As the Brexit deadline looms and with trade negotiations in a state of turbulence, Irish businesses must prepare for the change that lies ahead. From the 1st January 2021, rules for trading with the UK will change.
IDDEA CEO and strategic sourcing specialist, Ingrid De Doncker, recently spoke with Enterprise Ireland about vital Brexit preparations, such as the necessity to “forensically examine your supply chain”.
Whatever the Brexit outcome, your business can be prepared if you act now.
Ingrid explains that “in times of disruption, thinking forward to the different scenarios is the most we can do – we know that the Brexit impact will be severe for Ireland and will not only impact trade, but the whole of society.”
Ingrid shares insights from her interview in the article below, providing trade and industry disruption forecasts, while sharing actionable advice and recommendations to help your business prepare for Brexit.
Brexit trade impacts
Brexit has been a complex journey, and while various outcomes have been explored, it is clear that Ireland will be severely impacted and that the cost of trading will undoubtedly increase. If the negotiations of a future trade agreement cannot be reached before the end of 2020, it would mean that the UK would ‘fall off the cliff’ in 2021, into a hard Brexit scenario.
It matters greatly to the future of Irish trade how chief UK negotiator, Michel Barnier, prepares for the toughest negotiation rounds in the history of the EU. It is clear that trade costs will increase in all scenarios of outcome.
The biggest economic impacts are forecasted to be felt across the agri-food sector, the pharma-chemical sector, the electrical machinery sector, and the wholesale and retail sector.
To give you context, I must highlight how the UK has always been a very strong trading partner for Ireland and Brexit will have a severe impact on Irish businesses operations. The UK is Ireland’s largest source of imported goods, and second largest export market (behind the USA). Ireland is the UK’s 5th largest export market and the 9th largest source of our imported goods.
Our important trade relationship with the UK is clearly evident. In 2019, Ireland had a trade imbalance of £14 Billion with the UK (£38 Billion import, £24 Billion export), so it is impossible to calculate the Brexit impact for Ireland’s GDP, where so many cost criteria are interdependent.
I believe that in this politically and economically unstable environment, where supply chains are interconnected and various scenarios of an agreement are still being considered, the lack of transparency and clarity will create a bullwhip effect that might create a multiplier of costs on costs.
One thing is clear: all products and services will cost more. It is just a question of how much more.
The impact of ‘regulatory divergence’, a clear regulatory break, will have severe impacts on Irish trade. Recent research papers suggest that the long-term impact of Brexit on Ireland’s total import will be a 3 %-8 % reduction, with Irish exports facing a 3 % to 7 % reduction.
If no regulatory divergence occurs between the EU and the UK, Irish goods exported will face additional trade costs of between 4 % to 8 %. If regulatory divergence occurs in the long run, trade costs for Irish goods to the UK may increase by up to 12 % to 32 %.
The importance of supply chain resilience
Whatever the financial impacts may be, it is evident that supply chain impacts will be one of the top Brexit risks for most businesses.
I strongly advised that supply chain leaders forensically examine the trail of any product or service they buy, from farm to fork, and map the links in that chain. For every product, a full supply chain map needs to be created from source to customers.
In reality, this may not be fully possible, but we should do this for the core products and services we buy and also engage with key suppliers for which the survival of our business depends on.
Negotiations are likely to pivot around finding the best solution to six main cost areas:
- Tariffs: duty may need to be paid on all products.
- Large quotas: if Ireland’s quotas for agriculture are not maintained, there will be a significant impact for agricultural trade.
- Goods crossing the border: extra costs may apply in cross-border trade.
- Land bridge transit: 53% of Irish goods exports are transported via the UK to other destinations. Burdensome processes and administration to transit through the UK to the EU will create additional costs and waiting time.
- Regulatory divergence: where different regulations exist between EU and UK in areas important to Ireland, such as Beef, Dairy, Processed food, Pharma, Electrical machinery, we will have to handle the costs of complying with two regulatory systems.
- Barriers for service trade: as for goods, similar mechanisms would be needed for services to avoid regulatory divergences and excessive trade costs.
Industries where disruptions will be felt most
Different sectors are going to be impacted differently as well. The impact on industries will be felt throughout production and employment. However, this will have a knock-on impact on the rest of the overall economy.
My research points to five industries as key in assessing the overall economic impact of a new trade relationship with the UK after Brexit:
- Agri-food – this sector has been long intertwined with the UK and supply chains here have been long established. Agri-food sectors are 80- 100 per cent indigenous firms, and Brexit will be felt more in the rural parts of the country where these sectors dominate.
- Pharma-chemicals – the pharmaceutical sector in Ireland is vibrant and has always been a part of a European and global value chain, integrated with the UK via its supply chains. Irrespective of where the products are coming from, a quarter of pharma-chemical material is trucked through the UK. Border inspections, product standards and good manufacturing practice requirements will impact the supply chains in and out of Ireland.
- Electrical machinery – the sector comprises computers, radios, televisions and communication equipment, e.g. mobile phones. The impact of disruption will be most felt here by the risk of regulatory divergence and it would impact employment as it is offering attractive salaries.
- Wholesale and retail – the sector will face substantial challenges as the UK leaves the EU. The many retail chains operating in Irish and UK markets could be facing new costs both in their supply chain and as a result of diverging regulatory requirements. Equally important, the sector would be negatively impacted by an overall drop in consumer demand resulting from Brexit.
- Air transport – this is complicated. Some airlines may lose access to the intra-UK market since the UK would be unlikely to allow EU carriers to operate intra-UK flights without reciprocity from the EU. This is a lose-lose situation.
- Financial Services – Dublin is closely connected to the financial sector in the UK and many activities conducted out of Ireland depend on the ability to service clients across Europe from Ireland. Hence, Ireland’s financial sector is dependent on a well-functioning single market for financial services.
While detail is still limited around these issues, companies should not sit on their laurels. I must reiterate the importance of supply chain link analysis and engaging with key strategic suppliers.
Prepare, prepare, prepare
A lack of detail from negotiations is not an excuse for being underprepared when the potential change is so significant. Procurement can provide a competitive advantage by being proactive in risk identification, mitigation and cost optimisation. We expect underprepared organisations to suffer profitability consequences.
Businesses must take personal responsibility for ensuring their Brexit preparations and supply chain resilience.
By now, you should have identified and assessed your business’ critical risks and created contingency plans. However, if this hasn’t been done, there are still ways to mitigate the impact:
- Revisit your business goals and reconfirm your product and services.
- Listen to your customers.
- Analyse your data and prioritise key suppliers and materials.
- Develop full transparency of supply chain links.
- Identify and assess all risks and opportunities in your local supply chain and in broadening your supply base.
I believe businesses should use this time wisely, focusing time, money and effort where it matters.
We will shortly see the return of employees to work and the reopening of non-essential retail outlets. Businesses will need to develop new and innovative ways of working, both in your company and with your suppliers, that are compatible with social distance..
The agile, innovative leadership displayed by businesses during Covid-19 restrictions has prepared us for Brexit and our ‘’new normal’’. We have proved to ourselves that we can, and will, adapt to change. I believe that opportunities don’t just happen, you create them.
We advise you to turn Brexit into an opportunity by reassessing your operations and examining your supply chain. As Albert Einstein once said: ‘In the midst of every crisis lies great opportunity.’
To prepare for Brexit, please make use of critical resources including:
Brexit Online Toolkit of IBEC
Written by Ingrid De Doncker