Faced with the possibility of a no-deal departure from the European Union in six months’ time, British fashion businesses are scrambling to put contingency plans in place.
If there is one image guaranteed to strike fear into the hearts of fashion manufacturers and retailers, it is that of articulated lorries parked along the side of the motorway, waiting to cross a border. Yet as the date of the UK’s departure from the European Union approaches, there is a real and worrying risk of queues at Calais and Dover.
There are just six months to go until the UK leaves the EU on 29 March 2019, and yet so much is still unknown. The EU’s chief negotiator, Michel Barnier, has said he is confident the terms of the UK’s withdrawal will be agreed by early November.
However, fundamental differences remain between the two sides. Many EU leaders have expressed their dissatisfaction with prime minister Theresa May’s Brexit plan, accusing her of trying to “cherry-pick” the best bits of EU membership.
The EEC [European Economic Community] was good for JD as it made expanding across Europe relatively simple
Brian Small, JD Sports Fashion
Meanwhile, several Conservative MPs reject May’s proposed solution, and rumours swirl of a leadership challenge. For her part, May has insisted that she will not accept a bad deal for the UK. As the negotiations enter their crucial, final phase, business leaders are facing up to the possibility of no-deal Brexit on 29 March 2019.
In August, the UK government published a series of notes detailing what could happen if we fail to agree terms of our withdrawal from the EU. The guidance warned that, without a deal, “the free circulation of goods between the UK and EU would cease”. The British Retail Consortium has estimated that the cost of clothing could rise by as much as 7% as a result of the additional checks and controls this would entail. It has also pointed to a risk of substantial delays if border posts struggle to cope with a spike in customs declarations.
“A cliff-edge Brexit would hit retailers and consumers very hard,” says William Bain, the BRC’s Europe and international policy adviser. “If you look at the delays that might happen at Calais and Rotterdam because of regulatory checks, as well as delays on the M20 getting into Dover – people would have to wait longer for goods, so the consumer experience would be impacted.”
A cliff-edge Brexit would hit retailers and consumers very hard
William Bain, British Retail Consortium
The BRC has been talking to retailers about how to prepare for the worst-case scenario.
“On the customs front, more use could be made of customs warehousing, duty suspension and processing reliefs, for example, which would mitigate exposure to extra costs,” says Bain.
Another ongoing concern is whether new duties will be imposed on clothing and footwear imports and exports – particularly in the event of a no-deal Brexit, which would mean the UK defaults to World Trade Organization (WTO) trade tariffs. For some retailers, this is a real concern.
“We would certainly prefer to remain in a duty-free trading zone,” says Brian Small, chief financial officer of JD Sports Fashion. “The EEC [European Economic Community] was good for JD as it made expanding across Europe relatively simple. If we leave the duty-free zone there would be – at best – a lot more administration.”
Civil servants have got a hell of a lot of legislation to get through by the end of the year – there are no guarantees
Nigel Lugg, UKFT
The UK Fashion and Textile Association (UKFT) held a meeting with senior civil servants in July, during which they discussed the potential impact of trade tariffs on the industry. It has published a checklist of risks for fashion businesses, which includes UK/EU customs checks, potential delays at borders, tariffs, banking arrangements, currency risks, intellectual property, contracts, standards and employment.
UKFT chairman Nigel Lugg says: “Everyone’s talking about flipping to WTO rules, but that would mean we don’t get any benefits from GSP [the Generalised System of Preferences, under which the EU and other developed countries offer developing countries lower tariffs on their exports into the EU], so the impact on textiles would be enormous.
“The civil servants said they’re going to put emergency legislation through the House of Commons to ensure that those countries with preferential duty-free rates, such as Bangladesh and Cambodia, even in a hard Brexit, will remain duty free. But they’ve got a hell of a lot of legislation to get through by the end of the year – there are no guarantees.”
However, Cecile Reinaud, founder of UK-based maternity fashion brand and retailer Séraphine, is confident that UK businesses will not be slapped with duties: “If I look at countries that are outside of the EU, like Switzerland, Norway or Turkey, they have no tariff barriers into Europe other than VAT, which you get back.
“I cannot see how the UK could manage to have a worse situation. We must not forget that Europe exports more into the UK than the UK into Europe, so Europe doesn’t want trade barriers either.”
Instead, Reinaud is planning for an increase in salary bills: “A lot of our store and warehouse staff are not British nationals. Less supply will create inflation on salaries, as we may have to go back to attracting British people, who don’t want to be paid under a certain threshold. I think the only thing we can do in this kind of labour market is apply a premium on that in our financial budgeting.”
Europe exports more into the UK than the UK into Europe, so Europe doesn’t want trade barriers either
Cecile Reinaud, Séraphine
On 18 September, the Migration Advisory Committee published the results of a survey exploring the contribution of EU nationals to the UK workforce. It took the assumption that a UK immigration policy would not be included in the Brexit agreement, and on that basis recommended that it should be made easier for higher-skilled workers to migrate to the UK, and that there should be no preference for EU citizens.
Bain says the final labour market policy will depend on the post-Brexit negotiations: “There are 170,000 EU nationals working in retail in the UK, and we need people with a range of skills. We wouldn’t want something that unduly restricts that free flow of labour.”
With six months to go and the prospect of a hard Brexit looming, fashion businesses are desperately trying to plan ahead. However, with so many unknowns, it is challenging.
“Like everyone else, we are planning for Brexit,” says JD’s Small. “The problem is there is only so much we can do. There is so much uncertainty around what’s going to happen.”
Supply chain blockages
Lifestyle retailer Joules has set up a Brexit taskforce to monitor and evaluate the potential impacts of different scenarios. It has established an option for a EU-based distribution arrangement to mitigate potential supply chain disruption and adverse duty impacts. However, the retailer warns that the “lack of clarity on the nature and timing of the post-Brexit arrangements make it challenging to plan mitigation strategies effectively”.
Reinaud agrees: “What can we do? Nothing can prepare you. We are perhaps in a better position than some UK retailers – we have a legal entity in France, so we could consider a warehouse in Europe – but this would be a significant investment.”
The BRC is pinning its hopes on a Brexit deal that includes a two-year transition period.
“That is a priority, but we’ll only get that if there is a withdrawal agreement,” points out Bain. “If there is, retailers will have the security of two years during which very little will change in terms of trading relationships with the EU. For clothing importers and exporters, this is the best option by a mile.”
Companies should be looking at ways to mitigate exposure to extra duties and any additional VAT liability
William Bain, British Retail Consortium
However, he urges retailers to prepare for all potential outcomes, including a hard Brexit: “Companies should be looking at ways to mitigate exposure to extra duties and any additional VAT liability which might accrue, particularly in terms of transactions from the UK to other European countries. If free movement goes, how can companies adjust their hiring patterns to deal with that?”
Lugg agrees: “This is the biggest trade negotiation the world has ever seen. You’ve got to be prepared for it going both ways. Some people are thinking of bringing in first-quarter stock before March. The industry needs to do more contingency planning.”
If the UK can agree a withdrawal deal with the EU by 29 March 2019, it is just the beginning of a long process of negotiating our new trading relationship. The last couple of years have shown just how important and interconnected overseas markets are to the UK, particularly in broadening our supply chains and giving consumers more choice. It is vital that any decisions made between now and 29 March, and beyond, preserve this way of working.