The Brexit Vote: How It Could Affect U.S. Supply Chains

Brexit took a big bite out of the British economy and roiled financial markets across the globe. Market and regulatory uncertainty dampens the outlook for investment and growth, and unfortunately, we can expect a sustained period of uncertainty once exit negotiations begin.

That's right. For all the turmoil Brexit has wrought, last month's vote is not yet binding. The U.K. must invoke Article 50 of the Treaty on European Union, which would trigger a period of up to two years of negotiations for the U.K. and European Union to finalize terms of a separation.

That promises to be an arduous process because any negotiated exit agreement will require the support of countries representing at least 62% of the EU population — which could mean as many as 20 of the remaining 27 member nations — and the approval of the European Parliament.

But first things first: The U.K. must formally invoke Article 50, and it could be months before that happens.

Companies cannot wait that long for the next shoe to drop. That's why compliance departments throughout the U.S. and around the world are hard at work assessing the potential impacts on global supply chain management that will occur if the U.K. follows the voters' wishes and leaves the EU.

The implications of the Brexit vote primarily fall into three broad categories:

1. The status of EU law(s) already adopted into U.K. legislation.

2. The U.K.'s trading relationship with the EU-27.

3. The U.K.'s trading relationship with the rest of the world.

Expect an Avalanche of New Laws in the U.K.
There are all kinds of reciprocal changes looming based on that vote. It will change the way duties and taxes and goods and services are distributed in that region. When it comes to moving goods into and out of the U.K. — from a trade compliance and tax standpoint, as well as inter-company transfers — all of these strategies would have to be reworked over the next two years because everybody's business models for doing business in England would most likely change under revised laws and political structure.

Undoubtedly a Brexit would lead to a tremendous volume of new legislation in the U.K. — some experts predict as many as 25 Bills in every Queen's Speech (an annual address to the House of Parliament) for the next decade. Nearly every aspect of life in the U.K. would be impacted, from financial services to health and safety, immigration and employment.

In terms of business, new trade agreements would need to be negotiated, as well as establishing new a new structure for tariffs and taxes, and new policies for free movement—all of which is currently dictated by the EU.

One option might be as simple as recreating EU laws as U.K. statutes — a “pick and choose” approach, so to speak. However, leading proponents of Brexit appear to be leaning toward a more radical change.

Brexit Effects on Trade with the EU
The U.K. has long been an attractive “gateway to Europe” for exports to the EU — particularly for American and Canadian companies. The cultures, language, and business expectations are similar. With Brexit, however, exporters need to consider the cost and reliability of their existing supply chains: British ports may become less attractive interim stops on the way to EU countries.

Over 40% of shipping traffic at British terminals is EU-related. Experts predict a slowdown in traffic at British ports and the communities are bracing for future layoffs. If any of your EU-bound export shipments go through British ports, pay close attention to the financial health of the shippers you contract with and closely monitor compliance with trade regulations.

Those trade regulations will undoubtedly change, as the U.K. would most likely lose the benefits of trading and moving goods among EU member states without tariffs, customs duties or customs declarations.

That means renegotiating trade agreements with the remaining 27 EU members. And while that most likely will come in the form of a single trade agreement, it won't be all that easy. Experts predict forging that deal could take up to another five to 10 years beyond exit negotiations triggered by Article 50.

Britain could join the European Free Trade Association or the World Trade Organization, but as a member of either organization the U.K. would still be subject to adhering to many of the EU's most stringent — and costliest — regulations.

Trading with the Rest of the World
As part of the EU, the U.K. also participates in free-trade agreements with Norway, South Africa, South Korea, Switzerland, and many other countries. British exports are duty-free and governed by EU agreements. These arrangements will change, as will import/export compliance requirements and costs.

However, the upside is that a Brexit will enable Britain to forge major trade deals with India and China—two emerging markets that have not been approachable due to EU membership. Brexit proponents also contend that, without having to go through the EU trade commissioner, such deals with nations all around the world will be negotiated far more quickly.

The impact of that cannot be understated. Economic experts predict increased inflation in Britain, coupled with an economic slowdown. That combined with a weaker currency — the Pound recently hit a 30-year low — spells trouble to exporters. They face the prospect of selling higher-priced goods in a depressed economy.

Modifying your sourcing and/or manufacturing arrangements may help manage financial exposure and supply chain uncertainty:

• Distributed manufacturing – Consider in-country production. The “Made in Britain” movement should gain steam both from a sense of national pride and economic necessity. Domestic manufacturing facilities and/or partnerships can help reduce risk.

• Dual sourcing – Create relationships with local suppliers in the U.K. That will protect your supply chain if a key component is delayed at the border or increases in price due to currency changes or tariffs.

Brexit Effects on British Imports
If you source components manufactured in the U.K., the short-term news is good: with the British Pound losing value, these imports have become less expensive. But over the long-term, the outlook is cloudy.

First, we can expect the Pound's value to fluctuate over the next two years, and those fluctuations introduce uncertainty into your contracts. This increases the need for tools such as a foreign currency hedge to minimize risk.

Second, if the UK slips into a severe recession, it could put the stability of U.K. suppliers in question. That may require companies to dual source components from countries other than the U.K.

Third, the EU provided a single, stable framework for tariffs and customs regulations with Europe. Once the U.K. leaves the EU, those will be replaced with an entirely new framework unique to the UK. This will affect everything from tariffs to intellectual property. The situation is, in a word, “unpredictable.”

Nothing Is Certain but Uncertainty
Ultimately, the impact on trade with the U.K. depends on what sort of agreements are negotiated with the EU. Pro-Brexit leaders floated the possibility of keeping most trade agreements in place, but freeing Britain from other EU requirements and regulations. That's unlikely to happen: EU leaders gain nothing from an “easy-Brexit” that might encourage others to follow suit.

However, the UK is not without leverage: it's a net importer of EU products. Closing that market will have repercussions for EU exporters and for U.K. consumers. Hopefully, negotiators on both sides will keep this in mind when developing a new model for British participation in the EU marketplace.

In the meantime, pay close attention to the statements of political leaders. The negotiations surrounding the U.K.'s exit will be political theater, but it's a performance that will affect the global economy. Your trade compliance team should have at least one dedicated member who follows the negotiations and keeps track of new regulations.

SC
MR