was besieged by problems even before the Brexit vote and the priority now will be to ensure that nobody follows Britain’s example.
European Parliament president Martin Schulz has conceded he is now waging a battle to avoid similar referendums taking hold across the rest of the EU and that will set the tone of the debate as Britain sets about negotiating its exit deals. It seems unlikely that the remaining 27 EU countries will be feeling overly generous under the circumstances.
Granting the UK unfettered access to the single market without obligations will not happen, largely because similar treatment would immediately be demanded by others.
A Norway-style European Economic Area deal that preserves access to the single market with hefty contributions to the EU budget seems, politically speaking, a long-shot. But a free-trade deal with the EU along the lines of Canada does not offer everything Britain would need and would be a complex and time-consuming affair.
In short, a quick deal that does not limit access to the single market seems highly unlikely from this point.
For the UK’s shipping sector, the key issue remains the role of London as a leading provider of maritime services and how it squares up to international competitors.
The threat from international maritime cities vying for London’s business is real and the industry will need to focus on how they keep hold of their status in the wake of its European divorce.
An exodus of international banks and financial institutions from London is a real threat that could yet destabilise UK shipping PLC.
It is, however, worth reminding ourselves that shipping is a resilient industry with an inherent ability to find opportunity in any period of volatility.
Short term, there may even be some upside. Shipping business globally is conducted in dollars, so shipping services business conducted in London will probably be thanking their lucky stars that with their profits in sterling and their income in dollars, that might be the only reason they make a profit this year.
Longer term, London’s status as a leading centre of maritime services has only ever rested on its ability to innovate and adapt. While the circumstances are not welcome, the dangers of complacency were notable in London over recent years. It is no bad thing to have the occasional wake up call to get up and hustle to earn your status afresh.
Keep up with all the Brexit news, views and analysis here.
Shipping Prepares for a Brexit
On Friday, the citizens of Britain voted to leave the European Union, with widespread consequences that will take years to fully determine – including as-yet-unknown effects on shipping.
The most immediate impact was felt in the markets: the S&P 500 lost all of its gains for the year to date as Wall Street suffered its largest selloff in 10 months; the Nasdaq shed four percent; the Dow lost 3.4 percent; the pound sterling fell to its lowest level in three decades, and is expected to keep falling; and shares in the UK's largest banks fell by nearly 18 percent.
"The word 'unprecedented' is often used too much, and people often reach for the hyperbole. But this is truly unprecedented," said Steven Major, head of global rates strategy at HSBC in London.
The UK Chamber of Shipping remained neutral on the question of Britain's departure during the runup to the vote, and on Friday it issued a statement emphasizing the industry's importance in all events. "We are still an island nation that has to make its way in the world through buying and selling, and the shipping industry is here for that purpose . . . shipping moves 95 percent of the UK's international trade and we don't see that changing," the organization said. It called for strategic thinking and an emphasis on free trade – specifically, the timely, well-managed establishment of new agreements with trading partners to boost international commerce. "We believe that Government should establish a new Free Trade Commission, working across the Department for Business and the Foreign Office, to train trade negotiators and begin the process of establishing new trading ties around the world and be ready for the negotiations with the remaining members of the EU."
However, John Nelson, chairman of the Lloyd's of London insurance market, has said it was "fantasy" to expect bilateral negotiations to be simple. "It would be impossible to do that except over many, many years," Nelson told Reuters in April.
Others are also skeptical on the idea that bilateral agreements would allow a smooth transition. In a forecast earlier this year, analysts A.L. Goodbody noted that there will likely be "trade agreements between the EU and a Brexited UK, but the difficulties involved and the time such arrangements would take to adopt should not be underestimated. The EU-India Bilateral Trade and Investment Agreement negotiations commenced [nine years ago] and are stalled . . . Work on [the EU-Canada trade agreement] commenced in October 2008 . . . [and] in regard to the EU-US 'Transatlantic Trade and Investment Partnership,' the negotiations are currently in their thirteenth round."
"No one has left the European Union before, and the EU may seek to ‘punish’ the UK for leaving, in order to discourage others from leaving too. The Brexit negotiations are unlikely to be quick or easy," acknowledged Guy Platten, chief executive of the UK Chamber of Shipping, speaking to Reuters in April. "If it is lengthy, with tariffs and other penalties built in, then the consequences could be profoundly negative."
The impact on the UK's extensive maritime services sector remains to be seen, and Nick Brown, marine and offshore director of Lloyd’s Register, forecast a period of uncertainty ahead. "It is clear that we are now in a period of significant political, economic, legislative and market uncertainty," he said. "Our view is that whilst we believe an exit from the EU is unlikely to have a significant impact on LR, the general uncertainty in the financial markets will not make trading conditions any easier going forward. However, we are a strong and resilient business that benefits from a global footprint, so we are in a good position to deal with the immediate aftermath."
Brown also highlighted the regulatory questions ahead for the class society: "One question, in transition from being in an EU member nation to one outside the EU, is the possible effect this could have on the process by which LR receives its status as a Recognised Organisation (RO) within the European Union. This will be addressed in due course," he said. "Lloyd’s Register is a global business supporting clients and flag states all over the world, including within the European Union, and this will continue to be the case."
Brown also highlighted the regulatory questions ahead for the class society: "One question, in transition from being in an EU member nation to one outside the EU, is the possible effect this could have on the process by which LR receives its status as a Recognised Organisation (RO) within the European Union. This will be addressed in due course," he said. "Lloyd’s Register is a global business supporting clients and flag states all over the world, including within the European Union, and this will continue to be the case."
Britain is also a partner in the EU's Navfor anti-piracy effort off of Somalia, and cooperates with the EU and NATO on a variety of maritime security measures; some are concerned that the Brexit vote could impact these agreements. British Defense Secretary Michael Fallon spoke Friday with NATO Secretary-General Jens Stoltenberg on Friday regarding cooperative maritime security arrangements; he provided his assurance that the vote would not impede joint EU-NATO naval operations in the Mediterranean. In March, the UK deployed the amphibious assault ship RFA Mounts Bay to assist with NATO's migrant-trafficking mission in the Aegean Sea.
"It is a more unpredictable situation than before the UK decided to leave. I think that's quite obvious," Stoltenberg said at alliance headquarters in Brussels. "I am concerned about a more fragmented Europe."
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.
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