On 23rd June 2016, in a historic referendum held after the UK’s 43-year long marriage with the European Union, 51.9% of the British electorate voted to ‘leave’ the European Union. Britain’s exit from the EU also nullified its membership from the EU’s Single Market Customs Union, an independent trade bloc comprising of EU Member States that eliminates all physical trade barriers between member countries enabling free movement of goods and services across the bloc.
A little more than a year later, in August 2017, the British government released the “Future Partnership Paper” outlining the UK’s proposed plans concerning its adoption of an innovative customs and border-control framework championing ‘the freest and most frictionless trade possible in goods between the UK and the European Union.’
The document proposes two models. The first approach aspires to replace the existing customs framework with a unilateral model that introduces additional administrative procedures and tariff charges at the UK-EU border. Goods entering the UK from the EU and vice-versa are expected to be subjected to independent taxation in the form of VAT and customs duties under this framework.
The second approach would essentially eliminate a UK-EU border by mirroring the ‘EU’s external customs border.’ A product bound for the European market would be levied the EU’s ‘common external tariff’ on arrival at a British port. The shipment can then be loaded onto a truck and sent to Europe without having to encounter another border barrier.
However, the uncertainty regarding the UK-EU border points toward the possibility of a supply chain logjam for businesses that frequently transport parts and goods between Britain and Europe. Imposition of border checks and customs application can pose a challenge, in terms of costs and time, on the supply chain that currently enjoys the free movement of goods across the bloc.
Impact on Procurement and Sourcing
The post-Brexit scenario is expected to be the most ominous for automotive car makers and pharmaceutical companies. The imposition of strict border administration and customs tariff is set to plague the supply chains of these two industries, among others, by driving up costs and inefficiency of their logistical operations.
Thousands of auto components make multiple journeys across Europe and the UK before use in final assembly. BMW fabricates and processes the engine crankshaft of the Mini in Germany, Britain and France before its final assembly into the car in Oxford. Likewise, Bentley manufacturers its vehicle bumpers in Eastern Europe and Germany before shipping them to the UK for final assembly.
Most automotive manufacturers follow the ‘Just-In-Time’ philosophy that dictates the direct incorporation of parts and accessories in the car. Since most components arrive at the production facility just hours before assembly, institutionalization of a customs barrier is sure to cause a disruption in the supply chain, in terms of time as well as cost.
According to a study by the Institute for the Study of Civil Society (Civitas), French and German exporters to the UK are estimated to pay a ~5.5% customs tariff on automotive parts and accessories, while imports from the UK are estimated to be subjected to a ~4.5% tariff. Most automotive parts are fabricated and processed in multiple countries before they are used in the final assembly. The restriction of free movement is estimated to cause an ~8% hike in prices of cars post-Brexit.
As part of the EU Customs Union, pharmaceutical and chemical products too, were allowed free movement across the bloc. Post-Brexit however, border barriers are expected to introduce regulatory challenges that could potentially disrupt a pharmaceutical company’s supply chain.
Even with Britain pressing for a transition period of three years following its exit in 2019, the impending supply chain logjam is expected to negatively affect the procurement strategies of European as well as British firms. A British SME is estimated to shoulder an additional £163,000 annually due to imposition of customs clearance charges, VAT and import/export duties. German export/import is estimated to suffer from a potential ~£3.4B tariff barrier while France looks at additional tariffs amounting to ~£1.4B.
Although a business-friendly agreement between the UK and the EU seems likely, the economic and administrative changes are sure to create ripples in the underlying supply chain dynamic of businesses operating trade between the two divorcing entities.