17 March 2023

UK in changing EU: Brexit trade and manufacturing-a Midlands perspective

David Bailey outlines the findings of a new UK in a Changing Europe working paper which examines how Brexit has impacted on manufacturing in the UK Midlands and the extent to which such firms are reconfiguring their supply chains.

The Trade and Cooperation Agreement (TCA) provided important clarity for UK manufacturers in many ways, avoiding some of the concerns that manufacturers had about the post-Brexit UK-EU relationship, and largely preserving tariff free trade.

However, this is by no means equivalent to the frictionless trade that existed prior to the UK exiting the EU. Brexit has imposed extra costs on firms in terms of compliance costs (such as customs and rules of origin rules), supply chain disruption and associated costs (e.g. stockpiling), labour shortages (notwithstanding the relatively liberal UK position on migration after Brexit), regulatory issues and funding for R&D.

In some cases, such firms have either ceased exporting or now stockpile at hubs in say the Netherlands. Supply chain disruption has been exacerbated by Covid-19 (e.g. chip shortages in manufacturing, skills shortages in certain sectors), and the war in Ukraine (through higher energy costs and key materials shortages). British manufacturers are thus exposed to risks and additional costs that are unlikely to disappear going forward, in what can be seen as a ‘slow-burn’ disruptive process.

Longer term the government hopes to be able to deliver some benefits of Brexit such as better tailoring regulation to domestic needs. But in the short term, the Midlands was expected to be particularly exposed to the disruption caused by Brexit given the latter’s potential to impact on trade. That’s because manufacturing supply chains had been tightly interwoven across the UK and EU thanks to the benefits of the single market and customs union.

Whilst there is considerable ‘big picture’ macro evidence on the impact of Brexit on trade between the UK and EU, the impacts on particular supply chains are just only just starting to be explored. This is of particular significance for manufacturing focused regions like the Midlands which have been highlighted as being particularly vulnerable to the impacts of post-Brexit trade barriers on manufacturing.

A new UK in a Changing Europe working paper tries to better understand the implications for manufacturing at the regional level of such impacts.

In particular, the working paper asked the following research questions: To what extent have the disruptive processes driven by Brexit (and the pandemic) led to a decoupling of UK manufacturing supply chains from the EU (in the Midlands)? How have firm-level characteristics (especially size) affected firms’ ability to adjust to Brexit? What policy issues arise from this, and what spatial scales could and should be considered for these?

In so doing it explores to what extent assemblers and suppliers are reconfiguring their supply chains. This could include shifting operations away from the UK, or avoiding the UK when expanding operations, or by changing the nature of their operations in the UK.

Such effects can have short- and long-term consequences for UK manufacturing and regional economies, and in order to explore such impacts, we interviewed 14 representative senior managers and directors in advanced manufacturing firms across the East and West Midlands regions of the UK.

What they told us what that the supply chain impact of Brexit is mixed, with effects more severely felt by smaller supply chain firms – this corresponds with recent survey work by the British Chamber of Commerce. And this also correlates with macro-level perspectives which suggest the impacts of trade barriers fall more heavily on smaller firms. In particular, smaller manufacturing firms have fewer resources to use to anticipate and avoid disruption, with the effect that they have faced greater export disruption and supply chain issues arising from new trade barriers between the UK and EU....

more at UK in changing EU

© The UK in a changing Europe