The UK’s Prime Minister, Teresa May, has indicated that Brexit will mean an exit from the European Union (EU), the single market and the customs union, in favour of a series of ambitious new trade agreements with the EU and beyond.
While many questions remain, the possible reintroduction of trade borders – whether tariff or non-tariff barriers – will present formidable challenges for UK supply chains that have developed over decades on the premise of a borderless Europe.
In the infographic below we provide two examples to illustrate the extent of UK supply chain integration with the EU.
Example 1 shows a major component maker of fuel injectors for lorries. As indicated, the components used cross the English Channel five times before the final product is bought in the UK. In a new ‘hard border’ environment, the components would be stopped at each crossing, possibly on both sides of the border, so up to 10 times.
Example 2 shows how a UK component maker’s driveline is a fully integrated supply chain, with parts coming from at least five European countries.
Brexit and future trade
The European customs union (which includes non-EU and even non-European Economic Area countries such as Turkey) allows goods to circulate without checks, duties or tariffs (frictionless trade).
Increasingly over the years, UK component makers have become to rely on parts manufacturers in the EU for their supply chains.
Even if the UK can strike a zero-tariff free trade agreement (FTA), some of these supply chains are likely to become untenable following the re-introduction of physical borders.
The ‘rules of origin’ problem
Most of the focus of the post-Brexit trade debate seems to be on tariffs and negotiating FTAs, but this is only part of the story. A crucial element lies in how the UK supply chains have evolved over decades into a dense web of logistic chains that span Europe.
Even if the UK manages to strike a zero-tariff agreement with the EU, the re-introduction of ‘rules of origin’ would pose huge problems for the UK supply chain. Rules of origin will mean that every exporter – whatever size – must prove that goods exported originated in the UK and that everything that enters the UK has a verified country of origin.
The resulting paperwork, custom delays and compliance costs could paralyse or destroy some current supply chains, as they have been built on the premise of seamless travel across Europe.
60 per cent of ‘British-built’ cars are made up of imported components
The Society of Motor Manufacturers & Traders, estimates that two-thirds of UK motor components, worth a total of GBP4 billion, are exported to the EU, while 60 per cent of ‘British-built’ cars are made up of imported components. Most exports go through the Channel ports which currently do not have the staff, physical infrastructure or software capacity to deal with all-encompassing border controls.
Add to this that many supply chains have been organised on a ‘just-in time’ principle to keep stock at a minimum and optimise costs, meaning that certain materials and components can be delivered just a few hours before being used in the UK plant.
The two largest carmakers in the UK have only two hours of stock for some items – such a production-organisation model would be difficult to maintain in a post-Brexit environment.