Turmoil points to need for robust mapping of supply chains, rigorous analyses of alternate sourcing strategies
More than four years after a majority of UK voters opted to leave the EU, negotiations on the terms of the Brexit breakup were finally agreed to on December 24, 2020—just days before its January 1 implementation. But for supply chain managers, uncertainty over the final shape of the Brexit deal hasn’t been resolved—in fact, in the first weeks of 2021, new uncertainties and challenges have emerged.
While the EU-UK Trade and Cooperation Agreement (EUTCA) provides for “zero tariffs and zero quotas,” its rules of origin resulted in unexpected tariffs for goods that cross EU-UK borders multiple times. For example, retailers in Ireland—part of the EU—learned in the first days of 2021 that goods made in Ireland but shipped to and from their UK-based distribution centers are taxed when they re-enter Ireland.
“A lot of the existing supply chains work on the basis of distribution hubs that are in Britain,” a spokesman for Irish retailers told the Independent. When Irish-made goods leave these hubs for Ireland, they face full EU tariffs “because in a sense they’re actually returning to the EU.”
Of course, this will be true of many industries, as millions of products in today’s globalized economy are sourced, manufactured, assembled and packaged in multiple countries. The automotive industry supply chain, for example, is more closely integrated across the EU and UK than any other industry, according to a spokesperson for the EU Automobile Manufacturers Association.
While the association welcomed the finalization of the EUTCA, it warned that the implications of the deal’s rules of origin were still emerging, according to an article in Forbes. And the Financial Times reports that automakers will be under pressure to “obtain supporting documents” from suppliers “to certify that their goods qualify as locally sourced in order to avoid tariffs.” Fortunately, the deal grants a 12-month grace period on some elements of the rules of origin.
Aside from surprise tariffs arising from rules of origin violations, the main concerns for procurement and supply chain managers are the costs and delays brought on by new permit and paperwork requirements. While the UK agreed to delay most customs checks for six months, the EU began checking paperwork at borders on January 1, noting “if businesses are not prepared, or do not fill in the new paperwork correctly, it could cause delays and backlogs.”
In the first days of the EUTCA, French companies in the time-sensitive fish and seafood industry reported onerous delays and spoiled products as post-Brexit red tape was impeding deliveries of salmon and lobster from the UK. Mandatory EU sanitary checks were leading to shipments being held up due to violations as petty as incorrect Latin names for fish species.
“It’s been apocalyptic,” said the head of sourcing at Demarne Freres, a French seafood firm that gets most of its supply from the UK.
For their part, French customs officials say they’ve been flexible in the first days of the EUTCA but warn that they will soon become more strict, according to Reuters.
Sorting out the impacts of rules of origin in the EUTCA will require robust mapping of existing supply chains, as well as sophisticated analyses of the costs and benefits of strategies like alternate sourcing. Resilinc recommends planning for a range of scenarios over the next year or two, as well as planning for longer-term redesigns of supply chains to adapt and build resiliency for a EUTCA-shaped EU-UK trading system over the long term.
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