Brexit: what exiting from the Customs Union means for European supply chains

Pierre Liguori, Director of the supply chain consultancy firm, Tokema International, explain in a series of articles how Brexit could harm trade between the UK and continental Europe, create major supply chain disruptions, and impact the logistics industry in the short and long term.

There is difference between the Single Market and the Customs Union that citizens and companies do not usually make: The EU single market as well as eliminating tariffs, quotas or taxes on trade, also includes the free movement of goods, services, capital and people. Countries members of the Customs Union agree to apply the same tariffs – negotiated by the EU on behalf of each member - to goods from outside the union. In addition, once goods have cleared customs in one country, they can be shipped to others in the union without further tariffs being imposed. A country can be part of the “Single Market club” without being an EU member (like Norway). Or can participate to the Customs Union without joining the Single Market (like Turkey).

The first consequence of Brexit is that the UK would walk away from the Customs Union, therefore from all these trade deals and would have to negotiate their own agreements with each country, resulting potentially on tariffs changes – for the worse but also the better! – that may have an impact on current logistics flows to and from the UK: applying higher tariffs on import for a specific product in the UK would end up to lower competitiveness, reduce its market share. On the other hand, applying lower tariffs would create a competitive advantage. The question would be, from a logistics perspective, to decide of the best scenario to source, import and deliver such products on the British market: does it mean a company may order higher quantities and store higher inventories in the UK (buffer stocks) in case of better tariffs deals than the current EU agreement with the country of origin? Or is it more efficient to shut down or down-size local distribution centres in the UK and store products in warehouses located in continental Europe?

A US exporter, who is currently using the UK as a logistics platform to trade within the EU Customs Union may have to take into account its future logistics strategy to serve the British market and the rest of the EU as different tariffs may apply.

Depending on these customs deals, logistics costs and end to end lead times would:

• fluctuate significantly and would impact immediately companies’ working capital optimisation.
• create less or more demand on warehousing space in the UK and directly hit logistics service providers P&Ls and the country’s infrastructure offering.

Businesses should consider to work on contingency plans and remodel their supply chains. However the current Brexit talks deadlock creates additional uncertainty: in theory the UK is not allowed to start officially trade deals negotiations with non-EU countries while still being part of the Customs Union. And a clear trade deal about the future relationship with the EU is unlikely to happen before March 2019. This is why Theresa May said during the last EU council last week that there “was a clear and urgent imperative” for the EU to move on to trade talks or the reason why several British ministers backed the suggestion to go through a transition period of 2 additional years where the UK would be still part of the Customs Union.

The next critical milestone in the Brexit process is the European council in December. EU members shall decide at that moment if they agree to open trade talks. And if not, the UK shall have to decide to go – or not- for a “no deal” scenario and trade with Europe and the rest of the world under the WTO rules. Many “Leavers” are backing this scenario as it would give more clarity to businesses with 3% to 8% already-known tariffs. Sir James Dyson even said that “uncertainty is an opportunity”, that his company “already pays the WTO tariff into Europe” "and it hasn't hurt us at all - we're one of the fastest growing companies in Europe".

There are 2 ways to work on business continuity plans and related supply chain redesign projects: to wait until December or even later… or to consider uncertainty is a key feature of today’s world and move forward by defining several scenarios.

In this ever-changing world, the “wait and see” approach is definitely the worst one!

Pierre Liguori - Tokema International

www.tokema-international.com

Next article: Brexit: what leaving the Single Market means for European supply chains.

Read our first article: https://www.dhirubhai.net/pulse/hard-brexit-european-supply-chains-must-anticipate-major-liguori/