Fashion Roundtable Despatch December 2017
POLITICS • ECONOMICS • BUSINESS
Social Mobility Commission Clock Out
Under the most dramatic circumstances, December saw the Social Mobility Commission’s entire board walk out, citing the Government’s lack of progress and commitment to the area. Sir Vince Cable raised his concerns at this in an Urgent Question. Fashion relies on social mobility to ensure the broadest range of talent is available, regardless of socio-economic status.
Fashion Roundtable are pleased to announce that we are working with Parliamentarians in Westminster on the newly formed Textiles and Fashion All Party Parliamentary Group (APPG), chaired by Dr. Lisa Cameron MP. Our first APPG event is scheduled for March 2018 in the House of Commons, details to follow.
Trade in Non-Financial Services (EUC Report)
We are pleased to report that fashion got a mention in the House of Lords this month, as Baroness Hayter referenced the importance of fashion to the economy, amongst other services including tourism. Lord Whitty also mentioned how the UK is the world leader in Fashion – a bold statement we are happy to endorse. We will be engaging directly with the Lords on this debate and the report the sub-committee worked on. You can read the full debate here and you may notice that Fashion is mentioned once whereas Music is mentioned several times, despite the fact that the Fashion Industry contributes over £28 billion to the UK economy whereas Music contributes £4.4 billion.
Eszter Kantor: From Brussels with Fashion Roundtable's EU Politics Expert.
Being proactive with Brexit
There is a sense of dichotomy settling across the EU. While there are clear opportunities emerging from Brexit such as the relocation of companies which could stir up employment
in the EU, there is also an awareness of the difficulties that Brexit will bring along, predominantly for trade via reinstated customs and border control.
Regions, particularly those around the coast of the North Sea that are operating ports and passenger transport will need to put in place customs infrastructure, begin training and hiring customs officials who will then inspect the content of containers heading from the EU to the UK as well as checking the credentials of the travelers. Policymakers will want to make sure that their regions will not experience trade diversion and lose income, or at least not much, as a result of reintroduced border control.
Why is this an issue?
The above slide was presented by the Article 50 Taskforce of the Commission at the December 2017 EU Council meeting. It shows the remaining options left for a future EU-UK relationship following the UK`s rejection of a number of EU rules. The current state of UK demands leave no other option than that of a free trade agreement to be the basis of a future relationship. Free trade agreements take years to negotiate. The much referred to EU-Canada agreement (CETA) took about seven years of negotiations.
We can expect that a future EU-UK trade deal will move faster simply because there are similarities between the legislations of the partners; however we may still very well be looking at 3-3.5 year of negotiations plus ratifications by all member states (and in some cases regional parliaments).
This means that a transitional agreement will be in place to cover the time gap. We would expect that said transitional agreement will leave everything as it is now; as if the UK would be a full member. Unfortunately, we cannot be sure of this. Bargaining will likely take place which may have a restrictive effect on trade, with tariffs being imposed on certain categories of goods and services.
This is where being proactive comes into play
Talks between some regions have already begun. According to reports representatives of French coastal regions will meet British MPs sometime in February to start bilateral discussions on the possible implications of Brexit. That is why pushing a sectoral agenda into forefront is necessary.
The fashion industry will need to put itself onto the political map, literally. Identifying the key issues (raw materials, trade, training, free movement of people) and connecting with relevant EU regions is the first crucial step, which would need to be followed by an active outreach campaign to local and EU level policymakers who can help further the agenda of a seamless transition for the sector. So far only few sectors have received significant attention mostly those with several multinational actors involved such as banking or car manufacturing.
Ensuring that the goods and services of the UK fashion industry can continue to reach EU countries as well as other third countries (with which the EU has built relations via free trade agreements or dialogues) after 2019 without extra costs and administrative burden should be a focal point of attention. Campaigns could and should go beyond targeting politicians and reach out to the raw material providers, manufacturers and educational institutes to build up a common platform and a solid basis for future cooperation.
Eszter Kantor will be presenting on EU - UK relations at our next Fashion Roundtable on January 17th: https://www.facebook.com/events/751979165003151/
The Prime Minister will have felt an enormous sense of relief as the words ‘sufficient progress’ began to ring out around Brussels this month. They are words her and the Brexit Secretary David Davis have been fighting for for over a month. In issuing this statement, the EU were declaring they were content with the progress that had been made in the divorce negotiations and were ready to progress to a discussion on future trade
The focus of negotiations has so far been on Britain’s divorce from the EU and the exact terms under which this will take place. The talks have been characterised by a series of difficult concessions for Britain, most prominently demonstrated by the ‘divorce bill’, set now to be worth between £36-50bn. These figures have gone some way to hurt Britain’s previous confidence over the financial benefit leaving would bring.
Whilst the ability to progress is likely to be welcome in No.10, it does not mean that the scale of the challenge is any less gargantuan. For many, the nature of Britain’s future trading relationship was central to the decision to leave. In this phase of the negotiation, we are likely to see the debate focusing on the single market, customs union and freedom of movement.
Fashion relies on Britain maintaining a flexible relationship with Europe, and it is on these terms that we will base our negotiating position, once our official talks with DExEU begin over the coming months. Freedom of Movement doesn’t have to take the form we have enjoyed for the last few decades, but a close copy will prove essential for the future economic development of our industry.
The impacts of Brexit For Your Fashion Business
According to Oxford Economics, the fashion industry as a whole, is worth £28bn to the UK economy and it is widely reported by leading figures and organisations throughout the UK, that Brexit will likely affect the industry negatively. How will this impact individual businesses? At the moment, there is much uncertainty about the type of relationship that Britain will have with the EU after Brexit, however two of the biggest impacts for fashion businesses will be on it’s relationships with workers and the international supply chain.
Fashion businesses are highly reliant on people, with the whole industry fuelled by creativity, development of relationships, specialised skills in manufacturing and they are especially reliant on EU workers. For the UK as a whole, 6% of all employees are estimated to be EU nationals. However it is likely to be almost double that for the fashion industry, and for certain segments, much higher still - it’s been estimated that of the 13,650 apparel manufacturing jobs in London, 70% of these are filled by EU nationals. Anecdotally, there are already reports of skilled EU workers leaving in the wake of the referendum result and should Westminster indicate that future immigration controls are likely, then we will see more workers leave. This leaves gaps in the fashion workforce that will be difficult to fill - positions which revolve around creativity and relationships are usually highly dependent on the specific individual employed.
Companies become reliant on these EU staff. Additionally, fashion manufacturing is growing with the industry expecting to create an additional 20,000 jobs in this sector over the next few years. It is well known that the UK lacks a pool of talent in the home population and careers in manufacturing are generally not promoted to young people - this has been partially solved by private companies setting up formal training programmes, but entrants to these skew towards EU workers. These issues will lead to companies being unable to expand to meet the projected future demand. It will create increased competition in the job market which will increase the costs to hire talent.
Over the course of this year, we will start to see the shape of our future trade relationship with the EU. For both fashion retailers and manufacturers, the outcome of these discussions will greatly affect the industry. At the moment, 74% of textiles and apparel exports are to the EU and 45% of textiles and 25% of finished clothing products are imported from the EU, making them the UK’s biggest export partner and one of the biggest import partners in this sector. The modern fashion supply chain is highly distributed, with raw materials, textiles, trimmings, assembly, QC, warehousing and finally retail all taking place in different countries, items being exported and imported many times over before arriving in the hand of the customer.
Any changes to the trading regime, where currently importing and exporting with the EU is as simple as sending packages to addresses in the UK, will add extra costs and time to the process. If there is a hard Brexit and the UK start from scratch again going back to WTO rules, tariffs of up to 20% would be added on to items imported and exported and companies attempting to import would be subject to customs inspections. For a lot of customers in the UK and EU, it is not uncommon that some the components in the clothes they buy will have crossed the UK/EU border a number of times.
With the sheer amount of trade that happens at the moment (44% of all UK exports are to the EU, with 53% of imports coming from the EU) the capacity of customs will need to expand significantly, which the government does not appear to have planned for. There is a likelihood that even with rapid expansion of customs resources, there will be additional delays to shipping times, resulting in extra costs for fashion companies. In addition, we have already seen that the vote to leave the EU translated into a direct impact on the exchange rate. Future announcements regarding relationship between the UK and the EU are likely to have large impacts, both positive and negative on currency. This impacts the bottom line of businesses.
All these issues combining lead to risks that a number of fashion brands who currently have only warehousing and QC in the UK, may decide instead to open an EU warehouse to cut down on costs and better serve the EU market. The overall situation may lead to increased prices as items are both more costly and more difficult to import, meaning businesses will have to raise prices and risk annoying it’s customer base, or holding prices and making less profit.
At the moment, with little view of our future relationship with the EU, owners find it difficult to make strong decisions to protect their businesses from the effects of Brexit. However, as we are already seeing the effects of Brexit even before March 2019, it is imperative for businesses to assess how they are exposed to Brexit, how this would impact their revenues, costs and profits and take steps now to mitigate these risks.
Assay Advisory will be presenting their work on the fashion industry and the potential impacts of each of the Brexit trade deals at our next Fashion Roundtable on January 17th: https://www.facebook.com/events/751979165003151/
Commentary by Selena Wu of Assay Advisory. Assay Advisory has developed a product which analyses the potential impact of Brexit for an individual business and explores how strategies can be employed to offset risk and capitalise on any opportunity presented. Assay Advisory is a hybrid consulting and corporate finance house which works with owner-managers to increase the equity value of their businesses, plan their growth, assist with financing and advise on the right exit strategy. For further information on Assay Advisory and their services, please visit their website or call 0207 798 2840.