When the U.K. voted to leave the European Union on June 23, shockwaves reverberated around the world’s financial markets. Stock markets tumbled overnight, the pound plummeted, the FTSE 100 Index of leading U.K. shares dropped off a cliff. It seemed that prophecies of financial Armageddon had come home to roost.

Fast-forward six months, and despite all the hot air, nothing much has happened. Stock markets have recovered and the FTSE 100 is trading at higher levels than before the referendum. The pound has fallen, but that only served to boost month-on-month exports by £800 million in July, as British goods became cheaper – although the cost of imported raw materials and consumer goods will rise.

New British Prime Minister Theresa May reaffirmed that she still intends to trigger Article 50, the process for leaving the EU, by the end of March 2017, despite the recent decision by the U.K. High Court that the referendum result must be ratified by parliament.

However, it may not be so easy. While MPs in the House of Commons, most of whom are pro-EU, have vowed to respect the referendum result, some may seize the chance to demand continued membership of the Single Market as the price for their vote. The legislation could also be held up in the House of Lords for up to a year. The government has appealed the verdict to the Supreme Court, and a decision was awaited at the time of going to press.

Only when Article 50 has been triggered will we really see how Brexit plays out during the two-year mandatory period in which everything is decided. There are so many unknowns, such as trade agreements that Britain may have to negotiate, and customs procedures not only with the EU but Ireland, with which it shares a land border.

So should businesses be alarmed – and what can they do to prepare? In particular, how can they safeguard their supply chains from any possible downside?

 “The good news, unlike many supply chain events – like a volcano disrupting air traffic or an earthquake destroying infrastructure – is that we have over two years’ notice of the change,” says Professor Richard Wilding, Chair of Supply Chain Strategy at Cranfield School of Management. “Do your scenario planning and understand how susceptible to impact your supply chain is – you may be pleasantly surprised.

“It’s a massive change and people need to plan for that, but equally this is a serious opportunity. I would argue that a lot of things that have been taking place in the last 15-20 years may not be the most efficient way of doing things, so it gives organizations the opportunities to really reflect on the right way of doing things.”

U.K. political debate is now focused on discussions as to whether there should be a “soft” Brexit – staying in the Single Market, or a “hard Brexit – leaving the Single Market. However, it is much more complex than that. Rather like an ice-cream parlor, there are four possible scenarios that could form the basis of the U.K.’s relationship with Europe post-Brexit, but each with a number of different flavors that could be added:

UNITED KINGDOM

Population: 64,600,000

GDP: £1.83 trillion

World Economic Forum’s Global Competitiveness Index:
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6th place (out of 189 countries)

DHL Global Connectedness Index: 8th place (out of 140 countries)

U.K. political debate is now focused on discussions as to whether there should be a “soft” Brexit – staying in the Single Market, or a “hard Brexit – leaving the Single Market. However, it is much more complex than that. Rather like an ice-cream parlor, there are four possible scenarios that could form the basis of the U.K.’s relationship with Europe post-Brexit, but each with a number of different flavors that could be added:

The Norwegian model:

By joining the European Economic Area (EEA), like Norway and Iceland, the U.K. would still have access to the Single Market but be exempt from EU control in some areas, such as external trade, agriculture and fisheries. However, it would be required to retain freedom of movement, and would still have to pay into the EU budget – the two biggest issues in the referendum campaign.

The Swiss model:

Joining the European Free Trade Area (EFTA) but not the EEA would allow the U.K. to have partial access to the Single Market in return for smaller financial contributions. There is argument as to whether this would still require freedom of movement. The Swiss signed a free trade agreement with the EU in 1972 that did not include freedom of movement, only signing up to this later, so a precedent has been set. Furthermore, in a 2014 referendum, the Swiss voted to end freedom of movement – an issue yet to be resolved with the EU. However, Switzerland does not have a deal on financial services, which are vital to the U.K. economy.

EU-U.K. free trade agreement:

Theresa May confirmed on October 2 that the U.K. will take back control of immigration and will not be subject to the jurisdiction of the European Court of Justice. Neither of these appear compatible with remaining in the Single Market – but this could change once the bargaining starts. The prime minister has said the U.K. will seek the best possible deal, including free trade in goods and services, but also wants to retain the “maximum possible access” to the Single Market. It has also been rumored the U.K. government may offer substantial payments into the EU budget to keep access to the Single Market for financial products and services.

Exit from Single Market:

If a U.K.-EU trade deal cannot be reached within two years of Article 50 being triggered, then the U.K. would leave the Single Market and trade would simply continue under World Trade Organization (WTO) rules, designed to encourage non-discrimination among its members. The U.K. is an original member of GATT, which preceded the WTO, and its membership is not affected by Brexit. Most tariff rates have already been bound by most of its members, and contrary to some reports, punitive tariffs are not allowed except in exceptional circumstances – also governed by multiple WTO agreements. An example would be the current anti-dumping investigations into China’s steel exports by multiple WTO member states.

Supply chain implications

The issue of customs declarations, and its potential impact on the supply chain, is an area of key concern for businesses. However, both Norway and Switzerland were able to find solutions through bilateral negotiations, removing the need for customs clearance in trade with the EU in most cases. Professor Wilding says that, despite the lurid headlines, it’s certainly not all doom and gloom. “The vote to leave the European Union was a vote for border controls, customs clearances, more extensive passport checks and border crossings that will not only take longer than now, but which may be more uncertain and unpredictable than now,” adds Professor Wilding.

“However, the opportunity to streamline processes in these areas may result in more efficient and effective trade. Technology platforms enabling automated prenotification of where goods are moving are already available, and they just need to be applied to the new processes we require.”

He says the key thing to prepare your business for change is to understand the structure of your supply chain. “Where are your first-tier suppliers located, where are your second-tier suppliers located, where are your core customers located? Once you’ve done that and you’ve got a network, some organizations are already starting to plot addresses of sectoral organizations on Google Maps – you get a picture up with lots of little pegs around the world, and then you can very quickly understand your exposure to various trade routes, you can see where people are moving things from, and so on.

Other tips include:

•  Streamline your business and trade processes, leverage the digital revolution and take advantage of regulatory flexibility. Off-the-shelf software can help you with things such as projecting customs duties, licensing requirements and rules of origin.

•  Make sure your people are aware of any changes in your business. There’s a lot of misinformation, so make sure you share the facts with them.

•  Get the data together, really understand what the opportunities are and share those with higher levels within your business.

Phil Couchman, CEO, DHL Express UK, is also optimistic about the future. “Britain is a trading nation – there’s an entrepreneurial spirit here, it’s relatively easy to do business and start a business... we should take a positive attitude in how we approach the future.

 “At the moment, there is of course lots of guesswork going on in terms of what Brexit will look like, but the overall mood here amongst our customers is one of resilience and continued desire to grow exports.

“That resilience is echoed right across our business. Our strength lies in our ability to help customers navigate complex customs processes and that’s something we’ll continue to do. As the direction of negotiations becomes clearer, customers will look to us for support and, with our expertise in global trade, we’ll be ready and prepared to offer just that.” — Richard Reed

Published: November 2016

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