Brexit will only be felt in the long run

The world’s stock markets plummeted and the pound sterling fell to its lowest level in 31 years on the morning of 24 June 2016, as the world awoke to the news that the United kingdom had voted to leave the EU. In Denmark, the C20 index lost 4.1%, and Prime Minister Lars Løkke Rasmussen called the referendum outcome “a very sad result for Europe and for Denmark.”

Indeed, there is a lot at stake for Denmark and Danish businesses. Danish exports to the UK run close to DKK 70 billion each year. Some of those exports rely on activities at the Port of Esbjerg, as both DFDS and Sea Cargo have regular services to the UK, and many of the companies based at the port work on UK projects.

Business as usual in the short term

Three months on, the shock waves seem to have died down in Brussels and on both the eastern and western coasts of the North Sea.

At the Confederation of Danish Industry (CDI), the head of the organisation’s Brussels office, Anders Ladefoged, explains that the mood in the EU capital is calm and collected right now. His main concern for the short term is what happens to the pound.

“The weakened pound has made Danish goods more expensive. It makes Danish businesses less competitive in the UK market and will possibly make it more difficult for them to defend their market position.”

Across the water in the UK port of Grimsby, Danish Consul Kurt L. Christensen says there is no reason to panic.

“The UK is not a new country. It’s business as usual. Britain has a healthy economy, and optimism is on the rise. Nothing has happened, apart from the effects on the pound,” the Consul says.

At the Danish Shipowners' Association (DSA) in Copenhagen, Director Jakob Ullegård is optimistic:

“It’s business as usual in the short term. Nothing has changed in the market that should make ship operators change their course. The pound has come under pressure, but there’s been no financial catastrophe. There’s no need to sound the alarm, but this is a step in the wrong direction.”

Uncertainty in the long term

On the other hand, the people at the DSA and the CDI are more concerned about the impact on Danish businesses once the British government decides to activate Article 50 of the EU Treaty, which will be the start of two years of negotiations on a British exit from the EU.

If those negotiations do not produce an agreement between Britain and the EU, the two-year period can be extended, provided all EU member states and the British government agree to it. If they do not, the EU treaties will no longer apply, and the UK will in effect no longer be a part of the EU or have any agreement with the EU.

“There is a wide range of possible outcomes as to how this could unfold. It’s the uncertainty we're worried about,” says Jakob Ullegård.

“One major concern involves global trade in general. The UK is a huge market, and the country is a party to each of the free trade agreements the EU has concluded with 55 other countries. What will happen to those agreements? Will they need to be renegotiated? Will they continue to run until renegotiated, or what will the situation be?”

According to Jakob Ullegård, the answers to these questions are extremely important for Danish shipping companies, because much of their business is transporting goods between many different countries, not just sailing from point A to point B.

At the CDI, Anders Ladefoged is concerned about new administrative barriers that might make trading across national borders more expensive.

“The benefit of being a part of the single market is that it offers more competition and fewer barriers. If you take a different route, there is a risk that trade will become more expensive and more complicated. If and when the UK leaves the single market to some degree, trade and business will probably become more costly. For example, there could be differences in regulation, implementation or rules enforcement,” he says.

However, it is still difficult to predict which sectors will be affected the most.

“It depends on what your product is, who your customers are and on how things unfold. There are many different parameters in play,” says Anders Ladefoged.

“However, logic would suggest that if it becomes more difficult for Danish businesses to sell their goods and services to the UK, then that implies a risk for companies whose business is to transport goods between Denmark and the UK.”

He also explains that companies supplying goods or services to sectors benefiting from national subsidy programmes should be extra aware of the situation. They should carefully monitor whether British companies are given exemptions from state subsidy rules or the rules for public procurement that apply to companies in the EU.

“The more politicised these decisions become, the greater the risk,” he says.

He recommends that companies analyse their individual exposure to such risks. The CDI is not advising Danish businesses to conduct their trade in any particular way at the moment, but he does recommend that they consider whether they can see far enough ahead to carry out potential investments.

In Grimsby, Kurt L. Christensen is not as concerned.

“Denmark and the UK have been trading partners for more than a thousand years. It would serve no purpose to stop now, so it’s not a problem. We won’t see an impact in the long term – that is, unless Denmark doesn’t wish to trade with a country that has left the EU, or if we are told by Brussels not to trade with the UK. If that happens, Denmark will have some big decisions to make.”

New opportunities for Danish businesses

Although Anders Ladefoged and Jakob Ullegård both fear a negative Brexit impact for Danish businesses and shipping companies in the long term, they don’t deny that the situation could also produce new business opportunities for Danish companies.

“London is the maritime centre of Europe, but it’s difficult to say whether they’ll be able to maintain that position. It could become more difficult for them to continue to operate, but it could also mean fewer restrictions. A lot will depend on what kind of agreement the UK can strike with the EU,” says Jakob Ullegård.

Anders Ladefoged notes that “the UK is completely entangled in value chains across national borders. For example, goods are currently being imported to British ports and redistributed from there to the rest of the EU. If that is no longer possible, that activity will have to be based elsewhere.”

He also sees more specific opportunities for Danish businesses if it becomes more difficult for UK firms to access, say, the French or the German markets, making it convenient to replace a British supplier with a Danish supplier who has free access to the single market and is able to trade in euros.

“Brexit is a game changer in this market, and each company will have to consider its risks and opportunities,” he says.

A new world order?

On the other hand, Anders Ladefoged and Jakob Ullegård both believe that Brexit will not change the fundamentals of the playing field. Globalisation, free trade and the single market will continue to dominate, but it will take more hard work than before to keep the playing field level and in one piece.

“For the EU, the biggest impact from Brexit will be the unpleasant political risk. What could happen? Is Brexit the first step towards a dissolution of the EU? Unravelling everything makes no sense from an economic point of view, and that’s what makes it such a serious matter seen from a political perspective. There is a clash between the political wishes and what makes sense from a rational economic point of view,” says Anders Ladefoged.

“I don't believe free trade is under threat. The improvements in welfare and growth the world has seen globally hinge on free trade, so it will take a lot to undo it. Will we see attempts to stop free trade? Undoubtedly. But what’s important right now is to hold on to what we've got, because there are political forces that do not share our view of the advantages of free trade,” says Jakob Ullegård, emphasising that it is especially important for Denmark, a small open economy that relies on trading to safeguard free trade.

This is a translation of the Danish article published in Port of Esbjerg Magazine 3, 2016.

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