Warning over supply chain switches in event of hard Brexit

Report highlights enormous range of variables that corporates will need to consider when deciding on the shape of their post-Brexit supply chains

Multinational corporates must prepare themselves for the potential difficulties of altering their supply chains in the event of a hard Brexit, warns a new report from law firm Baker McKenzie.

In The Realities of Trade After Brexit, the firm says that UK firms stand to lose £17bn in export revenues across just four sectors if the UK’s negotiations with the EU end up delivering a hard border.

Those sectors are automotive, technology, healthcare and consumer goods.

Of those industries, the sharpest decline – in both percentage and monetary terms – would be felt in automotive, which the report forecasts will suffer a fall in EU exports amounting to £7.9bn.

That is equivalent to 16.5% of the UK sector’s turnover last year.

While the report tips the percentage decline in the consumer goods industry to be far less significant (5.8%), the impact in monetary terms would still be more than £5bn.

“If a hard border were imposed between the UK and the EU,” the report points out, “companies that once traded freely with European markets would see their goods exposed to new costs each time they cross the channel. These costs would take the form of both tariff and non-tariff barriers.

“A much wider range of additional non-tariff costs could emerge as companies have to cope with divergences in technical standards and other regulations. Full analysis of the possible effects of diverging regulations is outside the scope of the research data, but they are a consideration with which companies must wrestle.”

Baker McKenzie trade partner Ross Denton says: “Some would say that the whole raison d’etre for Brexit is to remove obsessive standard-setting, categorisation and licensing of products from the UK, but that thinking doesn’t take into account requirements of other markets.”

As the report notes, the complication here is that multinationals which sell to the UK will also export goods to the EU and US – and they will be forced to choose which set of standards to incorporate.

“For better or worse,” Denton adds, “the UK followed the EU’s lead and many companies have optimised their supply chains to cope with EU regulations. Their major market is the EU and they understand EU standards.

“But if those companies begin to mix their manufacturing bases, optimising the costs, they could end up in a quagmire, questioning which standards to follow or to adopt.”

Understanding the ramifications of those decisions, the report stresses, “will be crucial to agreeing a multinational’s future strategy and beginning to quantify the non-tariff costs in each industry that would spring from a hard Brexit”.

It will also play a vital role in determining how companies adjust their supply chains.

Denton’s fellow trade partner at the firm, Sunny Mann, says: “Supply chains can be malleable, but it takes time to find alternative sources of a comparable quality from a country where the duty implications are at least as good, if not better, than existing arrangements.”

He adds: “New suppliers bring new compliance challenges from the perspective of the Bribery Act, human rights obligations and reviewing potential trade sanctions. Can you negotiate good commercial terms? Can the supplier gear up their manufacturing to supply you on time?

“And if goods are coming from further afield, have you ensured that transport costs won’t be too high?”

The report notes that, while supply chains may be altered with care, “it may not be possible to replicate entirely the position of trading from within the Single Market.”

Find the full report here.

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