Yes, Brexit is still a thing even though many of us have tried to forget it since the trade deal was struck at the end of last year. At the time, I felt a palpable sense of relief that the worst of Brexit would be avoided. However, it was quickly very clear that this was not the end of the Brexit story, only the beginning of the next phase in the EU-UK relationship.
The first hurdle is the re-introduction of non-trade barriers with the consequence for many businesses having to learn how to navigate customs checks and paperwork, adding to cost and complexity. In addition, unforeseen issues emerged for many businesses in particular around the so-called “Rules of Origin” requirements.
The journey begins
The story that caught public attention was that of the popular M&S treat Percy Pig and his journey to Ireland. Little did we know but all these years Percy has started his journey from Germany, where he is shipped to the UK and will continue with tariff-free access under the terms of the trade deal.
This all sounds very straightforward with the trade deal doing its job, I hear you say “Yes”. However, it is when Percy wants to come to Ireland that it gets confusing. The “Rules of Origin” deals with the extent to which a product can avail of tariff-free access if parts of the product come from elsewhere adding layers of complexity to the supply chain. To come to Ireland, Percy must be re-exported via a UK based distribution hub, however due to the rule of origin interpretation, he becomes “stateless” for the purpose of determining tariffs and therefore the full most favoured nation’s rates are applied. This rule pushes the prices up for the consumer depending on the product category and ultimately impact demand where the scope for alternative products to displace.
This created panic in the early stages with existing stocks of Percy Pigs flying off the shelves for fear of shortages! It was also the greatest marketing of Percy Pigs ever!
Percy is not the only victim
What is the solution?
It is already starting to happen with some of these UK owned retailers putting in place workarounds utilising the increase in new direct IE/EU sailings to bypass UK landbridge in conjunction with local partners. Others are sourcing more Irish produce to match the supply chain with customers and some are looking at bonded warehouse solutions to keep their UK distribution hub working as is. This ensures tariffs are not applied as products are not in circulation to the UK market before re-entering the EU. For products less price elastic, it is business as usual.
For all solutions, it is clear the legacy of Brexit will be higher costs and complexity for businesses, with estimates of input costs rising 10% - 15% as a direct consequence of Brexit. Notwithstanding the early outcry in the first few weeks, the noise around Brexit has lessened of late with many companies starting to get to grips with the new reality. The quick introduction of alternative shipping routes direct to and from the EU mainland has massively mitigated the impact of the UK landbridge becoming less viable. This was one of the greatest concerns for Irish business, but there has been a sevenfold increase in the direct EU traffic since the start of the year with capacity growing. The UK traffic has more than halved in the same period, which has eased the burden on navigating customs for direct IE/UK trade with the transfer of previous indirect EU trade through the alternative routes.
The trade-off is higher cost and longer travel time but the difference is now negligible when factoring in the potential for custom delays and paperwork. There is still some way to go for the logistic sector to get their import/export dynamic in sync, however huge progress made from the initial days of the transition. It is clear that the Brexit transition has and will continue to bring teething problems as it is a major change to a long and close relationship. It is also clear that business will find a way to navigate these issues given the strength of relationships built up over the very long term.
There will be some fallout given the disruption, higher cost and complexity on both sides of the Irish Sea but thankfully it looks like the very worst parts of Brexit have been mitigated.
More importantly for the moment, we can still enjoy our Percy Pigs!
An article by:
Head of Risk Underwriting
Allianz Trade Ireland
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