Brexit Negotiations: A Case Study

The below has been edited and extracted from a bonus chapter written by Norman McLennan for  Collaborative Principles for Better Supply Chain Practice.

At the time of writing, perhaps one of the most striking recent high-profile international examples of a negotiated exit strategy to move away from a long-standing collaborative arrangement is that of the Brexit Negotiations associated with the United Kingdom’s decision to exit the European Union.

‘Brexit’ is the widely adopted acronym used to simplify capture of BRITAIN EXITING the EU and this short case study reflects on the historical circumstances leading to the departure, the ongoing political negotiation and also meaningful forward deliberations for organizations and the supply chains upon which they rely who are affected by Brexit.

The EU is a political and economic union of 28 member states that are located primarily in Europe. It has an area of 4,475,757 km² and an estimated population of about 513 million. It was founded in 1993 and forged and ratified legally by the Lisbon and Maastricht treaties.

Notwithstanding the legal aspects which bind the 28 member states, the EU is essentially a collaborative arrangement between those member states with a united purpose to promote peace, establish a unified economic and monetary system, promote inclusion and combat discrimination, break down barriers to trade and borders, encourage technological and scientific developments and champion environmental protection.

The United Kingdom, however, voted to leave the EU in June 2017 but this is no short-term relationship where you can simply unfollow, delete and move on. It is the most complex of situations. Brexit supporters argue that the EU threatens sovereignty and stifles growth, while opponents counter that EU membership strengthens trade, investment, and the UK’s standing in the world.

The exit strategy mechanism to enable the UK to leave the EU is something called ‘Article 50’. Article 50 is a clause in the EU’s Lisbon Treaty that outlines the steps to be taken by any member country seeking to leave the bloc voluntarily. Invoking Article 50 kick-starts the formal exit process and serves as a way for countries to officially declare their intention to leave the EU. Consider this in the context of the framework proposed by the CRAFT 8 stage life cycle model within ISO 44001, the new Global Standard for Collaborative Working and Relationships.

One of the key stages identified within the ISO 44001 framework was ‘Stage 8: Exit strategy activation’.

In October 2016, the UK Prime Minister announced that the government would trigger Article 50 and that the UK would formally invoke Article 50 on 29 March 2017, thereby self-imposing a two-year deadline to exit the EU and negotiate a complex withdrawal agreement by 29 March 2019. This deadline was subsequently extended to Halloween of the same year (31 October) and may be subject to further change down the line.

The Brexit negotiation between the UK and the remaining 27 member states is one thing, but the outcome of that negotiation will be the catalyst for a plethora of negotiations for organizations and the supply chains upon which they rely across the private, public and 3rd voluntary sectors.

In terms of an integrated negotiated outcome, the author considers that this will result in a ‘LOSE-LOSE’ scenario for all EU member states including the EU, at least over the shorter term.

The immediate key risk arising from Brexit on supply chain contracts relates to perceived delay in crossing the UK/EU border with a corresponding risk of UK and EU export/import controls being different.

There will be many impact areas that businesses across the supply chain throughout Europe (and indeed globally) should consider as they appraise their current supply chains in light of Brexit. For example, the final negotiated Brexit outcomes should prompt businesses now to think proactively about the supply chain Brexit considerations in Figure 5 below.

Businesses will need to carefully think through their supply chain footprints and be ready for things such as: potential new duties on imports, absorb additional costs, possible replacement suppliers, production and manufacturing locations, transaction arrangements and costs, for cross-border movements of goods.

Businesses will also need to be ready for possible three-way legal impact on contracts, people and intellectual property. Renegotiation of existing contracts may be needed and safeguards built into new contracts to protect against uncertainty.

Taxation needs to also be considered vis-à-vis readiness for extra costs and administration. For example – when the UK stops being a member of the EU, sales of goods between the two will become imports and exports for VAT purposes and UK businesses with pan-European supply chains may also miss out on VAT simplification measures that avoid the need for local VAT registrations.

This has the propensity to impact organizations’ cash flow and current systems and processes.

Another consideration is Systems. Look at the new data required to submit import and export declarations and understand how this will be captured and made available to support the physical despatch and receipt of goods and materials. Supply chain hubs will need to be developed and negotiated for pan-European business. For instance, how do you make deliveries quickly, or for a specific time, with a border to cross, and an associated cost? It may be necessary to hold stock in the UK and Europe to be able to service them both.

Lead times are a further consideration in terms of establishing the impact on planning and margins. Longer lead times caused by new customs bottlenecks could affect service levels and margins – especially for goods with short shelf lives.

Government grants and incentives are an area of further uncertainty. Organizations across the EU currently benefit from incentives, from grants to R&D tax breaks, but will grants be available at the same level in the future and what will the process be for applying for funding etc. Such matters could affect where organizations choose to base parts of their supply chains.

Understanding what ‘HARD’ and ‘SOFT’ Brexit means in the context of future collaborative environments and possible Brexit outcomes is an important precursor for organizations and the supply chains upon which they rely across the private, public and 3rd voluntary sectors. Put simply, a hard Brexit rejects the whole idea of close alignment. The goal is to escape burdensome EU regulations and tariffs, so as to be able to draw up rules and customs arrangements of the United Kingdom’s own choosing.

In practice, a hard Brexit means leaving both the EU single market and the EU customs union.

From a negotiating strategy standpoint, businesses or organizations that are well prepared, and have modelled possible scenarios that will be able to adapt effectively in response to the challenges brought about by Brexit, as well as being equipped to capitalize on the opportunities that will arise. Having a list of considerations and scenarios is important, but businesses need to also be aware of how quickly alternative arrangements can be implemented once concrete information does appear. These could provide you with a tangible ‘first-mover’ advantage if your business has the response plans ready and can adapt, switch or remodel at pace.

Clearly there is much ongoing uncertainty across supply chains as to what will play out with Brexit, however, a suggested useful template for organizations which will complement and supplement the earlier blueprints and templates in this bonus chapter:

Brexit readiness checklist for organizations up, down and across supply chains

1. Map your supply chain and prioritize.
Identify high value/strategic suppliers/customers. Split supply chain contracts into three groups:
- UK/EU
- UK/rest of the world
- UK domestic
Identify binding commitments which go beyond 31 October 2019.

2. For each relationship identify:
- the delivery point;
- who is responsible for border requirements/cost/delay.

3. Identify term and exit options for existing contracts.

4. Avoid long term contracts until position clearer.

5. Assess likely change in tariff/duty.

6. Prepare for cross border logistics getting harder:
- Manage risk of border delays.
- Prepare for increased logistic costs.

7. Assess if any export/import are likely to need export/import licences.

8. Consider impact of change in exchange rate.

9. How can prices in contract be reviewed/changed?

10. Identify if any services are provided. Consider impact.

11. For new contracts consider using arbitration or mediation.

12. Identify opportunities post Brexit.

The full bonus chapter is available to download for free as a supporting resource from the product page for  Collaborative Principles for Better Supply Chain Practice.