The Troubled Brexit Legacy
In 2016, it was clear that the social, economic, and political ramifications of Brexit were going to be huge. Even prior to the negotiations and delivery of the leave agreement, uncertainty was rife across the UK, with businesses showing real signs of hesitancy and worry. In fact, according to ONS data, business investment today remains more than 9% lower than it was on the date of the Brexit referendum, and has flatlined from 2016 to the outset of the pandemic.
On the sixth anniversary of the Brexit referendum, the close timing of the UK’s departure from the EU and Covid-19 makes it difficult to disentangle the effects of these two events on the UK economy. However, the evidence we have strongly suggests that Brexit may have had a significant impact via higher prices of imported goods, lower wages in some parts of the country, and higher uncertainty, which reduced foreign investments. However, and perhaps surprisingly, for years after the referendum, the impact of Brexit on trade has been limited – until now.
It isn’t a free trade
After a series of what felt like endless negotiations and many twists and turns, the UK eventually reached a deal with the EU and we saw the introduction of the Trade and Cooperation Agreement (TCA), meaning trade remained tariff-free. And although it’s premature to draw conclusions on the long-term effects of Brexit on trade, it is clear that the TCA failed to address the regulatory, logistical, and administrative barriers that many businesses were fearful of, likely leading to UK businesses rethinking the configuration of their supply chains.
ONS BICS data showed that businesses dependent on imports and exports had plans to adjust supply chains before Brexit. Although, over the course of 2021, supply chains changes in retail, for example, more than doubled. The TCA is likely to be the main driver, because while it prevented the burden of tariffs, it was no substitute for free trade and created a considerable amount of red-tape.
Beyond UK boarders
If we compare the UK’s trade patterns to major economies that were similarly affected by the pandemic, including France, Italy and Germany, as well as the US, their trade is now on the upward trajectory to recovery, while the UK’s is not. Moreover, after growing more than most G7 economies in 2021 and 2022, the UK could be the slowest growing economy in the G7 in 2023 (excluding Russia).
In this environment, new supply chain strategies are surfacing and being implemented – specifically, nearshoring (re-designing supply chains to be closer to home) and supply chain diversification (broadening the network of suppliers).
Work from Dun & Bradstreet using ONS data shows that during pre-transition planning, small businesses tended to favour nearshoring, while larger firms attempted to build resilience via a combination of the two strategies. Although this all changed by December 2021 once businesses had had 12 months to experience the real-life impacts of leaving the EU and the TCA and make changes to their business operations accordingly. Businesses of all sizes underestimated the need to diversify. For example, by the end of 2021, the number of firms with 0-9 employees that adopted supply diversification was 1.5 times larger than those that had planned to do so in 2020; for firms with 50-99 employees it was 83% higher and for firms with more than 250 employees 66% higher.
Don’t put your eggs in one basket
While nearshoring is becoming increasingly popular, businesses should be aware that relying entirely on one market can increase risks, not curb them. For some businesses, combining nearshoring and supply diversification might be the way to go; a portion of imports and exports closer to home, but also a diverse number of suppliers so that you aren’t solely reliant on one market and can re-calibrate more easily when shocks hit.
Clearly, the UK leaving the EU contributes to establishing a new geography of supply chains, which has only become more complex due to Covid-19 and de-globalisation forces becoming stronger. In this changed landscape, building resilient supply chains will require business to assess risk at different stages of the chain, across multiple dimensions, and data is critical to this. The granular and timely insights that data can provide will be pivotal to establish more robust supply chains and a competitive advantage. And as the UK paves the way for its new Digital Strategy, businesses should seek to have extra support when it comes to using data to mitigate risk and seize opportunities.
This article was originally featured in the © Evening Standard Ltd and can be found here.