On the same day Britons went to the polls to determine their country’s future with the European Union (EU), the Irish Business & Employers Confederation (IBEC) held a manufacturing conference in Dublin. IBEC represents the policy interests of 7,500 Irish companies, including many of the largest multinational medtech firms and many indigenous contract manufacturers. There were 300 delegates in the room that morning (June 23, 2016), with many representing the world’s largest medical device manufacturers: Johnson & Johnson, Abbott Laboratories, Medtronic plc, Boston Scientific Corp., Siemens Healthineers. Also in attendance were medical device contract manufacturing companies and pharmaceutical firms.

IBEC CEO Danny McCoy spoke very passionately that day about the potential risks of a United Kingdom-EU breakup. McCoy had been preaching about the dangers of a Brexit vote on complex international supply chains for months ahead of the referendum. Interestingly, IBEC’s counterparts in the Confederation of British Industry (CBI) took a neutral stance in the referendum’s run-up. Recently, however, the CBI has become more vocal on risks to British businesses if the United Kingdom fails to secure a negotiated settlement with the EU.

The manufacturing conference moderator called for a show of hands to indicate their prediction about the Brexit referendum’s outcome. Of the 300 delegates present, only five people thought Britain might leave, including (quite ironically) a British futurology expert. Less than 2 percent of the delegates present at the conference correctly predicted the outcome of the vote. When the results were announced, manufacturing executives were consequently forced to confront Brexit’s potential impact on their operations. Suffice to say, nobody at the conference that day really expected the United Kingdom to break from Europe.

All industries seek certainty in their trading environment, but the life sciences sector is especially risk adverse. Medtech companies are built on creating certainty and validated repeatability in their products and processes.

How might Britain leaving the European Union impact the certainty of raw material supply and the distribution of finished products? How might complex intra-company transactions be affected by the United Kingdom-Europe breakup? Supply chain professionals in medical device companies, perhaps ahead of colleagues in other departments, had an immediate sense of Brexit’s potential impact.

The EU was founded on principles of free movement of goods, capital, and people. How might the United Kingdom’s departure from Europe’s integrated supply chain impact the free movement of medical device raw materials and finished goods?

In U.K. and EU companies, working committees currently are assessing the impact of a “hard Brexit”—a scenario that would unfold if  the United Kingdom and EU fail to forge a new trade deal. In such a circumstance, the United Kingdom would essentially become a “third country” under World Trade Organization rules, obliging EU members to treat British goods and services as alien.

Negotiating a trade deal normally takes many years of diplomatic efforts. In this case, the EU and United Kingdom have until March 2019 to negotiate a trade deal. The EU has trade arrangements with other countries such as Norway, Switzerland, Canada, and Turkey but none of these models are likely to work for the United Kingdom. Here’s why: The United Kingdom will want access to European markets—particularly financial markets—but unlike other countries (Norway or Switzerland), it is more than likely unwilling to contribute payments for market access.

Medical device companies should stress test their supply chain infrastructure to determine the impact of a hard Brexit by asking themselves some difficult questions:

• Will sourcing products from the United Kingdom require a calculated tariff rate for those components?
• Will a tariff rate on U.K.-sourced materials impact the cost of goods?
• Does expertise exist within the company to classify goods sourced from the United Kingdom?
• Does selling to the United Kingdom automatically subject products to tariffs?
• What impact will customs inspections have on lead times if products are transported through the United Kingdom?
• Should the United Kingdom be bypassed as a transit point?
• Will products continue to have U.K. regulatory approval?
• Will U.K.-based employees need visas?

There are many practical examples of tariffs if the United Kingdom does not secure a trade deal with the EU. A European medical device company, for instance, is currently not charged for sourcing a plastic molded container from a U.K. supplier, but following a hard Brexit, the tariff on that component could be 6.5 percent of the landed cost (HS Code 3923900). An organic chemical like Aminoazobenzene sourced from a U.K. manufacturer (HS Code 292700) would trigger a 6.5 duty rate upon a hard Brexit, while razor blades used to cut catheter tubing (HS Code 82100) would incur a 2.7 percent tariff on the landed cost.

Reciprocally, the United Kingdom could impose tariffs on EU material imports, making life difficult for medtech manufacturers. With a population of 65 million people, the United Kingdom is an  attractive standalone market. Companies that sell products in the U.K. market from a European manufacturing site must pay a tariff on goods exported into the United Kingdom. But manufacturers with U.K.-based operations may be exempt from tariffs and hence have a price advantage over the competition. Though purely hypothetical, these tariff scenarios may impact where medical device companies decide to invest in future manufacturing facilities.

Brexit might have its greatest impact on global supply chains in Ireland, a country with a healthy mix of branded medical device developers and contract manufacturers. Supply chain networks there flow openly from the United States, Canada, Mexico, China, Singapore, Malaysia, Switzerland, and the EU, among other regions. Irish manufacturing sites access major European markets through U.K. transport routes; goods destined for distribution centers in the Netherlands or Germany must first be trucked across the United Kingdom. Raw materials and components sourced in Europe go through the United Kingdom as well, with some likely destined for Ireland.

A hard Brexit could have a dramatic impact on Irish-based medical device supply chains. A 2018 report from Dr. Ke Han of Imperial College in London estimates that a four-minute delay in paperwork inspection would cause a 40 km tailback of trucks in the U.K. port of Dover.

At a House of Commons committee last fall, Jon Thompson, chief executive and permanent secretary of HM Revenue and Customs (HMRC), said a hard Brexit would cause a significant spike in annual transactions on the HMRC IT systems (55 million to 255 million transactions). And while the HMRC is building a new IT system to cope with the expected increase in paperwork, there is little confidence the program will be delivered on time for Brexit.

There will undoubtedly be other global impacts to consider besides those affecting the United Kingdom, Ireland, and the EU. The United Kingdom currently benefits from free trade agreements negotiated by the EU with Mexico, Canada, Switzerland, South Africa, Turkey, and Chile; other free trade agreements are underway with the United States, Japan, and Australia. These agreements generally take years of preparation and negotiation. Other countries have traditionally treated EU trading block agreements as a priority because of their scale, but a new U.K. trading agreement would theoretically not be treated with such urgency. It would be quite ironic, actually, if the United Kingdom missed the opportunity to trade freely with other commonwealth countries because of its decision to leave the EU.

Obviously, there is still a lot of uncertainty around the United Kingdom-EU breakup. A hard Brexit might have a significant impact on supply chains, but a last-minute agreement between the United Kingdom and EU could deliver a much more workable solution. There are an abundance of opinions about the potential impacts: One former site lead of a medical device company, for example, likened Brexit to “Y2K,” while a U.K.-based medical device component manufacturer took a very matter-of-fact approach. “Our company supplies to nearly 30 countries worldwide,” this manufacturer said. “Brexit may mean extra paperwork but we can manage that.”

For the medtech industry’s sake, let’s hope these conjectures are right. 

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Dan O’Mahony leads customer engagement within the lifesciences portfolio of Exertis Supply Chain Services. He helps medical device and pharmaceutical firms outsource non-core activities. He has more than 20 years of experience working with companies to create robust supply chains and sales channels across EMEA markets.