Brexit and the apparel industry – what lies ahead?
The apparel industry must accept Brexit is going to happen – and start planning now in order to try to minimise the damage, writes Mike Flanagan, in his latest assessment of the UK's vote to turn its back on the European Union (EU).
There are six things we all need to understand about the potential ramifications of Brexit going forward.
Foreign trade is essential to Britain's apparel industry – and practically every rule governing it has been made by the EU.
There is every reason for getting the new relationship with its European neighbours right; none for doing so faster than suits British businesses.
Those negotiations are between flawed democracies, all subject to shifting local political pressures. Such negotiations take time – and are essentially about juggling conflicting domestic interests.
No democracy has a united apparel industry. In every democracy, management at each stage in the supply chain has different objectives – often conflicting with those of their workers.
When Britain moves on to agree relationships outside Western Europe, its apparel industry needs the right deals, on the right terms, with the right countries. Not just deals created so politicians can brag how many they've signed.
Whatever happens: people will still want to buy clothes. Sales didn't decline significantly during the 2010 recession; and they don't need to fall now.
What threats does the industry face?
Before the Brexit referendum:
The profitability of British brands and retailers was already depressed through retail overcapacity and costly internet fulfilment. There was also pressure from higher minimum wages, internet-fuelled discounting wars, compliance concerns, and fallout from recent scandals at BHS and Sports Direct.
Another counter-intuitive complication has been domestic apparel manufacture. Though costlier than producing in low-wage countries, its shorter leadtimes can help improve retailers' profitability. Ironically, immigrant labour from the poorest EU countries had recently helped UK domestic manufacture pick up.
Now there are new risks:
From the national economy: Almost immediate price increases as sterling falls, possible higher interest rates and overall falling demand if rising unemployment hits consumer spending. Maybe higher taxes if government seeks to recoup income lost from recession.
...To apparel sourcing: Sourcing involves complex supply chains, with components sourced from a number of countries, often at short notice. British brands and retailers are particularly worried about the prospect of Customs duties and controls between them and the Continent. British apparel manufacturers worry about losing skilled workers from other EU countries.
...To design and management: Britain is now a centre of garment design, relying on easy access for young European designers and others in the design process. As in so many other activities, Britain has become a desirable hub for ambitious Europeans, and can recruit its senior managers from the most successful in the world. Most talented staff speak English, and most other English-speaking countries have more restrictive recruitment laws.
...To Internet fulfilment: Brexit seriously risks Customs barriers between UK warehouses and Continental customers, with central warehouses in danger of relocation to somewhere inside an EU firewall.
Today our designers can as easily work in France or Italy as at home. Our fashion schools recruit students and teachers from throughout Europe. Garment components criss-cross borders. Shoes ordered from a Greek website last Wednesday arrived at my house on Thursday.
Keeping the movement of goods and people free from barriers and bureaucracy needs an effective Western European Single Market.
What might Brexit offer?
More free trade with producers. Most Asian countries would be delighted at no-strings duty-free access to the UK for their apparel. Few have any interest in making any material concessions to UK exporters of products like pharmaceuticals or insurance. In my referendum campaigning, I didn't meet a single Brexit voter who wanted free trade with China.
More free trade with buyers. The apparel industry has little to gain from the kind of free trade deal Brexiteers have advocated. Our manufacturers have no particular competitive edge that duty-free access to countries like the US or Japan would leverage.
Less regulation. Sounds good, but hard to see the benefit. The EU's REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) process is probably the supreme example of heavy-handed regulation: everyone hated the idea. But British companies now operate it – and if Britain quits it, neither our manufacturers nor retailers can sell to Europe.
No realistic deal outside Europe offers truly free trade between nations – or any interest in creating it. For the apparel industry – especially the most time-sensitive fast-fashion end – free movement of talent, a Customs-free chain from warehouse to customer, and straightforward trade regulations are all as important as low import duties.
So what should the apparel industry do now?
The industry must unite to lobby for a new Western Europe Single Market, based on five key principles:
Free movement of talent within Western Europe without further offending the Leave vote. Tricky. We want to keep hiring bright designers and seamstresses from neighbouring countries without endless bureaucracy – but it is precisely that ease of employment that Leave voters want to end. We must find a compromise that works. We can't invent a simple solution overnight, but officials won't invent one that suits the apparel industry unless we take a lead.
Free movement of merchandise within Western Europe. We need to be able to ship Chinese fabric throughout Western Europe – and once made up, despatch it straight to a Western European customer – without unnecessary paperwork or officialdom.
The rule of law in trade deals. This should go without saying. For the past 40 years, Britain's trade with Western Europe, as with the US and many other countries, has been regulated under strict legal codes. This isn't true of our trade with India, China or many really poor countries, where underpaid officials are encouraged to seek bribes if they want a living wage. Creating good rules governing business requires complex negotiation – and that requires time and negotiators.
Minimal bureaucracy in transactions. Ensuring international journeys without constant interrogation from immigration officers, or getting a parcel from London to Paris without sitting in Customs for a week, is just as important as not paying import duty.
Right, not fast. From our industry's point of view, there is no need for any speed in organising our future. We need the right deal with our neighbours. Right deals take time to craft.
In the current political climate, there's also a sixth principle that must underpin those five:
Our trade relations must help heal Britain's Great Divide. Most Leave votes came from people most damaged by the past 40 years' economic turbulence. None of them particularly want more trade deals with poorer countries. With profit pressure, many retailers and brands will want to lobby for duty-free access to our market for poorer countries. But they should avoid this temptation unless such deals clearly create real jobs in Britain (like, for example, by improving access for British-made cars). Leave voters are also enraged by contract labour and minimum-hours contracts: management innovations, rightly or wrongly, now seen to be especially misused by apparel retailers. Our industry does create British jobs – but it has to get better at providing decent jobs – and should lobby for trade deals that foster jobs here as effectively as our current deal with, for example, Bangladesh fosters jobs overseas.
How can we make this happen?
Our industry is proud of its record in bringing prices down (far more effectively than apparel retailers in continental Europe), brightening our shopping streets and attracting overseas visitors. We need to bang our drum louder – and play a real role in creating a new Western Europe Single Market, and promoting its benefits.
One huge problem faced by Britain is its lack of trade negotiators: for the past 40 years practically all trade negotiation has been done by the EU. We can help by seconding our brightest negotiators (we've got thousands) to a newly set-up Department of Trade Negotiation. And we should actively contribute to training in negotiation skills.
During the Brexit campaign, apparel retailers and brands were probably right to avoid publicly taking positions that would annoy half their customers and staff.
That argument no longer applies. Our management, shoppers and workers need an effective, revised, Western Europe Single Market. We should lead the way in building it.