As the UK government attempts to secure a transitional deal to ease our exit from the European Union, we explore how this could benefit the fashion and textiles industry.
Negotiations over the terms of the UK’s exit from the European Union have so far progressed frustratingly slowly. However, there has been some recent good news for business leaders: it seems increasingly likely that the UK government will push for a two-year transitional deal to help smooth the process.
In September, prime minister Theresa May outlined plans to strike a deal that would effectively delay implementation of any new trade agreement between the UK and the EU until 2021. At the end of October, Brexit secretary David Davis told a committee of MPs that he expected the outline of this transitional period to be agreed within the first three months of 2018.
This was welcomed by trade bodies across fashion and retail. British Retail Consortium (BRC) chief executive Helen Dickinson has said it would allow time to “adapt new customs controls to avoid disruption” and to agree a “final deal [that] avoids new tariffs”. She added: “A period of implementation is vital to offer certainty for businesses and allow them to prepare.”
We need an early agreement on transitional arrangements – it’s essential to allow companies time to prepare. Stability is paramount for business
Nigel Lugg, chairman of the UK Fashion and Textile Association
The potential benefits for the fashion and textiles industry in particular were debated at the Association of Suppliers to the British Clothing Industry’s autumn conference in Peterborough on 26 October.
“The government negotiation is key to the future of our industry,” argued Nigel Lugg, chairman of the UK Fashion and Textile Association (UKFT), in his keynote address. “There are huge benefits we could achieve post-Brexit, but the complexities of the divorce settlement run deeper than I think the government has grasped. We need to be very sure about where we’re going. I believe the decisions we’re making now are impacting on consumer confidence.
“We need an early agreement on transitional arrangements – it’s essential to allow companies time to prepare. Stability is paramount for business.”
Julia Redman, head of buying for kidswear, menswear and home at value fashion retailer M&Co, agreed: “We all sit here and we don’t really know what will come out of the other end of this process. We are stepping into the unknown. The only thing we can do at this point is prepare ourselves to react and adapt.”
Some of the speakers picked up on the BRC’s point about needing time to develop new customs controls. The BRC is lobbying for a system that ensures goods can continue to be imported without delays, disruption or additional costs. This would require significant investment in capacity, staff and IT systems – all of which would take time to sort out.
At borders outside the EU, lorries turn up and sit for a couple of days. Lorries entering and leaving the UK will face the same fate
Mike Flanagan, CEO of garment sourcing consultancy Clothesource
Mike Flanagan, CEO of garment sourcing consultancy Clothesource, pointed out that 92% of clothing exports and 31% of imports have to travel through European customs posts. He adds: “At borders outside the EU, lorries turn up and sit for a couple of days. Lorries entering and leaving the UK will face the same fate if we leave the single market at the same time as we exit the EU.”
Lugg agreed: “One of our key demands is to remain in the European Customs Union. The speed and simplicity of sending goods to Europe has been a huge benefit. On the French side of the Channel Tunnel, there is space for just six [articulated] lorries at the border. We can’t afford to let [customs delays] happen.”
A transitional period would also potentially give the UK more time to negotiate free trade agreements (FTAs) with countries in the EU and beyond.
In early October, trade secretary Liam Fox said the government expected to have draft FTAs on the table long before it reached the end of the Brexit transitional period. “We want the EU transitional ones done by [the Brexit date in March] 2019, and then at that point we want to see the US, Australia and New Zealand, which are the priority ones,” he told the Conservative Party’s annual conference in Manchester.
This would be good news for the fashion and textiles industry, said Lugg: “We need to conclude meaningful trade deals with the US, Japan, Australia, New Zealand, and so on. If we look at the size of these markets and the potential for UK fashion, the opportunities are unbelievable. FTAs could provide a huge boost to the sector’s export drive, and the growth of UK manufacturing.”
The US is the UK’s largest export market outside the EU, but duties and tariffs, the ATA Carnet – an international customs document that permits the temporary tax-free and duty-free export and import of goods for up to one year – and other non-tariff barriers make many UK companies reluctant to target the US.
“An FTA would simplify the process, allowing brands to enter the US more easily,” said Lugg. “The US has shown substantial interest in UK-made product.”
However, it was not all good news. Harry Morrison, managing director of consultancy firm Accenture Strategy, argued that a transitional period could prolong some of the difficulties the industry has experienced since the Brexit vote in June 2016.
“The short-term effects, such as the fall in the value of the pound, could be compounded as we exit, and potentially for a longer time if we have a transition window,” he pointed out.
It’s a sad fact of life that prices will go up. It’s been a tough few weeks – retail sales have dropped
Julia Redman, head of buying for kidswear, menswear and home at value fashion retailer M&Co
It is not known at this stage how a transitional period would affect shoppers’ behaviour. Consumer confidence fell steeply to -12 in the immediate aftermath of the EU referendum, but it quickly recovered, figures from market research firm GfK indicate. In the following months, it hovered around -5, and, in July this year – just after the snap election – it dipped back to -12.
The index for October shows consumer confidence remains low, at -10. People are feeling less confident about the general economic position of the UK, and continue to feel uncertain about their own personal financial situation over the next 12 months. GfK has predicted that, if Brexit negotiations “continue to deliver more questions than answers”, it is unlikely the overall confidence score will find any tail winds “for some time”.
Meanwhile, last month, the Office for National Statistics confirmed that inflation had hit 3% in September, for the first time in five years.
On 2 November, the Bank of England raised the base rate for the first time in 10 years, from 0.25% to 0.5%.
Lisa Hooker, UK head of consumer markets at business services company PwC, commented: “Consumers will begin to feel the effects of the rate rise in 2018.”
Meanwhile, retailers’ hedging facilities put in place before the Brexit referendum, are starting to come to an end. And as costs continue to increase, retail prices are likely to start rising for the first time in years.
Redman confirmed this: “As a retailer, we have to maintain margin, otherwise we don’t stay in business. It’s a sad fact of life that prices will go up. It’s been a tough few weeks – retail sales have dropped.”
If Morrison is right, a transitional period could prolong some of the short-term problems facing the industry – keeping consumer confidence and the value of sterling low. However, this would be offset by the advantages of giving businesses additional time to prepare for new trading and customs arrangements.
Like everything in the Brexit negotiations, the proposed transitional deal is still up in the air. At the end of October, senior sources in Brussels suggested that EU officials would be likely to offer an interim arrangement but limit it to 21 months. Whether it extends to 21 or 24 months, securing such a deal must be a priority for the prime minister.
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Opportunities and challenges of a transitional deal
A two-year transitional Brexit arrangement would:
- Give fashion businesses more time to adapt to new customs controls
- Allow EU nationals in the UK more time to settle their migration status
- Give more time to establish new administrative systems for customs
- Potentially give the government time to negotiate draft free trade agreements
- Give ministers more time to agree a final deal that avoids new tariffs
However, it could also:
- Keep the value of sterling low for longer, ultimately leading to retail price rises
- Have knock-on effects on already low consumer confidence
- Simply move the date of the possible “cliff edge”