January saw the biggest drop in manufacturing exports from the UK to the EU since 1997. With excessive paperwork plaguing the industry, could Covid-19 offer it some space to work through issues within the Brexit deal?
Despite Covid-19 continuing its assault on industry and economy, this 40.7% drop was the largest recorded since 1997. The value of goods not exported to the EU was £5.6bn and the drop in imports value was £6.6bn. With both sides of the border feeling the pinch of Brexit in January, its impact on industry isn’t set to diminish.
Paperwork plagues British manufacturers
Stephen Phipson, CEO of Make UK, a body that represents manufacturers from the country, outlines how British businesses have been coping since Brexit came into play. “[British manufacturers] are falling into two groups at the moment,” he says. “Larger companies are generally coping with the impact because they have got the resources to be able to work through it. Smaller companies, and supply chain companies in particular, don’t have the same resources.”
The new customs paperwork is very challenging to navigate without some expertise in the house. Stephen Phipson, Make UK
When the deal was first published at the end of 2020, there were concerns that excessive bureaucracy would drain manufacturers’ already limited time. Three months later, and these concerns continue to plague manufacturers on either side of the border.
Phipson says: “The new customs paperwork is very challenging to navigate without some expertise in the house. Even though the government has published a lot of guides, it has proven to be really difficult.”
The problems with paperwork extend beyond the British border, according to Martin Kaspar, head of business development at a German mittelstand company and a foreign direct investment (FDI) specialist. “The UK-EU deal in a way isn’t even the issue, it is the people simply failing to deal with customs papers,” he says. “The logistics problems we are seeing are in part due to companies not getting to grips with the new requirements… and that is on both sides of the border. The Europeans as much as the British.”
One particular bone of contention is a mass misunderstanding of rules of origin. Phipson says: “The rules of origin requirements are causing the greatest concern. That is where the majority of the drop-off is, where people haven’t been able to comply with paperwork. I think the UK government needs to communicate much better and there needs to be more tools for helping businesses navigate that.”
The clock is ticking for businesses having to get their heads around the rules of origin caveat. Phipson explains: “We don’t actually have to apply the certificates yet, we have got another few months before we do that, but you do have to keep the records. People are not used to having to keep records – particularly the large group of supply chain manufacturers.”
For manufacturing in particular time is money, and the time spent getting to grips with the additional paperwork is coming at a higher cost for some.
“The cost of the bureaucracy for small companies is quite large,” says Phipson. “A lot of them have tried to engage customers, brokers and customs agents. That has proved really quite difficult because there is not that many of them, there is a shortage of that skill and now they are very busy.”
Kaspar highlights the ongoing confusion around the rules. “A lot of the UK-EU deal is still as unclear as it was at the beginning,” he says. “We still don’t know what happens to services. We still don’t have clarity over how local content rules are applied. If Europeans buy in components from the UK and then sell that on to a third country, does that then count as European local content? Or is that British local content?
“There is also the question of data protection. From what I gather, we still have a grace period until 1 April, but what happens afterwards? On the legal, on the regulatory side, not a great deal seems to be very clear.”
These hurdles only pertain to the export regime. Another wave set to crash in this Brexit tsunami is the import regime, which the government has delayed. British Prime Minister Boris Johnson announced he would be reviewing the timetable for the import regime in order to address “teething problems” that the export regime had exposed.
Although the early images of lorries queuing up in Dover and sad-looking expiring prawns have died down, crossing the borders still holds challenges for manufacturing supply chains.
Phipson is sceptical that border woes have diminished for good. “The UK government keeps reporting that the flows of traffic at Dover and Calais are either in line with expectations or back to normal. The trouble is, a lot of those trucks are travelling empty,” he says. “A lot of them are not fully loaded.”
If Europeans buy in components from the UK and then sell that on to a third country, does that then count as European local content? Or is that British local content? Martin Kaspar, FDI expert
A particular problem, which combines border woes with the ongoing paperwork headache, is mixed consignment carriers. This, again, puts smaller manufacturers on the back foot.
Phipson says: “If you are a small manufacturer, you don’t take a whole truck, you take part of a truck, and sometimes there could be 400 different items on a truck. Now we need 400 different customs declarations to all be correct for that truck to pass into Europe. Very often they will have 350 correct and the other 50 aren’t correct. It is those sorts of problems that are causing the delays.”
Another concern is rapidly increasing freight costs. Phipson explains: “Since the beginning of January, there has been quite a substantial increase in freight costs in one form or another. Sea containers in particular have also been impacted by the pandemic, because many containers weren’t in the right place post-pandemic, causing a shortage of cargo.”
Phipson highlights that this, combined with Brexit, has exacerbated prices. “Road haulage freight going across the border has increased by an average of four times from the beginning of January – that is very expensive as well,” he says.
Phipson explains that solutions to rising costs are hard to come by. “People are trying to do workarounds, such as air, freight and things like that, but that is also horrendously expensive.” Kaspar echoes this from the EU perspective, saying: “If we don’t want to choke cross-border transport, we need to change something.”
Will Covid provide time to bring Brexit improvements?
Kaspar expresses surprise at how quickly the tide is turning for UK manufacturing. “What we seem to be seeing is that supply chains are reorienting themselves,” he says. “There is the real danger that if this works, if people have found other options, the UK will increasingly be dropping out of the equation.”
A report by the German Chambers of Commerce that surveyed firms invested in the UK reported that Germans have invested about £160bn in the UK with approximately 400,000 employees within these companies. When surveyed, 15% of those companies said that they were actively working on relocating out of the UK.
The UK has long been an important market for Europe’s manufacturing industry. It is a third country now, but it remains a trusted partner. Klaus Beetz, EIT Manufacturing
Many manufacturers are remaining positive about future trade prospects despite the roadblocks, however.
Klaus Beetz, CEO of EIT Manufacturing, an EU-funded body that represents European manufacturing, says: “The UK has long been an important market for Europe’s manufacturing industry. It is a third country now, but it remains a trusted partner. Following Brexit, companies and authorities on both sides of the channel will need time to adjust to new processes and regulations. Although the EU-UK Trade and Cooperation Agreement does not match the level of economic integration that existed while the UK was an EU member state, it provides a basis for future trade relations.”
Phipson calls for greater collaboration from the UK government to stave off the impact and suggests the pandemic may actually allow for the space to better prepare manufacturers. “Undoubtedly, there is a pandemic effect on the demand side, but it has also given us a chance to try to make as many of these systems as streamlined as possible,” he says. “These problems will be amplified once we get through the lockdown and back into full-scale recovery. Despite all the arguing in public, we need them getting around the table [EU and UK representatives] to try and make this easier.”
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