Supply Lines: Mini drivers brace for Brexit

Supply Lines

U.K. companies seeking to export their wares to the European Union will have to prove the origin of their goods to qualify for duty-free access under any potential post-Brexit free-trade agreement — a bureaucratic headache that's about to menace 150 billion pounds ($195 billion) of goods.

The end of Britain's customs union with the EU means U.K. firms will have to comply with so-called rules of origin to trade with nations in the region once the Brexit transition period ends on Dec. 31. Many have never had to identify the share of their exports that's produced domestically, and if they can't do it they'll have to pay tariffs on goods shipped to the EU.

In addition to a new mountain of paperwork, a certificate of origin costs about 30 pounds per shipment, according to the U.K. Trade Policy Observatory at the University of Sussex.

The threat posed by post-Brexit rules-of-origin restrictions to U.K. operations of automakers such as Nissan and Toyota, which collectively employ about 10,000 people, could be existential.

That's because trade agreements usually require about 55% of a product to be made locally in order to qualify for zero-tariff treatment. Yet only about 20% to 25% of the overall value of cars produced in the U.K. originates domestically, according to research group U.K. in a Changing Europe.

Sticker Shock

Even the famous Mini Cooper would be in the firing line. Only about 40% of the value of the parts in the iconic vehicle, made by BMW at its factory near Oxford, are produced in the U.K. Given that it would be virtually impossible for Mini to replace European-made parts with U.K.-made ones by Jan. 1, models exported from Britain would be on track to face a 10% tariff without an agreement on rules of origin.

"Price increases would be inevitable, with potential for reduced demand and therefore reduced production," Graham Biggs, a spokesman for BMW, said in an email.

Hopes hang on the U.K. and EU coming to an agreement on rules of origin in their ongoing trade talks. Britain has made an ambitious proposal that counts inputs as local provided they originate from the bloc or any country with which the U.K. or EU has a trade agreement.

Until white smoke emerges from the talks — which could extend into October with no guarantees of a deal — companies are left not knowing whether they'll have to reorganize their supply chains to be able to export to the EU tariff-free post-Brexit.

 Joe Mayes and Siddharth Philip in London

Charted Territory

The U.S. merchandise trade gap unexpectedly narrowed in June for the first time in four months as exports jumped by the most on record, signaling the downdraft in global commerce is stabilizing. The overall balance shrank to $70.6 billion last month from $75.3 billion, Commerce Department data showed Wednesday.

Today's Must Reads

  • Landing gear | Airbus cut back wide-body jet production after burning through an added 4.4 billion euros in the second quarter, retrenching further to safeguard cash while it waits out a collapse in demand.
  • Grocery list | A disorderly break with the EU at year end poses a bigger threat to Britain's food supplies than the pandemic, a Parliamentary committee warned. Meanwhile, the U.K. and Japan are close to agreeing a post-Brexit accord.
  • Thread count | China has bought more than $1 billion worth of American cotton in the past three months as part of the phase one trade deal signed with the U.S. in January, even though it doesn't need it right now.
  • After Hong Kong | Fears are growing that China's President Xi Jinping wants to cement his place alongside Mao and Deng by recapture authority over Taiwan, a prize that's eluded Communist Party leaders for decades.
  • Shifting strategy | Abu Dhabi-based food and beverage maker Agthia Group PJSC is shifting into online sales and home deliveries to help offset the coronavirus pandemic's impact on its business.
  • Bug in the room | Volkswagen asked German prosecutors to investigate the leak of audio recordings from internal meetings about a supplier dispute.
  • Over the hump | The coronavirus pandemic has wreaked havoc on trade and supply chains around the world. Not even the niche market in camels is immune.

On the Bloomberg Terminal

  • Government bonanza | The U.S. State Department is considering making one of its largest global supply chain management contracts a small-business set aside, according to Bloomberg Government, offering a massive opportunity to qualified applicants. 
  • Supplier blues | Profit potential at Boeing and Airbus has halved over the intermediate term, which will spur cooperation with the supply base in an effort to improve margins across the boar, Bloomberg Intelligence says in a webinar.
  • Use the AHOY function to track global commodities trade flows.
  • Click HERE for automated stories about supply chains.
  • See BNEF for BloombergNEF's analysis of clean energy, advanced transport, digital industry, innovative materials, and commodities.
  • Click VRUS on the terminal for news and data on the coronavirus and here for maps and charts.

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