Understanding Post-Brexit Scenarios and Minimizing Impact to Intercontinental Supply Chain Operations

Understanding Post-Brexit Scenarios and Minimizing Impact to Intercontinental Supply Chain Operations

Background

On March 29, 2019, the United Kingdom (UK) is scheduled to formally leave the European Union (EU). Both the EU and the UK are in negotiations on a 21-month transition period which would allow the UK to remain in both the EU’s single market and the customs union until December 31, 2020. However, a final agreement on the terms and conditions of the UK’s withdrawal from the EU, including the transition period, will need to be ratified before March 2019, otherwise trade would begin to be governed by World Trade Organization rules, where tariffs and customs checks apply.

Given the disruptive nature of such a scenario acknowledged by both the EU and the UK, the majority of analysts expect some form of an agreement to be negotiated before 2019 to allow for enough time for ratification procedures. However, the process to gain a deal could still fail in case no deal would be agreed upon over the next few months, a negotiated agreement would not be ratified or negotiations on future relations would be unsuccessful. During a potential transition period, both sides would then define the new trade relationship that would apply after 2020. The UK’s white paper on Brexit, published in July 2018, recently outlined the UK government’s ambition to remain closely aligned to the EU customs union and the single market for the majority of goods.

The decision to leave the EU has already caused considerable impacts on business operations as companies with complex supply chains face uncertainty over which rules will apply over the next years as long as no preliminary deal is reached. Back in 2017, an Ipsos Mori survey of more than 100 of the country’s top 500 firms found that 58 per cent of top executives in Britain said that Brexit has already had a negative impact on their businesses, while two-thirds believed that the business situation would worsen in the next 12 months. Although investment decisions in the manufacturing sector are on a four- year high and the economy has done better than expected, the UK has grown more slowly than other large European economies.

Preemptive Efforts to Minimize Impact

Large companies, ranging from packaging manufacturer DS Smith to a renewable energy unit of Siemens AG, have reportedly delayed strategic investment decisions regarding new plants and production lines. In addition, some companies have made the strategic decision to relocate jobs from the UK: Unilever, an Anglo-Dutch consumer goods company, has decided to move its headquarters to the Netherlands, while Jaguar Land Rover and Nestlé will move jobs to Slovakia and Poland respectively. Car maker BMW and aircraft manufacturer Airbus have recently threatened to stop producing in the UK should there be severe congestion at borders after Brexit. Finally, as the EU will move its UK-based regulatory agency for drugs to the Netherlands, pharmaceutical companies may start to expand testing facilities away from the UK to anticipate potential regulatory divergences in the midterm.

Aside from potential future trade and regulatory barriers between the UK and the EU, the biggest risk to supply chain management may well come from another factor: time. Additional documentation, customs checks and border congestion will likely slow the flow of goods, leading to increased shipping times for both inbound and outbound logistics and causing changes to supply chains, in particular to time-sensitive industries such as car manufacturing. Nissan, for instance, is concerned that its manufacturing costs will increase in the event of Brexit as it keeps just half a day’s worth of parts in its warehouses as part of a long-established just-in-time production process.

To assess the impacts of Brexit, this report will look at potential delays and increased transit times arising from border checks and congestion in two scenarios, namely a hard and a soft version of Brexit. A hard Brexit would see the UK leave both the customs union and the EU single market, giving it full control over its borders and the possibility to make free trade agreements on its own. In a soft Brexit scenario, the UK would remain closely aligned to the EU single market and reach some form of tariff-free agreement on most goods. While a no-deal Brexit is a also an option, both the EU and the UK have stated it would be the least desirable outcome.

Both scenarios would involve customs checks, albeit to various degrees, and thus bear the potential of disrupting EU-UK cross-border trade. According to the British Chambers of Commerce, the UK will need at least 3 to 5 years to develop a functional customs IT system, train new staff and build the necessary physical infrastructure.

Delays of as little as 15 min would cost Honda up to 850,000 GBP more in annual running costs

A Hard Brexit Scenario: Leaving Both the Customs Union and the EU Single Market

In a hard Brexit scenario, the UK would leave both the customs union and the EU single market, effectively reintroducing customs checks at borders for all trade movements between the EU and the UK. The number of truck checks at the Port of Dover, the main UK gateway for trucked cargo, could increase from 500 to 10,000 per day, which is the amount of trucks passing through the port on a busy day. Even a small increase in customs paperwork and routine checks bears the risk of congesting ports. According to the British Freight Transport Association, adding an average of 2 minutes to customs processing (where it currently takes trucks 2 minutes to clear at Dover) would result in a 17-mile queue from Dover to the UK hinterland. Similar scenarios have also been put forward for the French ports of Calais and Dunkirk on the other side of the Dover Straits. These delays may be critical for time- sensitive shipments, potentially delaying production lines. Car manufacturer Honda reportedly relies on 350 trucks per day from the EU to keep its just-in-time model at its Swindon factory running, and delays of as little as 15 min would cost the company up to 850,000 GBP more in annual running costs. Alternatives such as the Eurotunnel

Adding an average of 2 minutes to customs would result in a 17-mile queue from Dover to the UK hinterland

between Folkestone and Calais would be unable to add much capacity and are not even today an integral part of inbound automotive supply chains due to higher costs and less flexible schedules than short sea shipping.

In addition to new customs posts, ports and airports would also need new freight inspection points for sanitary checks of food, animals and plants. Such screening would mirror checks already made today on imports from non-EU locations such as China. Additional customs paperwork such as import or export declarations or origin certificates for the goods would still add administrative costs for companies. US car maker Ford warned over the huge volume of paperwork required even for basic customs checks, with an engine export from the UK to Germany requiring 20,000 separate declarations.

To alleviate the administrative burden on companies and ease potential logistics bottlenecks, the UK government may consider adding more customs staff and using new technology to speed up the processing of customs documentation. This requires, however, substantial investments into training and recruiting as well as technologies including number-plate recognition, CCTV cameras and pre-registration systems for cross-border traders and travelers. Even checks at the currently most automated border between Sweden and Norway take between 3 and 9 minutes on average to clear customs, causing long queues of trucks during peak hours.

A Soft Brexit Scenario: Remain Closely Aligned to the EU Single Market and Customs Union

Under this scenario, the UK would remain closely aligned to the EU single market and possibly reach some form of tariff-free agreement on most goods. Based on the so-called “Norway model”, such an agreement would allow Britain to strike trade deals on its own while maintaining full, tariff-free access to the single market for most goods and services. It would effectively remain fully aligned with EU market rules. Most research suggests this would be the least damaging form of Brexit, with border disruption far less severe than in hard Brexit scenario, although the UK has excluded the Norway model as a realistic option.

Points of potential border congestions in both Brexit scenarios:
– Port of Dover and M20 highway
– Port of Calais and Dunkirk and A16/A216 highway
– Port of Dublin and Dublin Port Tunnel
– Port of Holyhead and A55 Expressway

Such a scenario would ensure that the UK remains in full compliance with EU rules in sectors ranging from pharmaceutical to aviation to ground transport. The UK would continue to participate in the European Medicines Agency, the EU’s centralized system for approving and monitoring medicines as well as the EU’s single market in aviation services and road haulage regulations, which allow mutual recognition of driver licenses and transit through all EU member states with a single permit. However, the UK would likely not be part of the common fisheries and agriculture policies. These products would need to be checked at the border and be subject to tariffs.

However, even for non-agricultural products, the Norway model would not erase border checks completely. As Norway is not in the customs union, it has border controls and its exports must be checked to comply with EU rules of origin to ensure that goods from outside Norway are not entering the EU through the back door. It would not be possible, for example, to import a car from China and then export it to Germany without facing a tariff. And shippers transporting locally produced goods, i.e. in the UK, would need to prove that the goods are tariff-free, which would include some form of customs check.

Along the crucial short sea route between the Irish Port of Dublin and Holyhead on the UK’s west coast, there are up to 10 ferry crossings every day with more than 500 trucks aboard, of which up to 10 percent are regularly screened. Similar to the situation in Dover, there are severe doubts that both Dublin and Holyhead have enough space to temporarily park trucks and conduct checks, raising the danger of miles- long highway tailbacks.

Adapting Established Supply Chain Networks

As both scenarios would substantially impact existing supply chains and make them vulnerable to border checks and congestion, most shipping lines, port operators and freight forwarders have already begun to create viable alternatives to reduce disruption for manufacturing supply chains.

First, the Dover Strait currently accounts for about 75 per cent of EU-UK trucked cargo, but it is likely that both the ferry route Dover-Calais and the Eurotunnel link between Calais and Folkestone will lose its dominant position for freight movements across the Channel. Despite plans to increase truck parking space around Dover, chronic congestion, longer transit times and higher transportation costs will make this connection less reliable. During the 2015 migrant crisis, which disrupted the Dover-Calais route, logistics professionals turned to the south-east UK ports of Harwich and London. In particular, London may challenge Dover as an alternative hub. Recently, shipping company and logistics operator CMA CGM announced that it would take a long-term lease at London Gateway and invest in a multi-temperature warehouse. A similar announcement by ferry operator P&O to invest GBP 150 million further upstream on the Thames will strengthen the Port of London’s position to provide regular sea freight services from and to the UK. Crossing times from Belgium would be reduced to 7 hours, with a new road linking the terminal to the A13, allowing shippers to avoid the congested M25 highway and further reduce transit times to the UK hinterland.

Figure 02: Existing vs. alternative route examples across the Channel: On the left hand side, a connection from supplier to manufacturing plant via the Calais-Dover route; on the right hand side, the alternative route via Zeebrugge and Tilbury.

Second, inland clearance depots may be an alternative option to alleviate congestion and shift the problem away from the border. For most goods except agri-food and excise goods, the physical border can be separated from where customs clearance is actually conducted. If the UK continues to adhere to EU transit procedures like Norway, lorry drivers would be allowed to carry goods across EU member states to the UK without being stopped. A lorry from Turkey may then pass through Bulgaria to the UK without being stopped or paying any duty until it reaches the UK. Once in the UK, it is cleared at some inland facility, such as Stop24 on the M20. (A step further would be to allow for shared clearance depots where EU and UK customs authorities could conduct juxtaposed checks for both regimes at either side of the border). Nevertheless, the introduction of inland controls still requires the UK government to identify where depots can be placed. Such inland clearance depots will likely be handled by private operators on behalf of the UK government.

A viable alternative may also be customs warehousing offered by certified private logistics operators which process customs declarations in their warehouses while duties remain suspended, helping to avoid paying customs tariffs upfront. Despite additional costs for inventory, customs warehousing would considerably reduce transit times and provide companies with more certainty for production or distribution processes. The UK government has also suggested considering the use of EU’s trusted trader scheme, the Authorized Economic Operator (AEO) system, or a new, proposed UK-based equivalent, to reduce documentary requirements at the border. Such a scheme would certify trustworthy traders to benefit from streamlined processes, which could be extended to fewer physical inspections and prioritized customs clearance.

Third, ferry operators recently began to offer alternative short sea services from Ireland to European countries, bypassing the UK entirely. Some 50 percent of Irish truckers currently cross the UK to serve the European continent. If the UK left the customs union, cargo could be screened up to four times on its way through Britain, at departure and arrival in Holyhead and then again on both sides of the Channel, adding hours to transit times. Direct routes to continental Europe have the potential to displace some of the freight traffic although the Dublin-Holyhead link will remain important. New ferry routes have been introduced from Ireland to Belgium, Netherlands, France and Spain. Transit times on direct routes will certainly be longer – Dublin-Cherbourg takes 20 hours and Dublin-Zeebrugge takes 40 hours – but would offer more certainty over trucking schedules in the event of border checks.

Existing vs. alternative route example from Ireland to continental Europe: The solid line displays the existing route via the UK while the dotted lines show new direct connections bypassing the UK.

Fourth, unaccompanied trailers which do not require trucks and drivers to enter or leave the UK could reduce documentation checks at borders, although longer clearance times of between 20 minutes and 2 hours may apply. More than 50 per cent of sea cargo is already moved in this way between Ireland and the UK. Less time-sensitive goods could be held as contingency stock at the port of entry, with sufficient time to clear customs before being picked up. Peel Ports Group, which operates London Medway Port in south-east England, has put forward such a plan as an alternative to the Calais-Dover/Folkestone link, arguing that long warehouse leases, port congestion and the cross-border driver shortage could thus be avoided.

Despite these options, the lingering uncertainty around Brexit makes it difficult to anticipate how exactly supply chains may need to adapt and to what extent investment plans by logistics and supply chain operators will actually materialize. Depending on industries’ lead times, however, some options to mitigate impacts do exist and more and more may be added as the final outcome of Brexit becomes clearer.

Key Milestones Ahead

Regardless of the final deal on the terms of departure and future trade relationship between the EU and the UK, Brexit has already had considerable impacts on short-term and mid-term decisions of companies with complex supply chains. As both scenarios bear the potential of disrupting EU-UK cross-border trade, key players in the logistics and supply chain field have already started to explore options to minimize impact and maintain a smooth flow of materials across the Irish Sea and the Dover Strait. Key milestones to watch out for in the coming days and weeks include: the next EU summit in Brussels on June 28-29 where EU leaders will discuss how to avoid a hard border between Ireland and Northern Ireland and a parliament vote in the UK on whether to stay in a customs union with the EU or not in early July 2018.

Minimizing the Impact from Brexit

Organizations with intracontinental supply chains between the UK and the European Union can adopt several measures to minimize the impact of Brexit. Everstream Analytics recommends the following:

  • Review your current supply chain network setup: Organizations must have a clear picture of inbound and outbound flows and examine how Brexit may affect the duty-free movement of goods. Ensure you know the economic origin of your goods, including raw materials, as trade terms may change if those countries have trade agreements with the EU. Create these visibilities on a multi-tier level well enough in advance to avoid surprises. Use network mapping and visualization tools to create a common understanding across the organization of impacted supply chain entities.
  • Ensure timely application for trusted trader schemes: Consider obtaining a trusted trader status, such as the Authorized Economic Operator (AEO) system, or a new UK-based equivalent, or partner with logistics operators that are well ahead of Brexit in terms of planning post-Brexit cross-border movements. Explore options such as customs warehousing to benefit from faster clearance times and suspended tariffs. Logistics operators can provide a better understanding of the potential administrative changes, avoid administrative bottlenecks, reduce documentation needs and speed up transit times.
  • Identify alternative routes for your EU-UK shipping connections: Initiate talks with your logistics operator of choice to determine possibilities of utilizing inland clearance depots, selecting alternative locations for distribution centers, shipping to alternative ports of entry or exit as well as using post- Brexit transport routes. Calculate how changes in lead times and transit times may impact the material flow of your inbound supply chain and increase costs due to the need for additional inventory and warehousing.
  • Communicate with and review your supplier base: Companies should actively communicate with their suppliers and review their preparedness in terms of business continuity management and support or change high risk suppliers. Companies at highest risk are likely to be smaller organizations for which Brexit poses financial and regulatory challenges. Supplier management tools with survey capabilities and feedback loops can be a first step to creating transparency and establishing communication with your suppliers.
  • Keep abreast of new regulatory and border developments: As EU-UK negotiations progress, monitor key developments to understand how specific sectors may or may not be included in a future trade agreement (agriculture, services, fishery, animals, plants, pharmaceutical). Use real-time monitoring capabilities to receive updates on potentially congested locations and lanes in EU-UK cross border traffic as well as emerging alternative shipping routes and services.

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