Out-Law / Your Daily Need-To-Know

Out-Law Analysis 3 min. read

How the Brexit deal will affect supply chains

Modern manufacturing depends heavily on fast supply chains offering 'just in time' delivery of components, often across multiple borders. The Brexit deal agreed on 24 December will have a significant impact on how goods are manufactured in the UK and the EU.

While the EU-UK Trade and Cooperation Agreement (1,245 / 8MB PDF) (TCA) provides manufacturers with frictionless trade and means the most drastic disruption of a no-deal outcome is avoided, but there are complexities and compliance issues which businesses will need to adapt to.

The deal was agreed just a week before it will come into force, leaving little time for companies to adapt, leading motor manufacturing trade body SMMT to call for more support for transition. Manufacturers will need to collaborate and work closely with supply chains to ensure that they are resilient and can fully adapt to the new trading relationship between the UK and the EU.

Many manufacturers are still dealing with rebuilding their supply chains following the impact of Covid-19. They must now also consider how they adapt and change to reflect the new trading relationship between the EU and the UK as well.

Additional paperwork

Tariffs are mainly avoided on goods, but companies will need to complete additional paperwork and declarations when moving goods across the EU/UK border.

Though the TCA provides for mutual recognition of Authorised Economic Operator (AEO) status and commitments to reduce the burdens, some friction at the borders is still likely. This comes at a time with additional Covid-19 testing at some borders too and therefore the risk of delay is considerable. For just-in-time supply chains this can be critical to the production process and any delay will have a material impact, particularly for short shelf life goods such as fresh and live fish.

The UK is giving importers a six month grace period to give time to get prepared but the EU is not following suit. The TCA is clear that the parties will co-operate on customs facilitation particularly at roll-on, roll-off ports such as Dover. Therefore, over time this disruption and friction will ease but manufacturers should consider this impact in the short term. This will have featured in most manufacturers' no deal planning.

There are also additional compliance costs for businesses in either completing paperwork or appointing a customs broker to handle it. This extra cost can be material for those operating on slim margins and suppliers may pass them on to customers and end consumers. While this impact is not as significant as the imposition of tariffs would have been, it does mean additional costs.

Rules of origin and tariffs

For goods traded between the EU and UK to benefit from being duty and quota free they must meet requirements on 'rules of origin', which ensure that the goods really do come from the EU or the UK. The rules do not cover goods under any other third countries that both the UK and EU have free trade agreements with.

Different products will have different rules of origin. Gas and diesel vehicles will need to be made up of 55% of parts from the EU or 

UK to qualify; electric and hybrid vehicles must be 40% UK/EU, increasing to 45% by 2026; batteries must be 30% EU/UK, increasing to 50% by 2026.

The agreement outlines detailed provisions on how this is calculated and what is excluded from the calculation, such as the energy or personal protective equipment used in the manufacturing process.

Companies must carefully assess their supply chains to understand the origin of all the parts of their goods. For manufacturers with long supply chains this will be critical and supply chain transparency is more important than ever to enable businesses to ensure that these elements are met. Record-keeping will be even more critical for businesses in the future than it is now.

Testing and certification

As part of the negotiations the UK sought agreement on mutual recognition of product conformity assessments – this would have reduced costs and administration for businesses by providing for a certificate of conformity issued by a UK body to be valid across the EU, and vice-versa. However, the TCA does not provide for mutual recognition so UK regulatory bodies will not be able to certify products for sale in the EU. This means UK businesses selling in the UK and EU will need to comply with two different regulatory regimes.

There are specific provisions relating to pharmaceutical industry with inspections of drug manufacturing facilities to be valid in both regions. However, companies will need to carefully assess their compliance to ensure that they are validly placing goods on the market. Collaboration with supply chains will be required in this regard.

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