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.
Our work finds little evidence so far of much post-Brexit ‘reshoring’ in action (bringing back offshored manufacturing) to the UK, although firms interviewed do appear to be considering this in some detail – and more broadly MAKEUK find UK based manufacturers are sourcing more locally. It also seems that the impact of the UK-EU trade agreement is asymmetric due to the relative sizes of the two actors and because the UK has waived most import checks until 2023.
Our research suggests that, overall, Midlands-based SMEs face extra costs and delays and disruption in getting supplies to EU customers. In some cases, EU customers have started looking instead to EU-based suppliers, and in other cases, Midlands-based firms have opened or expanded operations in the EU.
Moreover, our research highlights the need for better policy support in a number of areas, particularly around skills and access to talent, cost reduction for exports and in facilitating trade. There is a clear need to support smaller supply chain firms: there is a risk of further ‘hollowing out’ of the UK-located manufacturing supply chains.
With hopes for ‘reshoring’ to contribute to ‘growing back better’ and levelling up, we need to better understand how far this trend can go. UK manufacturing firms face many barriers to repatriating activity, especially in the context of deep fractures and gaps in the domestic supply chain. Addressing such issues may require a longer term, proactive and holistic pro-manufacturing industrial policy than has been recognised thus far in the ‘building back better’ debate. Our interviews suggest that reshoring will be limited without a more supportive industrial policy to push this along and to help the supply chain invest.
These impacts are reinforced by firms telling us about skills shortages which have impacted production. Boosting productivity through investment in plant and new equipment will be necessary, especially in the context of ‘industry 4.0’. The latter involves a raft of new technologies including Artificial Intelligence (AI), automation, 3D printing, sensors and much more which are seen as driving a wave of innovation that takes us into a fourth industrial revolution. This is likely to transform how manufacturing – and the wider economy – works.
Furthermore, our research has illustrated that the ways these developments play out at the micro-level will vary for individual firms and their industries and could entail a variety of scenarios and mitigating responses. What we can say, however, is that our findings suggest that trade barriers have increased post Brexit and that they have impacted most on small firms. Better support for manufacturing small firms will be needed if we want them to export more in the future.
By Professor David Bailey, Senior Fellow, UK in a Changing Europe.
You can see the full working paper ‘Brexit, trade and UK advanced manufacturing sectors: a Midlands’ perspective’ via the UK in a Changing Europe website here.