After six months of uncertainty, BoF examines the challenges facing fashion as the UK government carves out a Brexit strategy.

LONDON, United Kingdom — When Britain’s vote to leave the European Union was announced on June 23, the pound plummeted to its lowest level against the dollar in 31 years and more than $2 trillion was wiped off the global stock market in reaction to the shocking referendum result.

Six months later, there is still little agreement on how the UK will leave the 28-nation trading bloc. From access to the single market and free movement of labour to the status of EU funding and education, there are a range of possible implications across a multitude of variables depending on whether negotiations result in a “hard” or “soft” Brexit.

While most signs have suggested that Britain’s conservative government favours a hard Brexit, UK Prime Minister Theresa May has remained stubbornly vague on the matter, using platitudes like "Brexit means Brexit" as opposed to laying out a clear exit strategy. Last month, May struck a different tone by declining to rule out whether the UK would continue to pay contributions into the EU budget after Brexit. Some have interpreted this as a signal that Britain may attempt to maintain access to the EU’s single market, further clouding the matter.

May also stated that she wants to give early reassurances in the negotiation process to EU citizens living in Britain, as well as UK citizens living in the EU, that their rights would be protected during Britain’s withdrawal, adding to hopes that Britain’s government may now be leaning towards a soft Brexit, something many in the fashion industry would welcome.

One thing that is clear is that May intends to trigger Article 50 of the Lisbon Treaty by the end of March 2017 — pending a verdict from Britain’s Supreme Court later this month — leaving less than three months for the fashion industry to ensure its interests are considered by Britain’s government as it enters the negotiation process.

It’s going to be absolutely crucial that business works with government.
The main areas of concern outlined by the British Fashion Council (BFC) are trade and investment, talent and skills, and EU funding, the status of which could dramatically change depending on the outcome of negotiations between Britain and the EU in the coming years.

“With the help of the British government we intend to ensure that we are able to protect tariff-free trade in the EU, keeping red tape to a minimum while also establishing effective trade deals in key territories outside of the EU,” Caroline Rush, chief executive of the BFC, told BoF in September.

“We will also be asking the government to provide assurances to businesses and individuals as soon as possible about the right to work and right to stay post-Brexit for EU citizens — as well as creating ways of attracting talent to London and the UK.”

But until Article 50 is triggered and the negotiation of the UK's exit from the EU is completed, the impact Brexit will have on the global fashion industry remains up for debate.

“What [Brexit] will mean for business is unknown,” said Alexander Betts, Leopold Muller Professor in Refugee and Forced Migration Studies, Oxford University, speaking last month at VOICES, BoF’s new annual gathering for big thinkers.

“Whether Brexit benefits business will depend on the terms of trade negotiated, access to high-skilled migration and other factors. To surmount this, it’s going to be absolutely crucial that business works with a government. That there is an influential voice, there are spaces for discussion and business’ voice is heard in those negotiations about the terms in which we leave,” Betts said.

Indeed, many fashion companies, including Burberry and Mulberry, consider it too soon to comment on the issue, given the uncertainty surrounding Brexit at this stage.

“It’s still too early to say what those impacts will be; we will look to mitigate incremental customs costs where we can,” said Burberry’s outgoing chief financial officer, Carol Fairweather, in November. “That said, we’re a British brand and so I don’t see it fundamentally affecting the way in which we operate here in the UK, but we’ll look where we can to mitigate if appropriate.”

Others are simply determined to make the best of the situation. “It’s not at all what I wanted but we have to move on,” said Anya Hindmarch. “Like the good Brits we are, we will find the positive to all this. Our stores are booming right now thanks to foreign visitors. Our suppliers in Italy have emailed us to let us know how determined they are that we all still work together and that they will lobby their government to keep trade flowing. It is time to be pragmatic.”

Worst Case Scenario: Hard Brexit

If a hard Brexit were to take place, the immediate effects on the global fashion industry would be a further devaluation of the British pound and the economic uncertainty that would follow, most likely resulting in lower domestic consumer confidence, which in turn could hurt the UK retail sector, said Bernadette Kissane, apparel and footwear analyst at Euromonitor.

A hard Brexit scenario would also limit the free movement of EU and British citizens living across Europe, creating problems for fashion companies whose foreign employees account for a large percentage of their workforce. Recruiting and retaining talent would become more challenging.

Central to a hard Brexit would be Britain leaving the EU single market, meaning it would have to hammer out a trade agreement with the EU. Trade between the EU and Britain would need to adhere to World Trade Organization rules, meaning businesses would be subject to trade tariffs on import and exports. Textile goods, for instance, may face a tariff of 12 percent in duties.

From a global perspective, these effects would mostly impact British companies, said Mario Ortelli, senior luxury goods analyst at Sanford C. Bernstein, though he notes that the knock-on effect on currency and trade agreements could hurt global fashion companies in the longer term.

“If a hard Brexit scenario results in FX volatility, increased macroeconomic uncertainty and a period of more protectionism for a global market like luxury, it’s a problem,” he told BoF. “Brexit, per se, for the global luxury industry is not a challenge because the UK is a market of limited size and therefore of far less concern that an eventual Chinese slowdown. But if Brexit has repercussions on the global currency markets or commercial agreements, it can become an important headwind for the luxury players."

UK fashion businesses and institutions could also lose access to hundreds of millions of euros in EU funding, which could affect the BFC, the Centre for Fashion Enterprise and the University of Arts London. It is not clear whether the British government will step in to replace the lost EU funding.

There may be some short term benefits, however. In October, Burberry reported a 30 percent rise in its UK sales as tourists flocked to its stores to take advantage of the fall in the British pound, which helped offset falling demand from US department stores. The continuation of that momentum will depend on whether companies operating in the UK maintain their prices, or raise them to compensate for the low pound.

A Better Path: Soft Brexit

There are hopes that Britain will negotiate a deal closer to a soft Brexit. This somewhat unlikely scenario would involve some form of membership of the EU’s single market, in return for some free movement of its citizens and would more closely resemble the relationships that Norway and Switzerland have with the EU. This would mean far less change and less upheaval than a hard Brexit.

“The Norway model of European Economic Area effectively means paying contributions. It effectively means free trade, it effectively means free movement of labour,” said Betts. “The Swiss model of around 120 bilateral agreements with the European Union also involves agreements on free movement, agreements of goods and services and again, it’s a soft Brexit option.”

A full or partial membership would mean no trade tariffs for businesses when trading in the European Union, though the UK would not be included in the customs union. It is unclear whether Britain would retain access to European Union funding.

The Likely Outcome: The Canada Model

In all likelihood, Britain’s government will opt for a hard Brexit, but with some allowances from the European Union that would soften the blow. Dubbed the “Canada model” by some, this would give Britain reduced trade tariffs through a free trade deal, but no access to the single market.

This kind of agreement may take much longer than the available two years to negotiate, so some observers foresee a transitional period that would see Britain paying for access to the single market for a period of 24 months after leaving the EU while the negotiations are finalized.

“To be honest, I believe we are headed towards a [Brexit] scenario where things are not black and white, but grey,” said Ortelli. “The British government will probably pay a bit more towards the European Union compared to what they paid before in contributions and they will probably get more freedom in blocking the flow of people. They have got their commercial agreements and then they will have to try and find competitiveness with other levels.”

source: www.businessoffashion.com