With England’s legal separation from the EU going into effect next March, companies with supply chains spanning the two regions have had their eyes and ears glued to ongoing trade talks. Their focus? Keeping their manufacturing and supply lines in step with whatever trade policies the European powers decide on. Decisions that occur at the bureaucratic level in the next seven months will drastically affect supply chain dynamics not only in Europe, but across the globe. Let’s take a look at the new, post-Brexit global supply chain, and what it really means for business.
What’s the Deal with Brexit?
The European Union implements a single market for its member nations. Each EU nation can freely trade its goods and services to other EU nations, and citizens are free to cross borders. Pre-Brexit, the United Kingdom and its companies were included in this single market.
With the U.K. exiting the union, significant changes are expected — and not all of them good.
Tariffs and customs checks will be put in place for the flow of imports and exports between the U.K. and the 27 nations that make up the EU. European manufacturers with bases in the U.K., and British companies with plants across Europe, are faced with the need to find alternative suppliers to avoid supply chain issues that could seriously damage business. Ports and airports are also predicted to become more congested due to the slew of new rules regulating shipments to and from the U.K.
The U.K.’s withdrawal from the European Union on March 29, 2019 is to be followed by a 21-month transition period. The grace period will give ports and airports time to expand their infrastructure to avoid congestion; manufacturers time to find new suppliers; and governments time to adjust trade policies. By the time this transition period ends on December 21, 2020, the U.K. and EU governments will have to have put new trade agreements in place.
Without a resolution next March, the U.K. will be leaving the EU with no trade deals — a "no-deal Brexit" — and the country will be forced to trade with other European nations under the rules of the World Trade Organization. This situation, dubbed a worst case scenario by economists, could damage the British economy on a massive scale, leading to high rates of unemployment and a possible recession.
What Changes Could Brexit bring to Companies?
Deal or no deal, Brexit is anticipated to bring massive changes to the supply chain. Suppliers and manufacturers are expected to be among those most severely hit with the new trade arrangements. According to a 2017 survey, 40 percent of businesses in the U.K. want to replace their suppliers in EU nations, while 63 percent of businesses in the EU want to move their supply chains out of the U.K. So suppliers from the U.K. will gain more domestic investment, but in turn could lose customers from the majority of businesses across Europe.
The U.K.’s manufacturing sector will be hard-hit, since so many U.K. companies rely on suppliers in continental Europe. European companies will have to face high tariffs or pull their supply chains out of the U.K. entirely. As one of the globe’s biggest economies, the U.K.’s withdrawal from the union could weaken the power of the EU as a whole in establishing trade deals with non-EU nations like the U.S., China, and Russia.
Despite these worrying signs, it’s not all doom and gloom. Supporters of the resolution claim Brexit will release U.K. businesses from preferential trade agreements within the EU and give the U.K. a chance to establish more trade deals with the rest of the world. U.K. companies will also be divested of the EU’s trade regulations (like those against GMOs and data-storing companies), as well as its bans on practices like animal testing.
There are still hopes for a resolution that will benefit both parties. Further negotiations are set to take place in October and December of this year, where the final details of the Brexit deal are expected to be ironed out. But European nations, particularly in the U.K., should invest in contingency plans in the case of a no-deal Brexit to avoid economic disturbance. Companies should use risk models to assess the possible damage that could be brought by Brexit and plan to mitigate the effects of a “worst case scenario.”
Much like the volley of trade restrictions issued by the U.S. this year, Brexit has supply chain analysts skeptical at best. Will the initial fallout that many are anticipating be followed by new economic opportunities for U.K. businesses? Only time — 28 months, to be exact — will tell.