Investigation of the supply chain impacts and opportunities for the UK of Brexit

12 Pages·2017·0.44 MB·English

Investigation of the supply chain impacts and opportunities for the UK of
Brexit
VasileiosKotiosandProfessorAlanBraithwaite
CranfieldUniversityandLCPConsultingLtd.
E-mail:[email protected]
Keywords:Globalsupplychains,Internationalsourcing.Tariffsandtrade,Brexit
Abstract:
Thesupplychain,tradeandeconomicimpactsofBrexitarethesubjectofwidespreadpublicandpolitical
debate.Ananalysisoftheacademicliteratureprovidesconflictingtheoriesandpointsofviewonthelikely
effects;itisacomplexsystemwithmultipledecisionpathways.Theresultofatradeshockontariffandnon-
tariffcostswilllikelyinducechangeswithahysteresiseffect,thefinalnewstatebeingquitedifferentfromthe
old.Possiblesupplychainre-organisationsarisingfromchangesinUKtradearisingfromtheso-called
‘Rotterdameffect’mayalsohaveaneconomicimpactwhichwillvarybyindustrialsegment.Thereisno
definitivepublisheddataonthespecificindustryimpacts.Thispaperreportsonanattempttocorrectthatby
creatingagenericanalyticoftradeflowsandWTOtariffstructuresappliedtothefoodandautomotive
sectors.Themodellingofthetradedynamicsisbasedonrelativetariffandnon-tariffcharges.Thefindingsand
limitationsaredevelopedintoaproposedmethodbywhichcompaniescanunderstandtheimpactsontheir
specificsupplychains.
Introduction
ThewithdrawalofUnitedKingdomfromEuropeanUnionisexpectedtobeamajorpolitico-economicevent
withanuncertainoutcome.FormerPrimeMinister,DavidCameronwarnedthatBrexitwouldbe“aleapinthe
dark”(Cameron,David,OralStatementtoParliament,22ndFebruary2016)whereasprominentUK
businessmenarguedthatoutsideEU,businesses“willbefreetogrowfasterandexpandintonewmarkets”.(
http://www.telegraph.co.uk/news/2016/05/15/eu-referendum-more-than-300-business-leaders-back-a-
brexit/accessed20/05).OpinionsaresplitonwhetherBrexitisgoingtorevitaliseoradverselyaffectthe
Britisheconomyinthelongtermbut,inviewofsuchadisruptiveevent,UKbusinessesshouldhedgeagainst
potentialrisksduringandshortlyafterthewithdrawalprocesstoensuretheirprosperity.
Internationaltradehasbeenconnectedwiththenation’seconomicwelfare(Smith,1776)andtheUK,
historicallybeingatradingnation,owesitseconomicsuccesstoit.Currentlytrade,accountsforthelargest
partoftheBritisheconomyat60%ofGDP.EU-UKtransactionsarealmosthalfoftotaltradewiththevalueof
importsmeasuringapproximatelyGBP291billionandGBP222billionworthofexports.Although,researchers
reportthatUK’stradevolumewithEUincreased172%afterthecreationoftheEuropeanSingleMarket,the
currenttradedeficitsupportstheargumentthatdevelopedEUcountriesarelikelytobematureeconomiesfor
theUKwithlittlegrowthpotential(Burrage,2014).Thereisapointofviewthattheapparentdeficitis
magnifiedbythedesignoflargecorporations’EUsupplychainsinwhatiscalledthe‘Rotterdameffect’.Thisis
whengoodsofnon-EUoriginentertheEUviatheNetherlandsatRotterdam(orBelgiumviaAntwerp)andare
thenmovedtotheUKasgoodsinintraEU‘freecirculation’.(HouseofLords,2016)
Uponleaving,theUKtradewillcomeunderWTOrulesasdefinedinprinciplebytwomultilateralagreements,
theGeneralAgreementonTariffsandTrade(GATT)andtheGeneralAgreementonTradeinServices(GATS).
ThecurrentEUtariffschedulewillbesupersededbytheindividualschedulewhichtheUKwillbefreeto
negotiatewithWTO.GATTisacomprehensiveframeworkconcerningthetradeofgoodsandincludesdetailed
tariffschedulesthattheWTOmemberswillimposeoneachspecificcategoryofproductwhenimportedfrom
foreigncounties.Non-tariffbarriersarealsoincludedandcoverawidearrayofelements,fromtechnical
specificationsandcertificationstosanitaryandtrade-relatedmeasures.AprominentexampleistheRulesof
OriginAgreementwhichbasicallypreventsimportsfromthirdcountrieswithalowerexternaltariffenteringa
partnercountrywithhighertariffschedule.RoOviewaproductasasetofcomponentswhichmaybe
importedfromandprocessedindifferentcountries,thussettingthetariffofimportedgoodsbymixofimpact
thateachcountryhadonthefinalproduct(WTO,https://www.wto.org/english/tratop_e/roi_e/roi_e.htm).
TradeinservicesarecoveredthroughGATSwhichdoesnotincludeanyspecifictariffsbutsetsoutgeneral
obligationsthateachmemberhastofollowwhentreatingforeignservicessuppliersandmarketaccess
limitationsunlessabilateralagreementhastakenplace.Bothagreementareconstructedontheprincipleof
KotiosandBraithwaite 1
“theMostFavouredNation”(MFN),apracticemeaningthataWTOmembermusttreatallothermembers
equallyandrestrictstheabilitytoapplydifferenttradebarriersoneachoccasion.Therefore,ifacountry
decidestoliftcertainlimitationsposedbystandardWTOrulesaspartofabilateralagreementbetween
nations,it’scompulsorytoapplythischangetoeveryothermember.
Theimpactoftariffandnon-tariffbarriersonthesupplychainsofspecificbusinesssectorsisnotyetclearand
iscomplextopredict.Outcomeswillbestronglyconnectedwiththesetofnewpoliciescoveringalonglistof
elementsthatforgedtheBrexitdebate,suchastrade&manufacturing,immigration,financialservices,foreign
investmentandtheinternalUKmarket.(Woodford,2016)
Thispaperreportsonaresearchprojecttoclosethatgapinunderstandingoftheimpactsandtotestthe
potentialtousetradeandtariffdatatoprovideguidanceonhowsupplychainswillneedtorealign.Itisan
attempttoprovidethespecificinsightsthathavebeenmostlymissingfrompublishedreportsaswellasa
methodforthefuture.Theinvestigationhasbeenfocusedintotheeffectonthefoodandautomotivesectors
ofnewlyimposedregulationsandtariffsaccordingtoWTOrules.
Theliteratureontheeconomictheoryandimpactassessments
Theeconomicliteratureisremarkablyrich,advancingmanytheoriesandevidenceontradeandeconomic
development.AfullreviewisavailablefromKotios(Kotios,2017)andthissummaryhighlightssomeofthekey
thinkingfrombotheconomictheoryandrecentBrexitrelatedpublications.Paperslookatbothmacroand
microeconomicfactorsandcovertariffs,exchangeratesandstructures.
Traditionaltheoryviewsinternationaltradeasameretransactionofgoods,servicesandcapitalacross
borders.However,astheworldhasbecomeincreasinglyconnected,amorecomprehensivedefinitionis
neededtocoverthearisingsynergies.Caschilliet.al.(2015)presentaframeworkofinterdependenteconomic
networksthatcharacterisetradeflows,suchasglobalsupplychains,internationaltradeagreements,trans-
nationalcreditandforeigndirectinvestmentsincludingfactorsthatfacilitatetrade(e.g.infrastructure)and
varioustradebarriers.
ThefamousHeckshe-Ohlinmodelappliestheclassicaltheoryofcomparativeadvantage(Ricardo,1817)to
internationaltradingpatterns,statingthatacountrytendstoexporttheirabundantandcheapfactorsand
importproductsthatrequirefactorsthataredomesticallyscarce.Thederivingtheoremessentiallyconcludes
thatexportsfromcapital-abundantcountriesarebasedoncapital-intensiveindustrieswhichpoorercountries
cannotsustainandthusledthemtoimportsuchgoods.Inreturn,thesecountriesexportlabour-intensive
goodsthatmatureeconomiesconsiderprofligatetoproducelocally.
AmoremodernapproachfromKrugman(1996c)considers“trademightreflectanoverlayofincreasing-
returnsspecialisationoncomparativeadvantage”whichcandevelopirrespectiveoffactorendowments.This
novelideasetthebasisoftheNewTradeTheory(NTT)anddevelopedfurthertofactoringnetwork-wide
effectsarisingfromcomplexityandsectoralinterdependencies(Economides,1989).Themostrecentstudies
shifttheirfocusfromsectorstofirm-leveltoaccommodatethestructuralchangesthatglobalisationbrought
upontradepatternslikethegrowingtrendofintermediategoods,oftenreferredas“New”NTT(Melitz,2000,
2003;Antras,2003).
Themajorityofempiricalresearchaddressestheprofoundtradeliberalisationthatoccurredduringthelast
decades,observingtheimplicationsofthismovementusingeconometricmodelsandqualitativeanalysis.
Tradeislinkedtoeconomicgrowthwithearlierstudies(Rivera-BatizandRomer,1991a;Grossmanand
Helpman,1991;Segerstrometal.,1990;Krugman,1988)providingcontradictoryviewsonitsrelationshipwith
tradeliberalisation.However,thesestudieselaborateonextremepolicyreformsassuminganoutrightshift
fromautarkytofree-trade,achangewhichisnotfeasibleinrealworldtermssinceliberalisationsare
performedinincrementalsteps.HelpmanandKrugman(1989)supporttheviewthattheeffectofincremental
changesiscasespecificandcanbeprooranti-growth.Inparticulartheoutcomereliesonthetypeofbarrier,
thekindofliberalisation,countriesinvolvedandthemarketcompetitionoftheindustryinquestion.Thus,
tradepolicychangesareneitheruniversallynegativenorpositivesincetheimpactoneachbusinesssectorcan
beentirelydifferent.
Disentanglingthenetworkeffectsoftradeandeconomicgrowth,thereisevidencethattheleveloftrade
opennessandpoliciespromotingfinancialandpoliticalcohesionmayhaveanindirecteffectonincoming
capitalflowslikeFDIs(deMello,1999;Alfaroet.al.,2010).StudieslikeBalasubramanyametal.,(1996)
KotiosandBraithwaite 2
demonstratethatanFDIcanpositivelyaffecteconomicgrowthonlyunderliberalisedtradingenvironments
thatareabletofacilitatespillovereffects(deMello,1997).
Therelationshipofinternationaltradeoutcomeswithexchangeratevolatilityhasbeenaprominentsubjectin
theliterature.Leadingeconomictheoristsoftenuserealexchangeratesandnationalincometomodeltrade
flows(Baldwin&Lyons,1991).Suchstudiesdefineratesasthevalueofonecurrencyrelativetotheother.
Arize,OsangandSlottje(2000)provedacausalrelationshipbetweenvolatilityandchangesinoutcome,
suggestingthatexchangeratevolatilityhasashort-termnegativeeffectonexportsduetorisk-aversionwith
furtherempiricalstudieslikethoseofChowdhury(1993)andArize(1995)supportingthisargument.Onthe
otherhand,Asseery&Peel(1991),Holly(1995)andBredinet.al.(2003)reportapositiverelationshipclaiming
thatfirmsmaytrytoreaptheopportunityvaluearisingfromvolatilityattimesandthustheexportstendto
increase.AcontradictoryviewisprovidedbyBaccheta&Wincoop(2000),whoarguethatthereisno
relationshipbetweenthetwo(Baccheta&Wincoop,2000)andthatexchangeratevolatilityishasno
statisticallysignificanteffectonthevolumeoftrade(Secru&Uppal,2000).Theybothconcludethatmonetary
policiesonfixedexchangeratescannotimprovethetradeoutcome.Theseambiguousresultsleadtothe
conclusionthattherelationshipisnotstraightforwardandsubjecttodifferentdatasets,namelytimeperiod,
countriesandthecurrencycharacteristics.
Relatingtotheresearchquestion,smallscaleexchangeratevariationsinthesemodelscannotsufficiently
factorthemagnitudeoftherecentGBPdepreciationaftertheBrexitvoteandarehencenotparticularly
useful.Lookingatlargescaleexchangerateshocks, Baldwin&Krugman(1989)pointedoutthatlargescale
shockscanhavepersistenteffectsthatpossiblychangethemarketstructureitselfandasaresultalterthe
parametersofestimatedtradeequationsofthesemodels,violatingtheirmainassumptions.
Hysteresisisasituation“whereone-timedisturbancespermanentlyalterthepathoftheeconomy”(Romer,
2001,pp.471)andreferstotheremnantmemoryofthedisturbanceintheeconomy,aftertheshockhas
passed.Baldwin(1990)studiedlargescaleexchangerateshocksasthe1980sdollarcyclewasunfoldingand
wasthefirsttointroducetheideaofhysteresisintrade.Theargumentwasbuiltontheconceptthataforeign
firmincurssunkentrancecoststoestablishitspresenceinadomesticmarketandperiodicalmaintenance
costsinordertosustainit.Asubstantialtemporaryriseintheexchangeratewillfavourtheentranceofforeign
firmsbecauseoftheaggregatedvalueforitsofferingsintheforeigncurrency.Thesenewentrantswillnot
unilaterallyabandonthismarket,eveniftheexchangeratereturnstopreviouslevelsbecausetheentrycosts
aresunk.Asaresult,itissuggestedthattherelationshipbetweenexchangeratesandimportsisreversed
underthenewmarketstructurewhichremainspersistentafterthechangeandthereforethepreviously
estimatedequationnolongerapplies.ThederivingBeachheadModel(Baldwin,1988)isbasedonthe
assertionthatrealexchangerateshockscanchangethedomesticmarketstructureandthisstructureaffects
importpricesandvolumes.
Insummarythereistheoreticalambiguityregardingpolicychangeandtheoveralleffectontrade.The
outcomecannotbedirectlyinferredbasedonconventionalnotionsthatconsiderashiftaseitherbadorgood.
Theliteratureimpliesatrendthatthestudyapproachesshiftedfromasolemacroeconomicpointofview,
aligningwiththeNewKeynesianschoolofthought,tryingtofindmicro-economicfoundationstoexplaintrade
dynamics.Hence,anin-depthsystematicanalysisoneachsectorandthesector-specificdeterminantsismore
likelytoidentifytherealimpactinviewofawiderenvironmentchange.Theresultscouldpossiblyprovidea
potentialoveralloutcome,althoughisimportanttoillustratethattotallyaccurateresultswouldstillbedifficult
toachieve,becauseofthecomplexityandtheinterdependencieswithothermacro-economicfactors.
Tariffsareaninstrumentoffiscalpolicyintheformoftaxationonimportsandexportsofproductsandis
tracedbacktotheBronzeAge,closelyfollowingthetransitionfromlocaltointra-regionalexchangeof
commodities.AncientGreekswerelevyingdutiesforgoodsenteringandexitingAthensto“maximisethe
benefitsofsociallifeforitscitizens”.TheactualwordhasArabicoriginsandtranslatesas“notification”and
derivesfromaSpanishcoastaltown,Tarifa,whichwasthefirstportinhistorythatchargedtradersforthe
usageofdocks.(http://self.gutenberg.org/articles/eng/Tarifa).
Historicallyassociatedwithprotectionism,thesedutieswereimposedtosecurethelocalproductionindustry
againstforeigncompetitionbymakingthetransactionmoreexpensivewhilealsointroducinganewsourceof
fundingforpublicpolicy(CatoInstitute,1998). TheGreatDepressionhadalastingeffectinchangingthe
approachofnationsregardingglobaltrade.TheU.S.tookaleadingroleintheliberalisationoftrade,pushing
foramultilateralagreementbetweenitstradingpartnersandshortlyafterWorldWarII,theGeneral
KotiosandBraithwaite 3
AgreementonTariffsandTrade(1947)wassignedby23counties.GATTwasdraftedtoreducetariffsand
othertradebarrierssubstantiallyaswellaseliminatepreferencesonareciprocalandmutuallyadvantageous
basis,introducing45000tariffconcessionsofanapproximatevalueofUSD10billionwhenbroughtintoeffect.
Nowadays,internationaltradeisgovernedbytheWTOframeworkandtariffschedulesareregulatedbyGATT.
Thegrowingtrendofglobalisation“redefinedtherelationbetweenproductionandterritoriality,nation-states,
economicinstitutionsandsocialstructures”(Robinson&Harris,2000)andthuschangedthedirectionof
capitalismfromanation-statephasetoglobalaccumulationofcapital.Concurrently,GATTwentthrough8
revisionstoadaptinthenewenvironmentwiththemostcurrentratifiedby123countriesin1986.Nowadays,
internationaltradeisregulatedbytheWorldTradeOrganisation,establishedin1995asasuccessorofGATT
andtariffschedulesarestillderivedincompliancewiththesamerules.Underthisframework,therearethree
typesoftariffs:
 MostFavouredNationTariffs:Thehighestleveloftarifflevelcurrentlyineffectthatacountrycan
imposetootherWTOmembersunlessthetradingpartiesenterintopreferentialtradeagreementto
reducethereciprocaltariffimpositionorabolishitcompletely.Thisagreementmayconcerna
customsunionorafreetradeareaandmustcoverasubstantialpartofthetotaltrade.
 BoundTariffs:ThetariffscheduleforeachcommoditylinethatacountrysubmitswhenitjoinsWTO.
ThisistheabsolutemaximumMFNtarifflevelthatacountrycanimpose,rarelyappliedinpractice
sincenegotiationsbetweenWTOpartnersleadtoreductionsthathavetobeappliedunilaterally
undertheMFNrule.However,alargedifferencebetweentheBoundandMFNtariffmakesacountry
unpredictablefordisruptivechangesintradepolicy.
 EffectivelyAppliedTariffs:AconceptthatisdirectlylinkedtoWTORulesofOriginandthemixof
impactthateachtradinghasonthefinalproduct.Ifthemajorityofimpactoriginatesfromacountry
engagedinafreetradeagreementwiththeimportingnation,thenapreferentialtariffapplies,while
anMFNtariffisimposedinanyothercase.
Regardlessoftype,atariffismostcommonlycalculatedasapercentageoftheimportedproductvalue(ad
valorem)butatariffschedulemayalsousedifferentfactorstodeterminethecustomduty.Thesetariffsare
callednonadvaloremandareconsideredtobelesstransparentwithhigherdistortingeffects.
Neoclassicaleconomictheoriesviewtariffsasaharmfulinterferencetothefreemarketwhichdistortsthe
economicequilibrium.Thereisaconstanteffortforreductionsandadmittedlyratesaremuchlowerthanat
thebeginningofthe20thcentury.However,thepracticeoftariffimpositionstillremainspersistentfor
politicaleconomyreasons(Baldwin,1985)andtheirimpactcannotbedisregardedsincetheystillbeara
substantialcost.Literatureprovidesanabundanceofexamplesforspecificproductcategoriessubjectedto
highratesandidentifiesindustrialsectorsthatarestillexperiencingintensedistortiveeffects.Theeffectscan
varyfromcompressedmargins,toreducedtradevolumesanddiversioneffectsinexportpatterns(Haveman&
Thursby,2000).
Tariffbarriers’effectonthefoodandconfectionaryindustrytradevolumehasbeenstudiedextensivelywith
theliteraturecitingthesectorasparticularlyvulnerable.Animmediatelyapparentchallengeisthatcontraryto
otherindustrialmanufacturedgoods,foodsproductsaredifficulttocategorizeandfindappropriatelyeven
matchesinordertomakedirectcomparisonsbetweencountries.Researchershavetorelyontheexact
productdescription,oftencompelledtotraveltodifferentcountriestofindappropriatematchesoreven
forcedtomakeassumptionson“equivalentinuse”basis(Bradford,2001).
Haveman&Thursby(2000)usedU.S.tradedatatodeveloparegressionmodelthatestimatestheelasticityof
demandandtariffrateforagriculturalcommoditiesinanaggregationlevelof3-digitSITcodes.Intheirstudy,
wefindthata1%tariffincrementinFruitandnutscategory(SITC017)isabletodecreasethetradevolume
between4.6%and12.84%inadditiontoanycompressingordivertingeffects.Dairyproducts(SITC202)trade
patterncanbedivertedtodifferentexporters,anywherefrom0.39%to25.11%ofthetotalvolume.On
average,apercentagechangeintariffrate,incursa14.6%negativedistortionofdemandover72agricultural
productcategories.
Internationaltradetransactionsaresubjecttoadditionalformsofcontrollingmeasuresbeyondcustomduties,
knownasNon-TariffMeasures(NTMs).NTMsarecomprisedofmultilateralagreements,suchastheTechnical
BarrierstoTrade(TBT),SanitaryandPhytosanitaryMeasures(SPS),ImportLicensingProcedures,Customs
ValuationandRulesofOrigin(Gurler,2002).TBTisaimingtosecurethecompliancefortechnicalregulations,
internationalstandardsandensurethattheconformityassessmentproceduresareperformedwithminimum
impacttotradeandonanon-discriminatorybasis.TheSPSmeasuresweintroducedtoprotecthumans,
KotiosandBraithwaite 4
animalsandplantsfromdiseases,pestsandcontaminants.TheRulesofOrigin,isessentiallyaNTM,even
thoughtheirimpactoffinaltariffdeterminationisdirect.Thederivingbarrierscantakevariousformslike
quotas,anti-dumpingduties,subsides,technical/safetyregulationsand,unliketariffs,theycanvaryacross
countriesandsectors(WTO,2012).
WTOreportsthatthecontributionofNTMstooveralltraderestrictivenessissignificantandinsomecasesfar
moreintensivethanactualtariffs.Morespecifically,theirrelativecontributiontotheoveralllevelofdomestic
protectionhasapositivecorrelationwithlevelofGDPpercapita.Fordirectcomparison,theimpactofNTMsis
depictedasan“advaloremtariffequilavent”(AVE),specificallythelevelofadvaloremtariffthatwouldhave
thesamerestrictingeffects.Keeet.al(2009)estimatedthatNTMshavea12%AVEonaverageusingasample
of91countries.
AcademiapresentsTBTasthemostimportanttradebarrier(Baldwin,2000;Chen&Novy,2009)alongwith
transportationcosts.Afindingthatisexpectedsincecomplianceandcertificationisexpensiveandonlythe
mostproductivefirmscanwithstandthesehighfixedcoststosustaintheirexportingactivities,afactthatis
supportedbyrecenttradeliteratureonheterogeneousfirms(Melitz,2003;Melitz&Ottaviano,2008).
Arguably,suchstudiespresentonlyoneaspectofNTMseffects.Inrealitythesemeasureshavebothnegative
andpositiveimpactsontheeconomy.Insomecases,thesemeasuresmayalsohaveapositiveeffectonthe
tradedvolumeandtheconsumers.Standardsandtechnicalregulationsmayraiseproducercostsbutcan
reducecustomercostsbecauseproductqualityinformationismorereadilyavailable.Tradeincreasesifthe
positiveeffectondemandisgreaterthanthenegativeeffectonsupply(WTO,2012).Anargumentwhichisnot
touchedintheidentifiedtradeliteratureisthewidelyrecognisedfactthatstandardisationdecreasesthe
overallproductionandsupplychaincosts.
Overall,WTOfindsthatTBT/SPSmeasureshavepositiveeffectsontechnologicallyadvancedsectorslike
manufacturing,wherecustomerinformationcostsaremoreimportantthantheregulatoryadaptioncosts.On
theothersideTBT/SPSimpactthetradeoffood&agriculturalsectornegatively,especiallyindeveloping
countryexports.Finally,itisapparentthattheexportmarketdiversificationisreducedbecausesmallerfirms
cannotwithstandthemarketentrycostsassociatedwiththesemeasures.Greatertradeintegrationand
mutualrecognitionofstandardsisviewedasawaytomitigatethenegativeeffectsofNTMs.
TheeffectsofBrexitarethereforenotpredictablebasedoneconomictheory,butitappearstheywillbesector
andcontextspecificandmaybequitedramaticintheirimpactwhenthecombinationofexchangerates,tariffs
andnon-tariffbarriersarefactoredinforaspecificfirm.Astudyin2011basedonhighlevelsectoralanalysis
suggestedimpactswouldbeintherangefrom0%tojustshortof10%basedonMostFavouredNationtariffs.
(Ottavianoetal,2011).Howeverthestudiescitedabovesuggestsomesegmentswillexperienceagreater
impact.
Thecomplexnatureofinternationalsupplychainsisrecognisedinofficialdocumentsthroughtherepeated
mentionofthe‘RotterdamEffect’.Becauseofsupplychainstructuresthatmovegoodsthroughsingle
Europeanportsandre-exporttotheUK,itisclearthattheUKtradewiththeEUisoverstatedintermsof
ultimateorigin.(HouseofCommons,2016).Specifically,thereportsays
TheEU,takenasawhole,istheUK’smajortradingpartner,accountingfor44%ofexportsand53%of
importsofgoodsandservicesin2015.….SomearguethattheshareofUKtradeaccountedforbythe
EUisexaggeratedbythe“Rotterdameffect”wherebytraderecordedasbeingwiththeNetherlandsis
actuallywithnon-EUcountries.Whilethiseffectcannotbequantified,itdoesnotalterthefactthat
theEUistheUK’smaintradingpartner.
TheCBIreportonTheFutureofTradeoftheUKpreparedbyCliffordChanceandpublishedinFebruary2017
notedoftheRotterdamEffect,asafootnote,thatanONSarticleestimatedthat50%ofallgoodsexports
(valueforimportsnotavailable)totheNetherlandswasre-exportedtononEUCountries.(CBI,2017)Italso
estimatedthattheRotterdamEffectwouldaccountfor4%oftheUK’sexportsofgoods.(ONS,UKPerspective,
TradewiththeEUandBeyond). TheHouseofLordsEuropeanUnionCommitteepublishedareportinMarch
2017underthetitle‘Brexit–TradeinGoods’.ThisanalysisalsopointstotheRotterdamEffect.BoththeCBI
andtheHouseofLordsreportsidentifythefoodandautomotivesectorsasbeingvulnerabletoWTOtariffs
butoffernodefinitiveguidanceonthescaleoftheissue. Itisthatgapthatthisworkhastriedtofill.
KotiosandBraithwaite 5
StudyMethodology
Thestudy’sanalyticalmethodologywasdesignedtoquantifythespecificsoftheimpactofbothadvalorum
andnon-advalorumtariffsonthetwosectorsthatwereidentifiedasbeingatrisk:foodandbeverageand
automotive.Theanalysiswasbasedonsecuringacomprehensivedatabaseoftradestatisticscompiledby
MDSTransmodalinitsBoxTradeIntelligencebusiness.MDSThasbeencompilingtrendsinglobaltradein
supportofitsworkformorethan20yearsanditsdatabaseisuniqueinthecompletenessofitsscopeand
trendcapability.
ThedatasetthatwasmadeavailablecoveredeveryincomingandoutgoingflowbetweentheUKanditsglobal
partnersfor2015and2016,groupingthedataontoitscorrespondingStandardIndustrialTradeClassification
(SITC)withtheaccompanyingmass(intonnes)andvalue(inUSD)workingatthecompletelevelofdetail.
TheStandardIndustrialTradeClassificationtracesitsoriginstoareport,“MinimumListofCommoditiesfor
InternationalTradeStatistics”publishedbytheLeagueofNationsin1938astheresultofagreaterneedfor
comparabilityofinternationaltrademerchandisestatistics(UN,2016).TheSITCwasformallyestablishedin
1950bytheUnitedNationsasastatisticalclassificationenteringinternationaltrade,intendedtofacilitate
comparabilityandprovidecommodityaggregatesappropriateforthepurposesofeconomicanalysis(OECD,
2001).TheSITCnomenclatureismadeupof9Sections(0-8)correspondingtothefirstdigitofeachcode,with
eachSectionbreakingdowntoatotalof89Divisions(2-digitcode).Onwards,theDivisionsarebrokendown
todifferentlevelofaggregationwith3-digitGroupsand4-digitSubgroups,culminatinginItemsofeach
Subgroup(5-digit).AlthoughthesystemcontinuestobemaintainedbytheUN,currentlyon4thRevision
(2006),itsprimaryusageislimitedtoanalyticalpurposesbecausetheadoptedstandardfortradestatistics
internationallyshiftedtotheHarmonizedCommodityDescriptionandCodingSystem(HS).Thecommodity
descriptionsofSITCRev.4correspondsdirectlytothoseoftheHS(HMRS,2016),providingcompatibility.
TheHSwasdevelopedbytheWorldCustomsOrganization(WCO)in1988toencompasssimilarpurposesand
isratifiedbymorethan200countries,correspondingtothe98%ofallmerchandisegoodstraded
internationally.Beyondtradestatistics,theHSservesasthebasisonwhichcustomtariffsaredeterminedas
wellasinternaltaxes,rulesoforigin,tradepolicies,freighttariffs,transportstatisticsetc.Thesystemismuch
moredetailedandcomplexcomparedtoSITC,with5000commoditygroupsonadisaggregationlevelof6
digits,arrangedinalegalandlogicalstructuretoachieveuniformclassification(WCO,2017).
SITCtradedataarepublishedwhereassimilarHSstatisticsappeartobelesseasytocompileandwerenot
availabletothisresearch.Itshouldbenotedthatthereisanindustrythatsupportstradeclassificationonthe
HSsystemandtheprocessoftariffmanagementwiththeaimofoptimisingtariffsforgoodsownersand
shippers.
Theanalyticalworkorganisedtheverylargedataset,profiledtherelevanttradesectorsforbothimportand
exportflowsandthenmergedtheSITCdatawiththeWTOtariffs(advalorumandnon-advalorum)basedon
theHStarifftables.Thisdatawastheninspectedtopinpointthetariffeffectsandtheresultsoftheanalysis
discussedfortheirimplicationsbasedontheinsightsfromtheliterature.
AnalysisResults
ThedataforSITCheadlinecodes0and1havebeenusedheretoillustratetheanalysisapproach.Table1
showstheSITCcodebreakdownforthesecategories. TheproductSITCdivisionsinquestionarepresented
withtheircomparableHSequivalenceinTable2.Duringtheresearch,itwasrecognisedthatevenwiththe
highestlevelofSITCdisaggregation(5-digit),onecodeusuallycorrespondedtomultipleHStarifflines.Also,
theEUisheavilyprotectingitsfood&beveragessector,imposingamixtureofAdValorem(AV)andNon-Ad
Valorem(NAV)tariffs.ThisisillustratedinTable3;notethattheimpositionofNon-AdValorumtariffswas
absentfromtheworkofOttavianoetal.(2011).Thisimpliesthatthisresearchwillhaveunder-estimatedthe
impactofWTOtradingconditions.
KotiosandBraithwaite 6
SITCSection0–Foodandliveanimals
SITC HSequivalent Description
Division
(2-digit)
00 SectionI–01 Liveanimalsotherthananimalsofdivision03
01 SectionI–02 Meatandmeatpreparations
SectionIV–16
02 SectionI–04 Dairyproductsandbirds'eggs
03 SectionI–03 Fish(notmarinemammals),crustaceans,molluscsand
SectionIV–16 aquaticinvertebrates,andpreparationsthereof
04 SectionII–10,11 Cerealsandcerealpreparations
SectionIV–19
05 SectionII–07,08,11,12 Vegetablesandfruit
SectionIV–19,20
06 SectionI–04 Sugars,sugarpreparationsandhoney
SectionIV–17
07 SectionII–09 Coffee,tea,cocoa,spices,andmanufacturesthereof
SectionIV–18,21
08 SectionII–12 Feedingstuffforanimals(notincludingunmilledcereals)
SectionIV–18,23
09 SectionI–04 Miscellaneousedibleproductsandpreparations
SectionII–07
SectionIII–15
SectionIV–19,20,21
SITCSection1-Beveragesandtobacco
11 SectionIV–22 Beverages
12 SectionIV–24 Tobaccoandtobaccomanufactures
Table1–theSITCbreakdownforFoodandDrink
TariffsMeasure HSTariffLines(%) SITCsubheadingcoverage
SITCSection0–Foodandliveanimals
AdValorem 1379(56.6%) 43%
Non-AdValorem 929(38.2%) 44.8%
DutyFree100% 127(5.2%) 12.2%
SITCSection1-Beveragesandtobacco
AdValorem 101(37.3%) 27.6%
Non-AdValorem 131(48.3%) 44.8%
DutyFree100% 39(14.4%) 27.6%
Table2–thecoverageofHStoSITCshowingmoreHSthanSITC
NAVMeasure Description
EUR/kg Fixedpricechargeper100kgor1000kg
EUR/kgneteda Fixedpricechargeperkgofdrainednetweight
EUR/kgnetsacchar. Fixedpricechargeperkgofsaccharoidsnetweightcontent
EUR/kglacticmatter Fixedpricechargeperkgoflacticmattercontent
EUR/kgtotalc Fixedpricechargeperkgoftotalalcoholcontent
EUR/pst Fixedpricechargeper100or1000items
EUR/hl Fixedpricechargeperhectolitre
EUR/%volhl Fixedpricechargeperalcoholpercentagevolume
MIN Minimumapplicabletariffas%ofvalueorEUR/kgiftheprimary
chargingmethodcalculatesaloweramount
MAX Thresholdtariffas%ofvalueor/andEUR/kgiftheprimarycharging
methodcalculatesahigheramount
EA Agriculturalcomponent–Additionaltaxthatestimatesthecontentof
certainagriculturalgoodspresentintheproductusingMilkfat,Milk
proteins,Glucose/StarchandSucrose/Invertsugarasindicatorsand
chargestheircorrespondentNAV
EP Entryprice-Tariffiscalculatedusingthevalueoftheproductand
increasesastheimportpricedrops
ADSZ Additionaldutyonsugarcontent
ADFM Additionaldutyonflourcontent
Table3–theavailableNon-AdValorumTariffs
KotiosandBraithwaite 7
Thetradedatabasewasusedtointerrogatethetradeflowsfortheselectedcategoriesoffood,beverageand
automotivesubsections. Thescaleofthisdatamakesitdifficulttomanageandpresentthesalientfeatures
forillustration.AnalysiswascompletedforbothtonnesandvalueonbothaglobalbasisandwiththeEU27.
Figure1showsthetradepicturebothinandoutoftheUKbyvalueinEurosforthecodeunderinspection.The
redlineisinboundtradetotheUKanditisimmediatelyobviousthattheUKmaintainsadeficitinallbutoil
andfish.
Figure1–TradestatisticsbySITC–UK<>EU27(33:petroleumproductsandexcludedfromthecommentary)
Themainassumptionisthatapost-BrexitUKwouldhavetosubmitaWTOtariffschedulesimilartothatofthe
EUinordertoavoidappealsandlengthynegotiationswithallWTOmemberstates.Basedontheliterature,
themostlikelyscenarioisthattheUKwouldsupport“atrisk”industriesbydifferentpolicymeansduringany
restructuringphaseanduntilFTAswithmajortradingpartnershavebeensetup.OnlythenwouldtheUK
wouldhavetheabilityandthenegotiatingpowertoenterintotimeconsumingnegotiationswiththeWTO. It
isthereforeonthebasisofWTOMFNratesthattheimpactofbothAdValorumandNon-AdValorumtariffs
havebeenmodelledtoestablishthelikelyeffects.
ThesummaryofthiscalculationisprovidedinTable4.It
showstheaggregatedaverageAVpercentagesandNAV
figuresoftheapplicableHStarifflinesatthetwodigitlevel,
basedoncalculationsforeach5-digitSITC.
Petroleum(SITC33)hasalowesttariffof1.3%with
Electricalmachinery&parts(SITC77)followingwith2%.
Roadvehicles(SITC78)face9.1%induties,confirmingthe
consensusintheliteraturethatcartariffswouldrange
around10%.However,thisfigureshouldberegardedasan
estimateduetoouraggregatedtradeflows.
ThemajorityoftheFood,Beverage&Tobaccosectorwould
besubjecttomuchgreatertariffsreachingupto50.8%for
Diaryproducts&birdseggs(SITC02),followedbySugars
etc(SITC06)at42.3%andMeatproducts(SITC01)witha
41.4%addedcommission.Somesub-segmentswithinthese
twodigitcodeswillincuryethigherrates.
Table4–themodelledoutputofpostBrexittariffs.
Liveanimals(SITC00)andBeverages(SITC11)wouldfacethelowestcostsinthesectorwith3.2%and4%
respectively.BeveragescouldbeanareaofinterestfortheUKwhichrunsonasurplusgloballybutwitha
deficitfromtheEUside.Withthislowertariff,UKbeverageindustrycouldhavepotentialgainsifitcould
reversethecurrentbalance.
ThereasonwhytheFood,Beverage&TobaccosectorendsupwithsuchhighdutiesisduetotheNAVtariff
measuresoftheEUwhichchargebysomeformofquantityregardlessofactualvalue.ThevarietyofNAV
typesencounteredwerepresentedinTable3,buttheprevailingmeasureintermsoffrequencywasEUR/kg
(NAVKG).Table4showstheimpactofNAVtariffsexpressedagainstthevalueofthetradeanditisclearthat
KotiosandBraithwaite 8
manytradingcategoriescouldexperienceoveralltariffsofmorethan100%. Indeed,NAVperKGaloneis
responsibleformorethan80%ofthecost,stretchingupto96%forAnimalfood(SITC08).Itisclearthatthe
EUisseverelyguardingthewholesector,effectivelyrestrictingforeigninputsoflowervalueinorderto
protectinternalproduction.Interestingly,Fish(SITC03)whichwasshowntobeanettradecontributorforthe
UK,isnotprotectedbyrestrictiveNAVs,justsomerelativelyhighAVduties.BeyondtheNAVperKGmeasures,
allothermeasuresarelessfrequentandappliedcasebycase;however,theycouldbeseverewhenapplied.
ThetradestatisticsbyEUcountryhavebeenanalysedtoascertaintheprofilebySITCandcountryaswellasin
aggregate.TheimportanceoftheNetherlandsasatradingpartnerexceedsitsabilitytoeitherconsumeor
manufactureandthisconfirmstheRotterdameffect.Whatisnotclearistheextenttowhichthegoods
recordedoriginateoraredestinedforoutsidetheEUasopposedtothebillingandhandlingarrangementsfor
theEUhavingbeencentralisedintheNetherlands.
Therelativevalue:volumerelationshipsofaggregatetradebycountryshowsconclusivelythateacheconomy
hasspecialisedbasedonitsfactorsinanEUwheregoodsareinfreecirculation. ThedetailofUKtradetoeach
countryalsopointstothebillingarrangementsforstatisticalrecordingbeingquitedifferentfromtheoriginto
destinationflows. Figure2belowshowstheautomotivesectorwithIrelandasthegreatestintonnesfromthe
UKandnumber3byvaluecomparedtoGermanybeingnumber2bytonnesbutnumberoneinvaluebya
factorof2.Thiscanonlyimplythatthesesupplychainsarebeingoperatedfororganisationalandprocess
convenience,butatalevelofdetailthatisnotexposed.
Figure2–SITC78TradefromtheUKtoEU27rankedbycountry–EURandTonnes
Supplychainimplications
Theimplicationsforthetwosectors,foodandautomotive,arequitedifferent.
Forfooditislikelythatthereisnotmuchintermediateprocessingbutthedatashowsadisproportionate
impactforBelgiumandNetherlands.Thisimpliesthepresenceoftheso-calledRotterdameffectandasa
resulttariffsmayhavealreadybeenleviedwhenthegoodsarriveintheUK.Re-exportdutyreliefschemesor
re-aligningtheflowstoUKportswillmitigatetheimpactonconsumersHoweverforlocalEUproduction,the
impactofAVandNAVtariffswillbepotentiallyseriousandunsustainable.Companiesinthefoodsector
shouldbetracingorigins,applyingthedutymeasuresandconsideringnewsourcesorrealigningflows.This
maywellbeaboostfortheUKfoodindustry,ascostoftariffsoutweighanyproductioncostdifferenceswith
lowcostEasternEUproducers.
Forautomotivegoodsandthecomponentsthepictureisyetmorecomplex.TheUKautomotiveindustry
producesanannualturnoverofGBP71.6billionandranksfirstinexportsworthGBP34.3billionwhichare
estimatedtohaveaddedapproximatelyGBP18.9billionofrealvaluetotheBritisheconomyin2015(SMMT,
2016).TheEuropeanUnionabsorbsmorethan35%oftheseUKexportsandreciprocallyexportgoodswitha
valueofmorethanGBP13.5billiontotheUK(OpenEurope,2015).Variousreportsflaggedtheautomotive
industryasoneofthemostcriticalsectorsfollowingBrexit(KPMG,2014;OpenEurope,2015;CBI,2016;KPMG,
2017).
KotiosandBraithwaite 9
ThemajorconcernisnotlimitedtoindividualtariffscostbutwithimposedNTMsunderWTOtraderules,
especiallyRoO.TheUKcontentisestimatedtobelessthan40%oftheproductvaluewith20-50%depending
onthecase,sourcedfromtheEU(KPMG,2014).Inthesamereport,industryprofessionalsfromautomotive
companiestradingwithintheUKlikeFordandNissanstatethattheirpan-Europeanoperationsarebuiltfor
theSingleMarket.Andthat’sbecausetheEUmarketprovidestheopportunitiesforeconomiesofscale,
especiallyfornicheproductsforemergingmarkets.
Practically,theautomotivesectorisbuiltaroundintensesupplychainoperationswhichtransportgenericparts
andWIPinandoutoftheUKindifferentforms,linkingdifferentlargeandspecialisedproductionunitsuntil
thefinalproductisassembled.AnillustrationofadrivelinesupplychainbyGKNinFigure3providesa
representativeexampleofautomotivesupplychainoperations.SomepartsoftheconstructingblockswereUK
madeandexportedtoanEUdestinationforproductionandwouldbesubjectedtoEUtariffs.EU-produced
WIPblockswillbesubjectedtotariffsastheyentertheUKforfurtherprocessing.Thedrivelinewillbe
producedintheUKtobeusedindomesticproductionorexportedtoEUandre-importedtotheUKaspartof
avehicle.
Figure2–SourcingandassemblyofEUAutomotiveDriveTrains(SourceGKN)
Assemblerswillbeabletoforcomponentdutyreliefonexportso,theultimatequestionconcernsmostlythe
finishedconsumerproduct,whichismostimportantinvalue-creationandmarketprice.RoOandfinalUK&EU
contentincaseofaWTOtradingenvironmentwillbecriticalascontentlimitswillbeimposed.The
disaggregatedanalysisinto5-digitSITCcouldgiveaninsightofthecostsandemergingrisks.However,a
completelyaccurateanalysisispossibleonlybyconsideringeachproductionandsupplychainsetting
separately.Therequiredsupplychainadjustmentscanbedeterminedbytracingcurrentcomponentflowsand
finalcountrycomposition.TheexpectationisthatUKassemblerswilldriveforincreasedlocalcontenttohedge
therisks;thisisatrendalreadyreportedbysomeindustryinsiders.
Theimplicationsforsupplychainsbasedontheseshortinsightsisthattheywillrespondtocostsandriskby
re-configuration.Thisisanopportunityaswellasathreatandtheimpactwillbefirmspecific.Itappears
boardsinthetwosectorsanalysedshouldbeundertakingdetailedsupplychainmappingandriskmitigation–
soonerratherthanlater.
Applicationandlimitations
TheanalysisinthispapershowsthattheuseoftradedataandWTOtariffscanprovidedetailedinsightsinto
thescaleoftradingandsupplychainriskspost-BrexitbasedonWTOrules.Assuch,themethodisprovenand
cancontributetocompanies’andgovernmentplanning.Companiesshouldbeusingtheapproachalongside
detailedmappingtodeterminewhereto‘straightenout’theirchainsbasedondetailedmappingandanalysis.
Itisclearlynotacompleteorperfectmethodologysincetheactualexperienceofindividualbusinessesbased
ontheirparticularsupplychainsandclassificationswillvary–hencetheneedfordetailedmappingand
scenariotesting.Italsoappearsunsafetogeneralisebecausedataisdistortedbycorporations’fiscal
architecturesandphysicalshippingpatterns.Theconclusionsofthemethodmayalsobelimitedbythetrade
dataused;theobligationtoreportpreciselyfortradeislesshardthanfordutiesandtheintraEUtradehasno
tradingdutiesatpresent.PostBrexittherewillbeanincreasingneedfordutyclassificationservicesand
complexdutyreliefschemes–allofwhichexisttoday,butarenotappliedbymanycompanies.
KotiosandBraithwaite 10