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How will Brexit impact global supply chains and Vietnam?

Blog, Global Trade, ONESOURCE September 30, 2016


 The word “Brexit” is a portmanteau, with the words “Britain” and “Exit” blended together to describe the withdrawal of the United Kingdom (UK) from the European Union (EU).

There are thousands of articles analyzing the ins and outs for Britain along with the pros and cons of leaving the bloc. There is even a large group of British that are petitioning for a new referendum. Since the vote, former Prime Minister David Cameron has stepped down and his successor Mrs. Theresa May will continue her job on “Article 50 of the Treaty on European Union” and the procedures for leaving the EU(1).

Brexit will impact many fields, with some questioning whether Brexit is the worst political portmanteau in history while exports, trade agreements, procurement legislation, business finance and human resources are, to some extent, seriously affected by the departure of the UK. This article will stay focused on three aspects of Britain’s (?) supply chain: (1) supply of goods (2) movement of persons and jobs (3) procurement legislation and its impact on its recent EVFTA signature – Vietnam.

Supply of goods

As one single market, the EU ensured four key freedoms: the movement of goods, capital, services and persons, which benefited traders in all 28 member states. Through the Doha round,  the European Union reconfirmed that “The EU wants to free up global trade in goods and services both through the WTO negotiations and through bilateral and regional trade agreements”(2). However, Brexit signals the end of these freedoms for Britain, including the free movement of goods.

The European Commission goes on to say that, “A number of the EU’s bilateral trade agreements have included a significant liberalization of trade in goods as well as provisions covering non-tariff barriers and trade in services”(3) such as EU-Mexico’s Economic Partnership, Political Coordination and Cooperation Agreement; the Association Agreement between the EU and Chile; the EU-South Korea FTA; the EU’s Trade Agreement with Peru and Columbia; EU-Singapore FTA; EU-Vietnam FTA; and the Association Agreement between the EU and Central America.

There are also ongoing negotiations with several regions and countries such as Mercosur, Gulf Cooperation Council, Canada, India, Morocco, Ukraine, Moldova, Georgia, Armenia and Malaysia. Therefore, it can take two years for the UK to complete exiting procedures, renegotiate its relationship with the EU, and for other EU members to embark upon a new trade relationship with the UK in its new state.

There would be a variety of ways to treat import taxes, VAT, declaration, duties and licenses, excise duty, and excise duty drawbacks once the departure is complete. The fluctuation of exchange rates will impact the cost of goods sold. There will also be a lag in regards to lead and transit time.

 Movement of persons and jobs

 Leaving the EU doesn’t necessarily mean a reduction in exports to the European Economic Area (EEA), so Brexit in turn doesn’t necessarily impact jobs. Gov.UK states:

“A Brexit will stop the current immortal, expensive, and out of control immigration system that means an open door to the EU while blocking people who could contribute to the UK coming from non-EU countries. We will make it easier for some to come, such as scientists and job-creators, and impossible for others to come, such as convicted criminals.”(4)

Brexit would free up low-skill labor jobs for UK workers by reducing the number of EU immigrant workers:

Blocking low skilled EU workers from migrating to the UK would, however, not necessarily make low-skill jobs more attractive to UK workers, which could make it difficult for some businesses to meet their needs.(5)

In addition, “Rejecting EU regulations would give employers more flexibility when negotiating workers’ contracts.(6)

On the other hand, the departure could pose an obstacle to the free movement of people. There are many British MNCs recruiting their staff from EU member nations, and Brexit could lead to the rearrangement of those human resources, resulting in higher operation costs and changes in availability of resources and transportation costs. These disruptions will influence the design of their supply chains.

Procurement legislation

“Bremain” is the opposite of Brexit and is partly defined by the thought that the UK has been influential in shaping the EU law on procurement. The EU’s procurement law has been enshrined in UK law and replacing EU legislation could be disruptive and costly. On the other hand, leaving the EU could be time consuming and costly for UK experts to implement the same procurement law. However, Brexit could permit the UK to adopt more business-friendly rules.

In leaving the EU, many companies and MNCs will lose their advantages against direct procurement from other large-scale EU companies. For example, IT and software companies often provide their solutions at a lower cost while within the EU. They risk higher costs to provide their offering to UK clients. (These concerns also arose in regards to the possibility of Scotland leaving the UK, leading to supermarkets sharply increasing prices.)

Will it impact Vietnam?

 Statistics from the Vietnam General Department of Customs indicate that Vietnam’s export turnover has increased dramatically in recent years. However, “export turnover to UK market only occupied 2.5% of Vietnam in 2015. This number also showed that 47% of it mostly came from the categories of mobile phones, laptops, and electronic devices, which [depend] on MNCs such as Samsung and Sony” (7). Therefore, many experts commented that it did not greatly influence Vietnam.

Other categories are textiles, footwear and wooden products, which are more flexible and result in less influence.

Imports from the UK to Vietnam accounted for 4% of total import turnover; most of them can be easily replaced by other sources: “Trade surplus with UK remained at $3.9 B in 2015 and $1.7 B in the first two quarters of 2016” (8). One of the biggest impacts is that EVFTA was signed in December 2015 with many complicated articles. During post-Brexit, Vietnam and UK will renegotiate it.

The exchange rate of sterling pound against VND will be slightly affected short term.

In a nutshell, Brexit would have short-term influences on the politics and economy of the EU member nations as well as the UK itself. It also impacts the global supply chain while the UK will continue to play an important role in global trade and investment.

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