It’s little secret that the manufacturing sector in the United Kingdom has been in a state of decline. Unfortunately for manufacturers in the UK, Brexit brings with it a heightened sense of risk. Britain’s European Union membership currently gives UK manufacturers open access to the lucrative European Union market as well as access to further international markets via the European Union’s network of trade deals. Given that the threat of Brexit is unlikely to go away anytime soon, how can manufacturers in the UK manage risk and maximise opportunity?
One of the key Brexit risks that UK manufacturers face is the loss of access to the (very large) European market. UK manufacturers supply a large proportion of their exports to other destinations in the European Union. Of course, it’s not simply the size of the European market that is of interest to UK manufacturers – their concern also relates to the current ease with which UK firms can conduct business elsewhere on the continent. While the terms of any withdrawal have yet to be determined, there is a risk that UK manufacturers will have to export goods to Europe under significantly less generous rules – if the ordering cost for UK goods rises, UK goods are likely to be much less competitive in the European market.
The outsized role that Europe plays for many UK manufacturers means that few firms will be able to completely hedge against the risks posed by Brexit. That said, many firms are increasingly looking to develop customer relationships outside of the continent.
Higher Ordering Cost
UK firms currently purchase inputs from elsewhere in the European Union with no added tarrifs or duty. Just as Brexit has the potential to impact UK firms’ access to the European market, it also has the potential to affect the price that UK firms pay for imports from Europe. While there may be little appetite to introduce tarrifs into the UK-EU relationship, there is a real risk that Brexit will affect the ordering cost of raw materials and intermediate goods from elsewhere in Europe.
Refocusing on Domestic
Although Brexit’s impact on intra-European trade is yet to be seen, the effects on domestic trade are likely to be more muted. Any slowdown in EU-Britain trade is likely to have at least some impact on local trade, but British manufacturers can take some comfort in the fact that they will still have ready access to the domestic market. In fact, deterioration in the EU-Britain trade relationship could even give UK firms a competitive advantage in the UK market. Against this background, it may be wise for some manufacturers to increase their focus on the domestic UK market.
A Changing Regulatory Picture
Current thinking is that on day one, UK regulations will largely mirror the position in the European Union. But as months and years pass, commercial regulation in the UK is likely to diverge from the approach taken in continental Europe. It is too early to say whether this will advantage or disadvantage UK manufacturers – despite this, savvy operators will be keeping a close eye on developments in Westminster and in Brussels.
Finding Quality Staff
Although the UK is known for its dedicated and skilled workforce, UK manufacturers have enjoyed a ready pool of staff from across the European Union. Although the position is not yet settled, Brexit calls that position into question; UK manufacturers may no longer be able to employ staff from across the UK in the same manner as before. This may make it difficult for some manufacturers to fill core roles, and may also have an impact on the cost of manufacturing labour. Although Brexit’s impact on the labour market is not yet well understood, manufacturers would do well to be mindful of the potential for labour supply to decrease and for wages to rise.