Damco eguide INTO THE UNKNOWN SUPPLY CHAINS AFTER BREXIT. Nitesh Mandal, Regional SCD Consultant

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1 Damco eguide INTO THE UNKNOWN SUPPLY CHAINS AFTER BREXIT Nitesh Mandal, Regional SCD Consultant 1

2 Table of Contents 01. MANAGEMENT SUMMARY TIMESCALE WHAT S NOT ON THE TABLE GLOBAL OUTLOOK EXCHANGE RATES NON-TARIFF BARRIERS LABOR MARKETS THE EMERALD ISLE ON THE POSITIVE SIDE QUESTIONS FOR SUPPLY CHAIN LEADERSHIP KEEPING AN EYE ON THE (CRYSTAL) BALL 9 2

3 01. MANAGEMENT SUMMARY In June 2016 the people of the United Kingdom voted in a referendum, by a small majority, to start a process that will lead to the UK leaving the European Union. It first joined the Union (known then as the European Economic Community) over 40 years ago. The twoyear exit process was formally triggered on 29 March Despite legal and parliamentary opposition, the decision is clear, although for anybody sourcing from, selling to, or transiting goods through the UK, that is about all that is clear. The disengagement process is only just starting, but many companies are already planning to negotiate supply or logistics contracts that would, under normal circumstances, extend through to a time when the UK is no longer an EU member. Many of Damco s customers are in this position. As you may imagine, Damco s Supply Chain Development teams are actively engaged in trying to devise solutions for as yet unknown problems. This White Paper describes what we know at the moment, and what some of the significant alternatives may be. 02. TIMESCALE After the referendum there were complex legal challenges. The UK Supreme Court declared that the Government required an Act of Parliament to trigger Article 50(2) (the clause in the EU Treaty that governs the way in which a country can secede from the Union). Such an Act was passed in March 2017, the government defeating amendments which would have tied its hands in negotiations, and formal notice was given to the EU on 29 March. That marks the start of a two-year process, which will culminate in the UK leaving the EU with or without a new deal on trade and other matters. (Any extension of this two-year period would require the unanimous agreement of the UK and the other 27 EU countries, and is regarded as extremely unlikely). It is important to remember that the UK-EU relationship now being unravelled is about much more than just trade terms, and it is possible that a deal could be blocked on other grounds by one or more of the 27 other EU member states even if acceptable trading terms are agreed. Complicating factors in negotiations, which may see them get off to a slow start, are the French Presidential elections in April/May 2017, and perhaps more importantly the German Federal elections on 24 September Chancellor Angela Merkel will face a challenge from Martin Schulz, who was until recently President of the European Parliament and may perhaps be expected to take a harder line in negotiations. It is highly unlikely that negotiations will proceed issue by issue, so the specific detail in many areas will not be clear until a complete deal package is assembled. Companies will thus have little advance warning of outcomes that affect them. 3

4 January David Cameron, Prime Minister of the UK coalition government, promises renegotiation of the UK s EU membership terms followed by a referendum 2013 LOOKING BACK Early 2015 Referendum pledge included in Conservative Party election manifesto. The Conservatives win an overall majority in the May 2015 election December 2015 Cameron calls for a new deal with the EU to be finalised by February February 2016 After some months of brinkmanship on both sides a deal is agreed at a European Council summit. Cameron announces the referendum, based on this deal, will be held in June and offer a straight choice between Remain and Leave 23 June 2016 Despite backing for Remain by most of the UK government and opposition politicians and UK and international business groups, the UK votes narrowly but clearly to Leave. Cameron resigns as PM and is replaced by Theresa May Autumn 2016 Several legal challenges are mounted to the referendum result and its implementation Autumn-Winter 2016 Many UK and international trade and commerce bodies, including the IMF, revise their gloomy pre-referendum predictions. Brexit is now seen as less potentially damaging, and with greater opportunities than previously forecast. Inward investment in the UK appears to have been largely unaffected January The UK Supreme Court confirms that Parliament must pass an Act permitting the government to trigger Brexit. However, the Court rules that the consent of devolved governments in Scotland, Wales and Northern Ireland is not required February/ March 2017 A short enabling Act is passed by Parliament. The government defeats amendments intended to restrict its negotiating freedom, especially around the free movement of people. 29 March 2017 The UK formally notifies the EU of its intention to leave in two years time. Real negotiations between the EU and UK can commence. The UK will also start trade negotiations with other countries (although the legality of this is still being questioned in some quarters). From this date the UK will also be excluded from European Council discussions (although it will still have European Parliament members) April 2017 The remaining EU countries are expected to approve guidelines to which the European Commission (who will negotiate on behalf of the EU) will work April/May 2017 French Presidential election WAY FORWARD July-December 2017 The UK was due to take up the rotating Presidency of the EU. In the circumstances Prime Minister May has passed the Presidency will now be taken by Estonia 24 September 2017 German Federal elections Late December 2017 EU chief negotiator Michel Barnier expects initial discussions to be concluded. It is likely that these will cover the mechanics of separation and it may be that only after this do trade negotiations begin in earnest Early 2018 The UK s Great Repeal Act to be passed, converting EU rules into UK law, and leaving time for additional legislation required to fill any gaps September 2018 Barnier s target for concluding Brexit negotiations. The terms will then have to be approved, both by the UK government and by the 27 remaining EU member states 29 March 2019 The UK leaves the European Union, deal or no deal 4

5 03. WHAT S NOT ON THE TABLE The UK Prime Minister, Theresa May, has clarified the Government s negotiating aims and closed down some of the options that had been talked about. In particular, the Prime Minister has emphasised that the UK will be leaving the EU entirely not partial membership, associate membership, or anything that leaves us half in, half out. That appears to rule out the various forms of so-called soft Brexit that have been advocated by which the UK could in some way retain most of the advantages of the EU Single Market without actually being a member. In practice this was always unlikely free movement of people is one of the four pillars of the Single Market whereas regaining control over who lives and works in the UK was one of the principal drivers of the Brexit movement. The UK will not only be leaving the Single Market but also, almost certainly, the European Customs Union, and looking to sign a Free Trade Agreement with Europe. This would be an entirely unique deal, not one based on the arrangements between the EU and Norway or Switzerland (and in fact as the EU s scope has developed greatly since the latter were signed, such agreements would no longer be possible). If an agreement cannot be reached and ratified within the two-year time scale, trade terms between the UK and the EU would fall back on World Trade Organisation rules and tariffs, effectively overnight. However, in other areas there will be no cliff edge. The UK government will adopt all of the EU Directives, Regulations and laws then in force into UK law through a Great Repeal Bill, so they will still apply, but will be justiciable only in the UK s courts without reference to the European Court of Justice. The UK Parliament would then be free to amend or repeal as it wishes, but apart from a few major issues (possibly including Climate Change measures, and the interpretation of the Working Time Directive), there is unlikely to be an immediate rush to rewrite forty-five years of accumulated legislation. 04. GLOBAL OUTLOOK The Prime Minister has emphasised that the referendum was not the moment Britain chose to step back from the world. It was the moment we chose to build a truly Global Britain. The UK is now allowed to attempt to cut its own trade deals with non-eu countries. China, India and the US are obvious priorities, although the new US administration s position on global trade may require clarification. The Prime Minister has also issued a veiled threat to EU countries tempted to punish Britain for leaving. We would be free to change the basis of Britain s economic model which is being interpreted as a commitment to preserve UK competitiveness by drastically reducing corporate taxation and regulation. 05. EXCHANGE RATES Since the Brexit vote, the Pound Sterling has fallen significantly against both the US Dollar and the Euro. In theory that makes UK exports more attractive and imports dearer. Since the 5

UK runs a permanent deficit in goods (and indeed has done since the Napoleonic Wars, even when Britain was the workshop of the world ), that could increase inflation and put pressure on wages.

6 UK runs a permanent deficit in goods (and indeed has done since the Napoleonic Wars, even when Britain was the workshop of the world ), that could increase inflation and put pressure on wages. But some of the exchange rate fall is believed to be a necessary correction regardless of Brexit, and we can expect rates to fluctuate quite widely over the next few years. The rate itself is, we think, a poor basis for supply chain decisions: the uncertainty may be more significant Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 GBP to EUR Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun Jul-16 POST REFERENDUM OF Aug-16 Sep Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar NON-TARIFF BARRIERS Tariffs themselves are not the only potential problem. There are several non-tariff barriers to trade that could be erected. The EU has recently introduced a Union Customs Code governing procedures for imports, exports and transfers and the UK is of course a party to this. It would make sense for the UK to keep its own systems and paperwork aligned, even if from the other side of the fence, but this is not a certainty. (By coincidence, the UK s principal Customs IT system is itself due for upgrade by Some doubts have been expressed as to whether it will have the capacity to handle the great increase in filings as European trade is brought in to the Customs system). Similarly, it would be strange for the UK to opt out of standards and certification work. Along with its German equivalents, the BSI (British Standards Institution) is one of the major global creators of technical standards, many of which are adopted as EN and ISO standards. The UK is represented on CEN and the other EU-recognised standards bodies, which have a membership wider than just the EU. But it is just conceivable that difficulties could arise in the recognition of UK testing facilities (there have previously been disputes about the competence and independence of testing labs in various EU nations). Exporters might feel a need to get additional approvals from a facility in an EU country, at additional time and cost. Although most standards are actually voluntary, even a suggestion that UK products don t meet EN standards could be very damaging. 6

7 07. LABOR MARKETS A big concern for the supply chain is the future availability of labor. Control of immigration was a cornerstone of the Brexit campaign and politicians are vocal about allowing skilled EU citizens access to the labor market. The Prime Minister has indicated that the status of EU citizens currently based in the UK will be protected, although no detail is available. However, the UK distribution industry, among others including agriculture, is heavily dependent on migrant labor, particularly from Eastern Europe. Most of these posts are unlikely to count as skilled. This could put upward pressure on labor costs, without any guarantee that posts can be filled from the resident population. Longer term this might promote greater automation in warehousing and distribution. It is even conceivable that distribution to the UK of products originating outside the EU might be performed from an EU country such as The Netherlands (to some extent this happens anyway). 08. THE EMERALD ISLE Whatever the outcomes, companies trading with the Republic of Ireland may have special concerns. The Republic is of course remaining in the EU, but the border with Northern Ireland (part of the UK) will essentially have to remain seamless and frictionless, as part of the Good Friday peace agreement, and the UK and the Republic will continue to form a Common Travel Area. The UK is the Republic of Ireland s largest trading partner. Additionally, a large proportion of Irish imports and exports, from agricultural produce to electronics and high tech, have to transit the UK en-route to other destinations, so special arrangements will have to be made. 09. ON THE POSITIVE SIDE The above are just some of the risks that could make the UK a less attractive location for logistics operations. However, the UK appears to remain committed to open global trade, and to seizing opportunities for increased trade with China, India, Japan, Korea, the Commonwealth countries and elsewhere. The possibilities of lower corporate tax and regulatory burdens may mean that companies wishing to export into Europe could find the UK a suitable location, especially for goods being held for last minute assembly/ configuration. 7

8 10. QUESTIONS FOR SUPPLY CHAIN LEADERSHIP Clearly the precise shape of the future EU-UK relationship, and its implications for logistics, will not be clear for many months. But the major risk areas are already clear and companies with exposure to UK-EU trade should be starting a contingency planning process. Key questions include: What effect will new immigration policies have on labor markets? What will be the optimal location for distribution centers serving the UK and EU? What should road and ocean freight networks look like? How might preferential trade agreements impact overall spend? What impact will new customs policies have on EU-UK trade? Severe curtailment of entry by EU workers to the UK labor market could be potentially catastrophic, and just for this reason is unlikely to happen. At the skilled worker level, EU workers will continue to be admitted, and it may in fact become easier to hire skilled workers from non-eu countries. At the lowerskilled level, government is aware of the needs of industry and agriculture and it is likely that change will be more around restricting welfare payments to nonworking migrants. But it may be that firms will have to apply for specific permits for their migrant workers (as indeed they already have to for non-eu workers). This may make the labor market less flexible and responsive. If movement between the UK and EU becomes unduly cumbersome, companies serving the UK from, for example, the Benelux, may consider establishing separate UK facilities. A more competitive business regime may also be an attraction. However, the commercial warehousing market across most of the UK is already extraordinarily tight. Particularly if the UK strikes trade deals with significant non-eu countries, it is reasonable to imagine that companies will ship directly into UK ports such as London Gateway, Southampton or Felixstowe rather than transshipping at ports like Rotterdam. The impact is of course unknowable at the moment. What is clear is that there are certain priority sectors for the UK government, both in negotiations with the EU and in striking deals with other countries. Besides the financial services sector, these include automotive, pharmaceuticals (particularly in terms of research co-operation), and food, drink and agriculture. This area in particular could see fundamental transformation as the UK leaves the controversial Common Agricultural and Common Fisheries policies. (However, this is also the area in which any retaliatory measures by EU members are most likely). Again, this is unknowable at the moment. If no agreement is reached and trade defaults to WTO terms, tariffs will range from the fairly mild to the potentially draconian (especially on some agricultural products). It is not clear whether the UK would match any tariffs imposed by the EU. Some observers believe that, even if a general agreement eludes negotiators, special deals may none the less be made for sectors such as automotive, but this may be over-optimistic. As important as the level of any duties and tariffs imposed, will be the efficiency of the newly introduced bureaucracy. The physical burden of Customs inspections may not be as onerous as feared since the UK isn t part of the Schengen Agreement on free movement, there is a high level of inspection at UK ports anyway. Developing and maintaining common systems and procedures such as the Union Customs Code, even once the UK has left, will be important in minimizing disruption. 8

9 11. KEEPING AN EYE ON THE (CRYSTAL) BALL In the absence of hard information, there are few sources for companies to gain firm advice on how to mitigate risks and maximize gains in their supply chains post-brexit. It is vital for businesses to identify and assess these threats and opportunities and leverage them to reinvent their existing supply chain footprint. Companies, instead of investing their own time and money, can rely on the expertise of Damco. In Damco Supply Chain Development we believe it is by no means too early for supply chain owners to start analyzing and simulating the possible impacts of different scenarios, and to begin formulating contingency plans. Where such analysis concludes that a movement of assets or relocation of operations is a likely outcome, early adopters could benefit, given the restricted availability of resources in some key markets. Damco s Supply Chain Development teams are keeping a careful watch on all these issues, and will continue to do so as Brexit negotiations commence. Damco is also partnering with leading Universities to conduct research on various potential solutions for organizations to leverage. If you would like to explore the issues further, please contact Damco Supply Chain Development at the nearest office 9

10 About the author Nitesh Mandal is Supply Chain Development Consultant at Damco and is based in The Hague, Netherlands. As a supply chain professional with over seven years of experience, Nitesh has delivered complex supply chain optimization solutions across various parts of the world. His specialties are in network re-engineering, inventory optimization, warehouse designing, and in managing warehouse operations. About Damco Damco is at the forefront of developing innovative supply chain solutions. We fuse our global network and depth of expertise with pioneering digital innovations to enable our customers to stay ahead. Our vision is to connect and simplify supply chains across the globe. We are experts in the field of complex, rapidly changing markets such as fashion, retail and technology. With a presence in over 100 countries, where we employ more than 11,000 people worldwide, we combine global reach with depth of local understanding. In 2016 we reached a turnover of 2.5 billion US dollars, managed 659 thousand TEUs (twenty-foot equivalent units) of ocean freight and 190 thousand tons of air freight. We are proud to be a part of A.P. Moller Maersk. All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Damco International BV. 10

Government Briefing Note for Oireachtas Members on UK-EU Referendum

Government Briefing Note for Oireachtas Members on UK-EU Referendum Summary The process of defining a new UK-EU relationship has entered a new phase following the decision of the EU Heads of State or Government