Brexit, Covid and disrupted supply chains; what’s really going on?

Updated: Sep 23

Kayleigh Su - Law City Student Ambassador




The current situation is undoubtedly an unsettling one, and the effects are tangible across many sectors: McDonald's and KFC had recently announced the unavailability of certain menu items due to shortages; Steve Murrells (Chief Executive of the Co-operative Group) noted that the shortages were the worst he had ever experienced; Guardian reported that the shortage of workers pushed retail stock to a 38-year low; and as the NHS are confronting with a shortage of sample bottles, GPs are asked to ration blood test vials.

Recently, the government rejected Logistics UK's plead for temporary visas for EU hauliers to enable them to return to the UK to fill the delivery gap disrupting the flow of the supply chain. The proposal followed the drastic shortage of drivers due not only to the complications brought on by Brexit but also by the rampant COVID-19 virus which forced test centres to close down. Such visas are typically reserved for higher-paid jobs, however, Logistics UK noted that their proposal would be in line with 'eight similar schemes already running, including ones for agricultural workers and those working in the arts'.

Brexit's Impact

According to the Office for National Statistics, in 2018, EU-UK trade in goods comprised 54% of imports and 49% of exports of the UK's total trade volume. As a matter of fact, many homegrown businesses as well as multinational corporations operating in the UK are greatly reliant on and integrated with the EU. One of the perks of being an EU member state was frictionless trade as a result of the EU's 'internal market', protected by Article 34 of the Treaty of the Functioning of the European Union which generally prohibits discrimination, and the principle of mutual recognition.

With the divorce, concerns regarding the return of tariffs which could cause the good to become uncompetitive, and increasing cost as a result of delays and additional paperwork, arose. The Chartered Institute of Procurement & Supply (CIPS) found that the rising costs began even after the vote due to currency fluctuations, with 60% of UK businesses with EU suppliers experiencing an increase in management cost of supply chains. Moreover, 22% of UK businesses with EU suppliers experienced difficulty in securing contracts running post-March 2019.

Perhaps the most unsettling concern is the uncertainty for what is to come in the long term. McKinsey & Company lamented: "Brexit poses major uncertainty for the supply chains of many companies operating in the UK, on top of already high levels of uncertainty caused by global geopolitical and economic trends". Uncertainty makes it harder to plan and mitigate, which is exceedingly worrying considering the economic downturn as a result of COVID restrictions.

Some uncertainty is alleviated by the EU-UK Trade and Cooperation Agreement (TCA) signed on 30 December 2020. However, this does not bring back pre-Brexit times for a few reasons. The TCA notes that the agreement involved an "unprecedented 100% tariff liberalisation". However, the tariff-free (no taxes on imports) and quota-free (no limit on imports) trade of goods is limited by the 'rules of origin' requirement, which necessitates that the goods in question originate from either the EU or the UK. This is to ensure that the preferential privileges provided for in the TCA are accorded only to goods that originate in the UK or EU.

Businesses need to be cautious to ensure they are compliant with such conditions to benefit from the free-trade agreement and if not, either authorise the changes necessary to make their import/export compliant or be prepared to absorb the extra costs. CIPS found that businesses are coping by passing on the increase in costs to the customers, which could drive customers towards competitors.

Furthermore, the TCA does not provide for mutual recognition which means that UK businesses selling in the UK and the EU will have to adhere to two different regulatory regimes, which is not only costly but inconvenient. Therefore, it is plain that businesses will still need to learn to adapt and it does not help that the TCA was already provisionally applied two days later on 1 January 2021. The brief intermission between old and new manifests an additional risk for unprepared businesses: partners in the supply chain or consumers may instead turn to those who are more prepared.

Deadlock?

The solution for UK businesses suffering such shortages may seem out of reach. On the one hand, businesses need to somehow pass on costs to sustain viability by protecting profit margins. On the other hand, 'there is a limit to what they can pass on to consumers at a time of stagnant wage growth, and rising inflation (John Glen, CIPS Economist). On the one hand, businesses may have to look to local or third party suppliers to ensure the inconsistent if not continuous flow of their supply chain. On the other hand, it is unlikely they will find suitable alternatives once factors like geographical proximity are considered. After all, the strategic value of the EU is that it is right on the UK's doorstep. In this sense, working towards a stronger relationship with EU partners might be the wiser way forward. However, the fundamentals can only be controlled by the deals struck between the UK government and the EU, not the impacted businesses.

Comorbidity?

While this post discusses the impact of Brexit, it seems almost ignorant to consider the disruption in the supply chain without also referring to the current pandemic, which compounded the negative effects consumers are facing today. Indeed, some suggest that the disruption in UK supply chains is primarily due to COVID. Ann Widdecombe, a former Brexit Party MEP, recently argued that the disruptions were "yet another example of mismanagement" following the nationwide lockdowns. While there is a shortage of HGV drivers to bring goods into the UK, this might be due to the closure of test centres as a protective measure; it was noted that over 30,000 people are waiting to take the test. Despite this, as DW noted: 'When diners cannot sip their favourite milkshake or savour their favourite chicken sandwich, it brings Brexit directly to their table and calls into question the idea that leaving the EU would bring back control'. Brexit, therefore, will seemingly always be engraved in the current state of affairs.