Already strained by trading challenges brought about by Brexit and the Covid-19 pandemic, UK exporters are now faced with navigating the trading restrictions imposed on Russia and Belarus in the last few weeks. Tommaso Aquilante, associate director of economic research at business intelligence firm Dun & Bradstreet, was formerly an economist at the European Central Bank before becoming senior economist at the Bank of England – a position he held for more than five years before taking on a leading Brexit role in the Monetary Analysis Directorate in 2016. Speaking to GTR, he outlines the steps UK businesses can take to protect their supply chains, and gives his take on the impact of Brexit on trade. 

GTR: What can UK firms do to get visibility on supply chain risks amid the impact of the Ukraine crisis, Brexit and Covid-19?

 Aquilante: Over the last year, there have been several notable supply chain disruptions. Consider the McDonald’s shortage in recent months, for instance, or walking into a supermarket and finding empty shelves in lockdown – all of which are real-world examples of how shocks can impact business operations. The logistical issues caused by Brexit and the pandemic, combined with more recent supply chain challenges caused by the Ukraine-Russia crisis, are proving that it’s more important than ever to have visibility of supply chain risks.

The sanctions that have been imposed on Russia will continue to be felt by businesses across the globe as access to oil, gas, electronic chips and other products is reduced. Dun & Bradstreet data reveals that at least 374,000 businesses worldwide rely on Russian suppliers. Not only do procurement officers need to map out the quickest routes, but they also need to see around every corner to navigate increasingly complex global supply chains with accurate supplier data and advanced analytics. Therefore, to help minimise the impact of shocks on operations, businesses need to ensure they have a holistic, clear overview of all their suppliers and their suppliers’ suppliers. By analysing their supply chain data, they will be able to lower their reliance on specific vendors and expose any vulnerabilities in their procurement processes – improving their business continuity planning to ensure survival through tumultuous times.

For instance, organisations need to determine if they have a supplier in tier two that multiple tier one suppliers are buying from, creating a false sense of diversification and a single critical point of failure. Then, they can uncover risky patterns, like if a business has multiple suppliers of critical components concentrated in the same risky location, such as places where natural disasters are frequent, or in regions with rising political tensions.

Once the risks are clear, organisations can move on to using the same process to identify multiple ‘safer’ suppliers. This should include a diverse range of suppliers from various geographies to help protect companies against the unexpected, such as border disruption, natural disasters, political unrest and regional sanctions.

GTR: Should UK firms look to near-shoring to protect against the volatile trading landscape?

Aquilante: A year after the Brexit transition period ended, 7.5% of UK firms had implemented changes to their supply chains via nearshoring and diversification strategies. Data shows that smaller firms adjusted supply chains way beyond their expectations, while their larger, more proactive, counterparts adjusted supply chains more in line with plans. Moreover, the fact that nearshoring was a popular strategy for firms of all sizes amongst those that adjusted supply chains could indicate a change in the mood of UK businesses. Faced with trade-disrupting shocks, they might think that closer to home is preferable.

However, nearshoring is not necessarily a risk-minimising strategy. It can actually become self-defeating if a firm’s supply chain comes to rely entirely on the domestic market. While this firm would be much less exposed to foreign shocks, when a shock hits home, it could be left with no alternatives for its supplies. There is no ‘one size fits all’ when it comes to hedging against supply chain risk. While a thorough risk assessment could warrant a higher reliance on domestic markets, this should not be the starting point per se. Rather, firms should adopt an agnostic approach to risk assessment and supply chain design, one that enhances business agility and minimises risk in a dynamic fashion.

GTR: In 2016, you took up a leading role on Brexit for the Bank of England. With recent data from the Institute of Export and International Trade showing a Brexit-driven decline in the number of UK exporters, could anything have been done differently to achieve a better outcome?

 Aquilante: A key lesson I took away while working at the Bank of England was to remain humble in predicting the effects of complex phenomena and be open to see the merits of different points of view. Since economic systems are difficult to decipher, making use of a variety of approaches, models and datasets is the best way to understand what impact certain events might have. While this might sound obvious, when time is limited, quick go-with-the-flow fixes can become very attractive. One defence against this risk is to build a culture that allows ideas and practices to be constantly challenged. But it might be not enough because, in [German economist] Rudi Dornbusch’s words: “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”

This seems to be partly the case when observing UK trade patterns from 2016. While it can be argued that trade has for some time been more resilient to Brexit than many had predicted, in the year when exchanges with the EU have been governed by the Trade and Co-operation Agreement (TCA), UK trade growth has been slow, especially when compared to the robust recovery at the global level or in economies like Germany or the US. This had been widely predicted and was somewhat inevitable. The TCA prevented the burden of tariffs, but it was no substitute for free trade and gave rise to the red tape that disrupted EU-UK trade flows.

The UK Department of International Trade has been very busy signing trade agreements. It is important to remember that most of them are replacement agreements that the UK had in place as member of the EU. So, the government is essentially re-establishing trade arrangements that were halted when the UK exited the EU. However, the UK has also negotiated and signed agreements with Australia, New Zealand and Singapore, and has recently started trade talks for an ambitious agreement with India. Whatever the future of globalisation, one thing is clear: economies like the UK are better placed to reap the benefits of trade if they remain open.