The Impacts of Brexit on Global Sourcing

Date: August 10, 2016

The Impacts of Brexit on Global Sourcing

The Impacts of Brexit on Global Sourcing

Although global supply chains are inherently complex, the unprecedented British exit vote has brought global volatility to markets. Fundamentally, leaving the EU means that Britain will lose the free movement of services, goods, and people ensured by their membership. Remaining members might keep relations open, but it will take two years to negotiate their exit and as much as a decade to establish new arrangements. Meanwhile, barriers to trade will stunt supply chain structure and sourcing, even as companies trade higher costs for flexibility. In the end, suppliers based in the United Kingdom will have to shift structures to overcome the resulting obstacles.

Overall UK Outsourcing Activities Slowdown

There could be an immediate slowdown in outsourcing after the Brexit vote as British companies may watch for key strategy decisions to be made. The biggest initial impact so far has been the drastic depreciation of the English Pound, which has already dropped to a 30-year low. The tremendous uncertainty involved can also foster a gloomy atmosphere which hinders consumer spending within the country and further jeopardize outsourcing. At the same time, in a declining economy that results from lower rates of consumption, retailers would have to choose between absorbing costs or passing them on to consumers. In either case, UK outsourcing activities would then decline as importing raw materials becomes costlier.

British Suppliers Can Suffer in the Long Term

Working with damage trade relations with EU, UK-based suppliers could face export slowdown until trade arrangements could be finalized. Although some can benefit from UK companies’ reversing souring activities and investment in local suppliers, the loss is hard to compensate as EU has long been one of the biggest export destinations for the UK. Meanwhile, it could hurt local suppliers’ competitiveness with decreasing outsider investment and fewer competitions. Overall, local suppliers will need to be cautious yet agile in developing new long-term relationships that can adapt to changing regulations and guidelines as they are defined.

Outsourcing Slow Downs in Other EU Countries

Impacts of Brexit on sourcing in EU would be drastic. Although negotiations could lead to European Economic Area membership, favored nation status, bi-lateral accords, or even adoption of World Trade Organization rules, the UK’s outsourcing relationships with EU countries would be significantly damaged. To start, a dropping number of goods would be imported to the UK from other EU countries, despite previously strong exports, due to less favorable tariffs and duties, and restrictions on moving across borders for Non-EU countries. Both cost and delivery time for imported goods would go up. Staffing cost could also rise due to increasing difficulty to travel to other EU countries for outsourcing activities. Lastly, for multinational companies with branches in the UK, some would have to consider relocation to elsewhere for easier access to the EU market, including reopening new facilities, dual sourcing components, distributing manufacturing, and shifting inventories of finished goods.

Non-EU companies, too, will be tracking the government’s approach to Brexit and its larger effects on cost, labor, and trade to adjust their own supply chains. Brexit’s impact on India and China, two of U.K.’s major importers, could be drastically different from EU countries.

Boost Outsourcing Activities in India

Brexit’s impact on India could be positive as the post-exit UK would focus on building stronger outsourcing agreements outside of the EU. India participates in a sizable annual trade with European countries, but Britain has long promoted India-EU relations in a way that no other member country has. When combined with a much longer history of migration and growing trade between the two, India is more likely to form a bilateral trade deal with post-Brexit Britain than to go in with the EU. Although the UK will no longer act as a doorway for immigration and trade to the rest of the European Union, it could provide more business for Indian companies and high-skilled immigrants.

Strengthen Ties with China

For China, in particular, the UK’s exit could lead to a new trade treaty between the two, facilitating UK companies’ sourcing activities in the country. Over the past three years, the European Union has been working on a fair trade agreement with China. Not only is this country the largest customer of EU members’ exports, but it is also the site of a number of offshore manufacturing due to inexpensive production. Yet, China’s annual exports to Britain is valued around 27 billion US dollars, and the two have a long history of bilateral trade. As UK would continue to look outside EU for outsourcing partners, ties between these two counties could strengthen, with China potentially receiving a boost in exports to the post-exit UK.

The Brexit vote represents a termination of trade agreements without clear plans for the future, not to mention the political and economic implications of this prolonged period of uncertainty. Yet, the best way forward is to be cautious and pay attention to changes in existing supply chains. In the process, these companies will have to review current contracts for cross-border goods and services to ensure compliance with currency exchanges, inflation, and changing laws and regulations. Because of the uncertainty involved, though, suppliers should act with caution – by watching and waiting to see what happens next.

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