May's Brexit Plan Comes Just in Time for Supply Chains

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A truck driver returns to his vehicle as the Eurotunnel Freight train carrying it and others arrives in Folkestone, England, in March. Trucks exiting the tunnel don’t have to stop as they head to their British destinations.

A truck driver returns to his vehicle as the Eurotunnel Freight train carrying it and others arrives in Folkestone, England, in March. Trucks exiting the tunnel don’t have to stop as they head to their British destinations.


Photo:

JACK TAYLOR/GETTY IMAGES

LONDON—At the Channel Tunnel terminal in Folkestone, southeast England, trains arrive every seven minutes carrying trucks packed with goods from across Europe, spilling vehicles directly onto motorways that lead to Britain’s industrial heartlands.

The 25-mile undersea link between Britain and mainland Europe is critical to supply chains spanning the continent that require goods to arrive at their final destination exactly when they are needed.

With the clock ticking toward the U.K.’s planned exit from the European Union in March 2019, concern over the preservation of these delicate “just-in-time” systems after Brexit has moved from corporate boardrooms to Downing Street.

A new proposal from Prime Minister Theresa May to keep the U.K. closely tied to European Union product regulations and customs arrangements—critical to safeguarding integrated supply chains and the jobs that depend on them—sparked turmoil in her government this week.

Her plan led to the resignations of Boris Johnson and David Davis, who favor a decisive break with the bloc—and say the British economy will flourish once it is free of EU regulation and London can make new trade deals on its own. Mr. Johnson said the proposals risked making the U.K. “a colony” of the EU.

Downing Street’s embrace of a tight economic partnership in goods trade follows months of warnings from businesses about what they see as the risks to their carefully calibrated connections.

Executives worry that new checks on goods and the people transporting them as they enter the U.K. would gum up terminals such as Folkestone and the nearby port at Dover. They warn that even short delays could make just-in-time supply chains all but unworkable, potentially requiring them to rethink the U.K.’s place in their European operations.

A shuttle carrying trucks enters the Channel Tunnel at Folkestone for the 25-mile journey.

A shuttle carrying trucks enters the Channel Tunnel at Folkestone for the 25-mile journey.


Photo:

ANDREW AITCHISON /IN PICTURES/GETTY IMAGES

The Port of Dover, which handles as many as 10,000 trucks a day, calculated that a two-minute delay to traffic passing through its gates could quickly lead to a 17-mile backup on nearby roads. A similar gridlock could emerge from delays on the French side.

Mrs. May’s new Brexit plan doesn’t eliminate all concerns for businesses. The EU may not sign up to it and negotiations could founder, leaving the possibility that the U.K. could crash out of the bloc without any deal at all.

The uncertainty is nerve-jangling for businesses. “It has forced companies to look at their supply chains,” said

Anastassia Beliakova,

head of trade policy at the British Chambers of Commerce.

Airbus SE

said its factories in the U.K. operate with next to no inventory, relying instead on the frictionless movement of parts across national borders to allow aircraft wings to be made in Broughton in Wales and landing gear in Filton in western England.

The aerospace giant, based in Toulouse, France, employs 14,000 people in the U.K. and buys components from 4,000 British suppliers. The company said that delays caused by a “catastrophic” U.K. exit from the EU without a deal would be so costly that it would likely close its British operations. Even a negotiated exit would likely throw grit into the gears of the sensitive supply chains built up over decades, it said.

Such sensitive arrangements span industries. “In advanced manufacturing, these systems are almost ubiquitous,” said

Philip McCann,

professor of urban and regional economics at the University of Sheffield. “Break one part of the chain, and the whole thing is in jeopardy.”

The automotive sector is especially reliant on just-in-time delivery, shipping in millions of parts a day from European factories to assemble vehicles at U.K. plants. The sector accounts for 11% of U.K. manufacturing output and employs 186,000 people directly in Britain.

“We need free and frictionless trade going forward, to make our just-in-time system work as it does now,” said a spokeswoman for luxury car maker Jaguar Land Rover, a unit of India’s Tata Motors Inc. The firm makes Range Rover and Discovery sport-utility vehicles at its plant in Solihull, England; 40% of the parts used in production come from the EU and arrive on the assembly line almost exactly when they are needed, the spokeswoman said.

It isn’t just manufacturing that operates on a just-in-time basis: 30% of all the food consumed in the U.K. comes from mainland Europe, according to government figures. Such supply chains are the reason British supermarkets are stocked with fresh produce all year. Lengthy customs checks would increase the risk of spoilage.

Freight traffic is carried through the Channel Tunnel on trains that can transport 32 trucks at 90 miles an hour, crossing from France to England in 35 minutes—and carrying, last year, more than 1.6 million trucks.

Trucks exiting the tunnel don’t need to stop: Since the U.K. and France are both members of the EU’s customs union and single market, there is no need to check whether tariffs have been paid on cargoes arriving in Folkestone or that they comply with EU regulations. The tunnel is the conduit for around a quarter of the U.K.’s merchandise trade with the EU, according to a 2016 study by Ernst & Young.

Mrs. May’s Brexit plan seeks to prevent the need for border checks by creating a new free-trade area between the U.K. and the EU. The U.K. would mirror EU rules in its own law and collect one set of tariffs for goods entering Britain for sale in its own market and another set for products in transit to the EU.

A clearer British break with the EU’s common customs arrangements and single rulebook for goods would mean new checks on both sides of the border, introducing delays in supply chains that depend on speed and precision.

Simply stopping traffic at the Channel Tunnel isn’t even an option, said

John Keefe,

head of public affairs at

Getlink

SE, the Paris-based operator of the tunnel. “It’s a rolling motorway. It would be like stopping a truck on the M1 in the middle of the fast lane,” he said, referring to the U.K.’s major north-south highway.

Write to Jason Douglas at jason.douglas@wsj.com