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Breaking ties with the European Union would allow the UK to seize control of its own destiny and secure lucrative international trade deals – or so Boris Johnson’s “Leave” campaign promised. Five years – and one pandemic – later, has that expectation become a reality for the UK fashion industry?
On paper, the UK has secured new deals with the EU as well as countries including Australia, New Zealand, Turkey and India. Negotiations for free-trade agreements with Canada and India were launched in May this year, and the UK is also doggedly pursuing a free-trade deal with the US.
The government has heralded the deals as significant achievements, promising ambitious new trading relationships. However, experts have warned some of the deals have little potential to boost the UK economy, and fashion businesses are uncertain about whether they can compensate for a raft of Brexit-related challenges, including increased bureaucracy, duties when re-exporting some goods and reduced trade with established markets in the EU. Drapers examines some of the key free-trade agreements – signed and pending – and their impact on the fashion industry.
The European Union: few benefits after Brexit brinkmanship
- Increased freight costs reported by 100% of UK fashion and textiles businesses, as well as problems with customs clearance and cancelled orders
After months of negotiations, the UK’s exit deal from the EU was agreed on Christmas Eve 2020. Johnson said the deal, worth £660bn, would allow UK goods to be sold without tariffs and quotas in the EU, declaring that “we have taken back control of our destiny”. The European Parliament ratified the deal on 28 April.
The UK’s fashion industry, however, has been less jubilant about the ramifications of the deal. Almost 100% of UK fashion and textile businesses have faced increased freight costs, 83% have had problems with customs clearance and 55% had had orders cancelled from wholesale partners because of Brexit, a survey by the UK Fashion and Textile Association (UKFT) showed in July.
“It has been an absolute nightmare,” says Daniel Marsden, CEO of Lounge Underwear. “We’ve worked closely with our logistics partners but ultimately had to swallow duty costs on behalf of the customer since Brexit. There was also a lot of confusion over the IOSS (Import One Stop Shop Scheme, the system which facilitates collecting and paying EU VAT.) Since Brexit, we’ve invested in a Belgian distribution centre to help alleviate any future issues with EU trade.”
The deal has particularly hit smaller businesses, which, unlike Lounge Underwear, cannot afford to invest in European distribution.
Australia: a long-distance relationship
- Relative size of the Australian economy, geographical distance and already-low tariffs make the deal “a poor substitute for the trade lost with European markets from Brexit”
A jubilant Johnson hailed “a new dawn” in the UK’s trading relationship with Australia after striking a free trade deal with its prime minister, Scott Morrison, in mid-June. The first trade agreement negotiated from scratch from the government since Britain left the EU, was described by Johnson as “global Britain at its best”.
Under the agreement, Johnson said, British products will be cheaper to sell into the market, and tariffs on Aussie favourites – including swimwear – entering the UK would be eliminated. The Australian government has described the deal with the UK as its most ambitious free trade agreement with any country.
Although the exact details of the agreement have yet to be released, it has been welcomed by the UK fashion industry. Retailers and brands tell Drapers the deal represents “a step in the right direction” and that a reduction in tariffs would benefit businesses both in the UK and Australia.
The UK-Australia trading relationship was worth £13.9bn in 2020 and the two countries share a mutual appreciation of each other’s sartorial choices. Womenswear brands Zimmermann, Bec & Bridge and Réalisation Par are just some of the Australian labels to have found favour with UK consumers, and Forever New, one of Australia’s biggest womenswear brands, launched a UK-facing website last year. Among the UK businesses doing well Down Under are Asos, womenswear label Mint Velvet and lifestyle label Celtic & Co. A free-trade agreement and tariff-free shopping is likely to only strengthen UK consumers’ interest in Australian labels – and vice versa.
“Fantastic free-trade deals with countries like Australia is exactly why Brexit was meant to happen,” argues Chris Griffin, CEO of SecretSales and former ecommerce director of Superdry, where he led the retailer’s digital international expansion into more than 20 markets.
“Many fashion brands in the UK trade mainly with Europe and therefore aren’t truly global. New trade deals with countries that have traditionally been harder to trade with [because of tariffs, duties, and red tape] will help businesses recoup sales lost during the pandemic.”
He adds: “In five years, British fashion will be a dominant player on the global stage thanks to new deals. I’m excited about the international markets opening up.”
Other experts, however, sound a more cautious note. Michael Gasiorek, director of the UK Trade Policy Observatory, argues that “economically, the deal remains a poor substitute for the trade lost with European markets from Brexit,” because of the relative size of the Australian economy, the geographic distance between the countries and low-level tariffs for most products, even before the free-trade agreement. Modelling from the UK Trade Policy Observatory suggests that UK exports to Australia will increase by a mere 0.35% as a result of the deal.
The government argues that the free-trade deal with Australia will act as a “gateway” to the Indo-Pacific region and boost the UK’s bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – a trade alliance that includes Australia, Canada, Mexico, and Japan, among others. However, whether this benefit will materialise is still yet to be seen.
The fashion industry may have heralded the deal with Australia as a promising first step, but whether the agreement will bear fruit and make up for lost trade with the EU is uncertain.
New Zealand: closing in on a Kiwi deal
- A free-trade deal would deliver a negative comparative advantage of -0.94% as part of a trading relationship valued at only £2.3bn
International trade secretary Liz Truss said the UK was “closing in” on a new free-trade deal with New Zealand in early August, adding that the UK and New Zealand share a long history, core values and a commitment to free trade. Truss has spoken frequently to New Zealand’s trade and export growth minister, Damien O’Connor, over recent months and a deal between the two nations is likely to be struck. Both countries hope the deal with reduce the cost of trade and make it easier for companies in both countries to do business.
The trading relationship between the UK and New Zealand was worth £2.3bn in 2020 – a tiny fraction of the UK’s £23bn relationship with India and £196bn relationship with the US.
A 2020 Department for International Trade report found that a free-trade agreement with New Zealand would have a “close to zero” impact on GDP. It also argued that UK goods would become more competitive in New Zealand and exports could increase by between 3.8% and 7.3%. Imported goods from New Zealand could also become cheaper.
However, the report found little benefit for the UK “textiles, apparel and leather” industry, which it estimated would receive a negative comparative advantage of -0.94% under a free-trade deal.
Turkey: business as usual
- December 2020 deal “mirrors what was in place previously when the UK was part of the EU, and so has no particular advantages”
The UK signed a free-trade deal with Turkey in the twilight of 2020, shortly after agreeing a belated Brexit deal with the EU on Christmas Eve. It was good news for the fashion industry, which relies heavily on Turkey as a near-sourcing hub with considerable manufacturing expertise. Retailers and brands sourcing from Turkey had feared they would have to increase prices to mitigate any tariffs on importing Turkish goods if a deal had not been agreed. The trade deal means the clothing supply chain between the UK and Turkey remains unbroken.
“We rely on Turkey for speed and quality, and we have formed long relationships in the country,” says the owner of one menswear brand. “We’re pleased a deal was agreed, but it mirrors what was in place previously when the UK was part of the EU, so hasn’t had any particular advantages. The government has described the deal as ‘tariff free’ but what we had previously as part of the EU was also tariff free, so there’s no real advantage.”
Paul Alger, director of international business at the UKFT adds: “Certainly, the UK-Turkey free-trade agreement has made it easier for UK companies to import goods from Turkey to the UK for the domestic market. However, duty applies on goods imported to the UK from Turkey that are then re-exported to the EU. We are also finding that the forms that the UK agreement stipulates to ship goods to Turkey under preference do not prevent those goods from needing to be quality-controlled on arrival, whereas the forms in the EU agreement with Turkey did. We are talking to HMRC to rectify this, as it seems to be an oversight.”
One supplier based in Turkey agrees: “The deal means the pre-existing relationship between the UK and Turkish clothing industries can continue and evolve, which is good news. However, we had hoped for more relaxed rules of origin in the agreement.”
India: few advantages for the UK
- “Free-trade deal could bring positive news for India’s textile, garment and leather manufacturers to export at lower tariffs”
The UK government announced in May that it had agreed an Enhanced Trade Partnership with India, which pledges to double the value of UK-India trade by 2030. The partnership addresses trade barriers around fruit exports, medical device exports and legal services, but does not bring any advantages for the fashion industry. However, both the UK and Indian governments see the partnership as the first step on the path to a full free-trade agreement. The two countries have agreed to complete the early processes necessary for a free-trade deal by the end of 2021.
India also resumed negotiations with the EU in May to agree on a long-delayed “mutually beneficial” trade agreement, which could bring good news for the country’s clothing and textiles industry.
“A renewed focus on India-EU ties will boost the growth momentum of the Indian economy, which has slowed down because of pandemic-induced business and trade restrictions,” argues Ankita Roy, retail analyst at GlobalData. “A free-trade deal could bring positive news for textile, garment and leather manufacturers to export at lower tariffs. It would also help India to protect its domestic clothing manufacturing base, which has been facing strong competition from countries such as Bangladesh and Vietnam as they enjoyed preferential tariff treatment.”
While new trade deals will spell good news for India, the advantages for the UK are less clear.
The UKFT’s Alger says: “We have some concerns as to whether India will be open to increasing exports from the UK [if a free-trade agreement is agreed]. The Indian lobby in the UK is particularly well represented in the government and they will be pushing for a free-trade deal, which is likely to benefit India more than the UK and India has a record of hiding behind state laws and rules to protect its own market from imports.”
He adds: “India sees herself as an exporter of fashion and textile products rather than an importer. However, some of our larger brands are looking at the potential to expand in India as long as we get a level playing field there and a tight level of intellectual property protection. In addition, our textile exporters could potentially sell more UK fabrics to Indian tailors.”
Simon Carter, founder of the eponymous shirting brand, which has 11 franchise stores across India and will be taking increasing that number to 18 by the end of the year, also sounds a note of caution: “I’m sceptical about the government’s big announcement about the UK’s new relationship with India – it suggests that India was a completely closed country before and that UK businesses weren’t able to trade there, which isn’t the case.
“Plenty of retailers, like me, have been trading with India for a long time. However, any free-trade agreements in the future that reduce duties in or out of the country will, of course, be helpful to businesses wishing to increase trade with India.”
US: giant opportunity
- Deal to expand on the £196bn of trade between the US and UK “is the big one, and would benefit our exporters greatly”
The UK and the US are locked in a “will they, won’t they?” dynamic over a free-trade deal. The two countries failed to secure a much-hoped for “mini-deal” that would lift US tariffs on the import of UK products, including whisky and cashmere, during the last days of the Trump administration. A potential deal looked promising in early January, when prime minister Boris Johnson became the first European leader to receive a phone call from a newly elected president Joe Biden. Downing Street confirmed that the duo discussed the benefits of a potential free-trade deal in the call.
However, recent media reports have suggested that a trade deal is unlikely to be struck until at least 2023 as Biden concentrates on rebuilding the domestic US economy in the wake of the pandemic.
A deal with the US could have powerful implications for the UK economy. The US is the UK’s largest single trading partner, government data shows, and total trade between the two countries hit £196bn in 2020. Both countries have more than $1 trillion (£724.5bn) invested in each other’s economies.
“The UKFT has been called for US/UK free-trade agreement for more than 10 years,” says Alger. “It would be the real prize of Brexit, as most of the other free-trade agreements we’ve seen to date have merely replicated deals the UK already had while it was a member of the EU. The US is the big one and if we can pull it off, it will benefit our exporters greatly. However, it is too early to tell whether this will happen in the next few years, and we know the EU is also in talks with the US for a deal.”
He adds: “Any deal with the US will have strict rules of origin, as the Americans are especially cautious around this, so only goods manufactured in the UK (or the EU depending on the agreement) will benefit from any free-trade deal. I very much hope that a US-UK, and indeed a US-EU deal, will be possible as it is important to bring like-minded market economies together.”
The US has long held considerable appeal for UK fashion businesses, because of the sheer size and scope of the market and cultural similarities. In July, Asos announced it had formed a joint venture with US retailer Nordstrom to support its US expansion strategy. Nordstrom has taken a minority stake in Asos brands Topshop, Topman, Miss Selfridge and HIIT, and will stock the brands online and in selected stores. CEO Nick Beighton said he was “excited” about the opportunities in the market.
Other UK retailers are also pursuing US expansion and are crossing their fingers for a deal.
“The US continues to be a focus our business because the consumer base there is so huge,” says Lounge Underwear CEO Daniel Marsden. “To be one of the biggest brands in the world, you have to be in the US – it is arguably the hardest market to crack, but with good reason. It is essentially like marketing to 50 separate countries, so it is a huge task.”
He adds: “There is no doubt that a free-trade agreement with the US would only make the market more attractive. I’m sure every retailer that exports to the US would agree. A deal would only increase our investment in the US.”
UK fashion businesses may be champing at the bit for a new trading relationship with the US, but there are many hurdles – particularly tensions around Biden’s close interest in post-Brexit related issues over Northern Ireland and concerns over the US’s food standards – to be thrashed out. With Biden also preoccupied with domestic policy, the UK is likely to have to play a long waiting game.