With the multiple transitions, extensions and grace periods now over, we take a look at the impact on supply chains of cutting trade ties between the UK and EU
Over the past 12 months, companies importing and exporting goods between the UK and EU have not needed to make full customs declarations, nor have they been subject to stringent checks – but in January 2022 this leniency came to an end. Now, all companies moving goods between the regions will be required to submit full, comprehensive information on goods, including their origins, and to pay all the necessary tariffs or fees.
A quarter of UK importers are not prepared for these changes, according to a recent survey by the Federation of Small Businesses (FSB), and a further 33% of respondants said they were totally unaware of the new rules until approached for the survey. Figures from the Institute of Directors (IoD) are even higher, indicating that 30% of responding firms were “not at all prepared” for the changes. Given that total imports to the UK from the EU rose 2.2% to £57.7bn in the third quarter of 2021, this could prove problematic moving forward.
Back on the single market
A look at the data from the first year as a single market suggests a wide variance in impact, though it could be limited to customs and might not affect the supply chain as much as expected. The Office for National Statistics insights and impact on the UK economy report from December 2021 asked import-exporters if they had made changes to their supply chains in line with the end of the EU transition period. Just 7.7% responded yes and 60.9% said no but for Northern Ireland specifically, 13.3% said yes.
Of those that had reworked supply chains, 41% said they were using more UK suppliers, while 11.6% were using more EU suppliers. The latter mostly represented firms in Northern Ireland, where 34.3% of those who had made changes to supply chains said they were using more EU suppliers. Across the UK, supplier diversity increased by 39.3% and was fairly stable across all regions.
Though only a small proportion of businesses have had to change their supply chains, nearly 60% have incurred greater costs since Brexit, of which the biggest outlays have been due to transport (24.7% overall, 39.2% in Northern Ireland) and more red tape (19.2%). Few businesses said increases were caused by the cost of importing goods and services (13%) and tariffs (10.8%).
Trade and tariffs outlook
Figures suggest Brexit has been negative for the UK economy overall. According to calculations by the Bank of England, the pre-pandemic economy was 1-3% smaller than it would have been without Brexit. And in December 2018, the government calculated the UK’s economy would be 5% smaller in 2030 than if it had remained in the EU.
The Campaign for European Reform thinktank calculated that UK goods trade was 11.2%, or £8.5bn, lower in September 2021 than it would have been. By the third quarter of 2021, the global market share of British exports had fallen by around 15 percentage points relative to the Office for Budget Responsibility’s March 2016 forecast. Much of this impact is based on a decrease in investment, consumption and the depreciation of sterling.
And while Brexit enthusiasts believed the UK could boost trade with the US, this has so far proved illusory. Symbolically, tariffs on steel and aluminium of 25% and 10% imposed by former US president Donald Trump on the EU were removed in October 2021 but remain in place for the UK. Until the Northern Ireland situation is settled, a trade deal is politically impossible.
The UK is also hoping to increase trade with Australia and, in December, signed deal to eliminate tariffs on many goods traded between the two countries. Trade between the UK and Australia was worth £13.9bn in 2020. The deal has been calculated to increase UK GDP by an estimated 0.01-0.02%, saving consumers £34m a year.
Manufacturing and supply futures
However, the impact on supply chains is less clear cut. William Bain, head of trade policy at the British Chambers of Commerce, says 2021 has been “challenging” for members in terms of cross-border trade with the EU, but that the steep fall in volumes at the beginning of the year has recovered “to an extent”. However, he explains: “There are clear points of friction around VAT, rules of origin, customs rules and paperwork and labour mobility.” In the second quarter of last year, 28% of members surveyed reported expectations of reduced export revenues – a historically high number.
While these figures give us an idea of what is happening to UK supply chains, they need to be treated with caution. First, it is hard to disentangle the effects of Brexit from those of the pandemic and, second, the export of goods is so different from that of services that it is helpful to look at them separately. In a separate questionnaire, the ONS found that among all exporting businesses, 47.9% of firms that only export goods said the end of the EU transition period was their “main challenge”. This compares with just 9.3% for businesses that only export services.
However, the effect of Brexit is weighing on manufacturing, according to the IHS Markit/CIPS UK Manufacturing PMI survey. This found that “severely stretched supply chains disrupted production schedules and drove up input prices to the greatest extent in the 30-year survey history”. Around 75% of manufacturers reported a rise and less than 1% a fall.
While the pandemic was, of course, a big factor in this, leaving the EU has not helped. “Manufacturers are facing a challenging backdrop, with rising supply chain disruptions, staff shortages and inflationary pressures stifling growth while ongoing difficulties caused by Brexit and logistical headaches restrict opportunities to expand into overseas markets. New export sales fell for the third straight month,” explains Rob Dobson, director at IHS Markit.
It's never too late to change
Overall, larger companies appear to have mostly absorbed the impact of Brexit and have managed to employ people to do the increased paperwork. But for smaller companies, general unpreparedness points to trouble ahead.
To ease the way forward, the UK government has committed £180m to developing a streamlined customs process – a “single trade window” – that will enable agencies, such as HMRC, and UK border workers to share information on imports and exports. The government also announced trials of “smart” border technology to reduce friction but this is not due to begin until May.
Still, experts are braced for what may come. While IoD chief economist Kitty Ussher is warning that “changes will exacerbate existing supply chain problems, leading to further congestion at ports, as well as extra costs from accidental non-compliance for many businesses”, FSB national chairman Mike Cherry is pushing for action. “What we need now, as these stark figures demonstrate, is an Import Support Service to empower firms with the guidance and information they require to successfully navigate global trade as it evolves,” he says.
“Speak to suppliers to ensure you have all you need to make declarations, consider alternative providers if that looks like an efficient way forward, and think about different transportation routes.”
And above all, Cherry adds: “There’s still time to act”.