As the United Kingdom gets set to vacate the European Union (EU), one of the primary concerns for UK manufacturers is how the government’s post-Brexit arrangements will affect trade, output and supply chain security.
It is anticipated that Brexit will lead to a decline in both trade and output, affecting the stability of some 50,000 jobs in the manufacturing industry alone. In practical terms, this means some labour market changes may be necessary and that the true number of job losses could vary significantly as a direct result of changing trade flows.
Manufacturing contributes around 10 percent to the UK’s GDP and accounts for some 44 percent of their exports. The EU is currently the UK’s largest trading partner and industry insiders are expressing real concern over how Brexit may impact future trade arrangements with both the EU and other international markets.
The EU Customs Union consists of all the member states of the EU, which include Monaco and some self-governing areas of the UK. Territories such as Guernsey and the Isle of Man are not part of the EU but share this large single market. The European Commission negotiates for and on behalf of the union, rather than each member state negotiating international trade deals individually.
As the union currently stands, UK businesses enjoy trade with the EU without tariffs or quotas. Customs duties are not imposed on goods travelling within the customs union, and in contrast to a free trade area, the customs union members impose a common external tariff on all goods entering the union. Following Brexit, it is possible that some tariffs and duties will be imposed on any UK goods and services imported into the EU under new trade deals.
Commentators in the manufacturing sector argue that Brexit will create opportunities and greater flexibility for UK manufacturing to establish more business with other global markets if they lose trade agreements with the EU.
However, trading arrangements with large markets such as China and the USA are not expected to reach as deep. There are also vulnerable sectors selling a high proportion of manufacturing inventory in the EU, which will be impacted the most by any new agreements are those organisations.
One example can be seen in technology-based manufacturing where, contrary to the government’s industrial strategy that seeks to promote high-tech sectors, these very same high-tech industries are particularly dependent on the EU market.
Manufacturing in the UK is currently experiencing its highest output in a decade, with 2.8 percent annual growth. This can largely be attributed to an overall global growth and to a fall in the value of the pound sterling that made UK exports more competitive following the Brexit referendum.
Productivity levels could drop due to any restrictions to the free movement of people within the EU. This could create issues with future labour sourcing as EU migrant labour is estimated to make up over 50 percent of all workers within food production, leather and textile manufacturing. Changes to the labour market could potentially drive up wages, where migrant workers were willing to work for lower wages than that of their British counterparts.
Outsourcing of labour and manufacturing inventory components could become more prevalent, as companies seek to keep their regular costs down.
For a lot of UK manufacturers, the EU is likely to remain their biggest export market. The prospect of new trade barriers or tariffs will have a significant impact on supply chains and manufacturing inventory management.
The export of finished goods will become more expensive for customers in the EU market if tariffs and import duties are applied, potentially driving clients to a competitor business. Manufacturers importing components from the EU face the prospect of increased border checks which could impact the movement of goods and disrupt next day delivery arrangements.
To overcome any issues UK manufacturers may consider holding more manufacturing inventory or seek out new suppliers in the local British market.
Organisations invest considerable time and resources into manufacturing inventory management and improving their supply chain efficiency. Brexit could see these organisations enter into new supplier contracts, reset key performance deliverables or renegotiate costs and lead-times with existing suppliers.
Whatever happens to the UK manufacturing industry post-Brexit, there is one thing that everyone agrees on and that is the need for clarity. Manufacturers need to know, now, what post-Brexit will look like, so they can adequately forward plan.