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This week saw the UK government publish its ‘future partnership paper’, which was designed to give some clarity over its proposed future relationship with the European Union.
It was an opportunity for procurement chiefs to learn more about the impact Brexit could have on supply chains once the UK leaves the EU in March 2019, which could involve the country pulling out of both the customs union and the single market.
Two potential models for customs checks were put forward by the government, both of which would have a significant effect on supply chains.
The government described the first option as a “highly streamlined arrangement”, as part of which a system of border checks would be introduced. The government admitted that this would come with an “increase in administration”.
“Here, the government is drawing on examples of what has been done elsewhere, and, with the right sort of trading relationships with the EU, a border that is unobtrusive could be created,” says Gregor Irwin, chief economist at advisory firm Global Counsel.
Even so, any additional administration is likely to slow the flow of goods.
“Anything that lengthens the process at the border, particularly when you are sourcing perishable goods or parts for a Just In Time manufacturing supply chain, can be very costly and slow the supply chain down,” Irwin says.
The paper claims to have already planned a solution to the risk of delays at ports and airports, by “negotiating mutual recognition of Authorised Economic Operators (AEOs), enabling faster clearance of AEOs’ goods at the border – according to HMRC estimates, UK companies with AEO status account for around 60% of the UK’s imports and 74% of the UK’s exports.”
But this statement raises its own concerns, says Lesley Batchelor, director general of the Institute of Export and International Trade.
The cost of compliance at the borders is likely to be fairly high, which will pose a challenge for small suppliers and businesses
AEO status is an internationally recognised quality mark outlining that a particular organisation’s role in the supply chain is secure and that the company has been vetted, so doesn’t require further checks. This status can help businesses fast-track shipments at customs. But, it hasn’t been widely adopted.
“Just 594 UK businesses are registered for this at the moment, and so there is likely to be a rush to sign up to become AEO-certified by businesses aiming to keep their supply chains moving,” she says.
“The government is also encouraging self-assessments, which I can only look upon as a danger, as this can lead to corruption.”
Beyond that, there are added costs.
“The cost of compliance at the borders is likely to be fairly high, which will pose a challenge for small suppliers and businesses,” says Global Counsel’s Irwin.
This, he adds, is likely to hit UK businesses importing parts from suppliers in the EU and small suppliers based in the UK that supply goods to businesses on the continent.
“Supply chain managers need to look at the small companies in their supply chains and question whether they will be able to perform their roles if or when this model becomes a reality,” says Irwin.
The second option is a new “customs partnership”. The government refers to this as an "innovative and untested approach" that would see the removal of the need for a customs border between the UK and the EU, by introducing custom checks that “align precisely” with the EU’s checks.
Although there would be no tariffs on goods travelling between the UK and the EU, checks would still need to be carried outon goods coming into the UK from outside the EU, separate from those used by the EU.
“It implies that the UK government is willing to concede that all UK producers accept the EU goods market regulations without any scope for adopting separate goods regulations for companies exporting into the EU,” says Irwin.
EU businesses may begin to question whether it is worth sourcing from the UK
Beyond the changes to customs rules, there will also be a need to look at country of origin rules that currently qualify UK-made goods as ‘Made in the EU’, which could also attract costs, say experts.
“[UK companies] won’t be able to declare goods as ‘Made in the EU’ so we will instantly attract another level of tariff and taxation,” says Batchelor at IOE International Trade.
Then there is the question of actually whether businesses in the EU will consider the changes so problematic they bring their sourcing focus solely on those countries still in the EU.
“If one part of the supply chain comes from the UK and this has a higher level of duty, delays at borders and lots of paperwork compared to the other parts bought from within the EU, then EU businesses may begin to question whether it is worth sourcing from the UK,” says Batchelor.
“We’ve already seen some UK supplier organisations setting up a base in the EU as a way around this issue.”
Preparation is ultimately all suppliers and procurement teams can do in that event.
Image: ATGImages / Shutterstock.com
This article is a piece of independent writing by a member of Procurement Leaders’ content team.