How Will Brexit Affect Global Supply Chains?

There has been a lot of doom and gloom surrounding Brexit. It is clear that in the short term Brexit has created uncertainty and roiled markets. In the longer term I believe its impact will be minimal. It is mainly tariffs and trade restrictions that would have the largest impact on global supply chains. I believe both the European Union (EU) and the United Kingdom (UK) will seek to keep tariff restrictions to a minimum. To do otherwise would adversely impact growth and make it more difficult for the politicians in power to get reelected.

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There is already precedent for being outside the EU but still having full access to EU markets. There is a good BBC article on this topic, but I’ll summarize here.

Norway is not a member of the EU. But they are a member of the European Economic Area (EEA) – the single market – along with the 28 current EU members, Liechtenstein, and Iceland. The Norwegian trade model requires a full a contribution to the EU budget, abiding by most EU regulations and standards, and allowing people from across the EU to live and work in Norway.

Switzerland has a free trade agreement with the EU, plus a number of agreements which give it access to the single market for most of its industries. But it does not have full access to the single market for its banking sector and other parts of the services sector. Switzerland’s agreement also requires the free movement of people and a contribution to the EU budget.

But while I don’t see Brexit having much of an impact on global supply chains, there are other developments that have gotten less attention that probably will.

First off, there is the U.S. presidential election. The followers of Bernie Sanders and Donald Trump have made it clear that there is a significant proportion of Americans who feel that global trade has not been in their interest. Both Hillary Clinton and Donald Trump oppose the as yet unratified Trans-Pacific Trade Deal which would have lowered duties on a variety of products and services between a number of Pacific Rim and Asian nations and led to increased trade with Asia. That just means trade will not increase as rapidly as it could; it is still true that global trade barriers remain historically low and not passing this treaty would have little impact on existing global supply chains.

But what the presidential election does show is that if Trump wins, he will seek to increase barriers to trade with countries like China and Mexico. Both China and Mexico are the sites of significant offshore manufacturing where many of the goods produced there are produced there because of low cost production; those goods then flow back into Europe and North America. That, of course, does impact supply chain networks.

Further, Trump’s campaign has made it clear that there is political capital in rolling back trade in places like China, Mexico, and even Japan and Korea. Other politicians are certain to pick up the anti-trade banner even if Trump loses in November.

But one of the most significant supply chain developments has received far less attention than either Brexit or the U.S. presidential election: the EU is getting serious about eliminating tax havens. Many large multinationals have created subsidiaries in low tax nations like Ireland and Switzerland. In the case of Apple, the EU is trying to claw back more than $8 billion in back taxes based on Apple’s use of Irish subsidiaries to avoid higher corporate taxes.

From a supply chain perspective, international tax accountants have generally said that corporations are on more solid ground if a multinational runs a regional, European supply chain out of the low tax country they are using to shield their revenues. It is clear, executing this strategy is getting much more difficult. Now many multinationals may begin to locate plants, warehouses, and regional control towers where it makes the most logistical sense, rather than in locations that provide tax benefits.

So in short, how will Brexit impact global supply chains? Not much. The U.S. presidential could have a much greater impact, and changes in EU tax policies the most of all.

Comments

  1. This is one of the most straightforward analysis on the impact of Brexit on Global Supply Chain. Now, what if the EU leaders determine to punish Britain in order to deter other countries from following suit? Would that still have a mild impact on tariffs and trade or there might be other ways to accomplish the goal?

  2. […] How Will Brexit Affect Global Supply Chains?: There has been a lot of doom and gloom surrounding Brexit. It is clear that in the short term Brexit has created uncertainty and roiled markets. However, in the longer term its impact may be minimal. It is mainly tariffs and trade restrictions that would have the largest impact on global supply chains. […]