At this time of the year, observers typically start pontificating about the challenges facing businesses in the next year. And it’s an odd-on certainty lots of those predictions will be about all the uncertainties facing us.
Unsurprising with the leaders of four of the developed world’s six largest economies seeing an end to their political careers in the past six months. But I think those alleged uncertainties are widely misunderstood.
In Europe: much less uncertainty than meets the eye
Europe looks like it’s full of uncertainty.
- Britain voted in June to leave the EU – but hasn’t the slightest idea when, or what will replace it. Leaving might well precipitate Scotland’s voting for independence – but the campaign to stay in has now gathered pace.
- Italy’s Prime Minister resigned on Dec. 4, with elections looking likely – and a party wanting to quit the euro leading its polls.
- France’s president announced on Dec. 1 he would not stand for re-election in May 2017, and the two front runners to replace him both want radical changes to the EU.
- Holland and Germany both have elections in 2017 – and parties also calling for radical changes to the EU are also well-placed in opinion polls.
But only the U.K. has a mandate for leaving the EU – and the most certain thing about that is the U.K. can’t leave before spring 2019. The strongest demands elsewhere in the EU are to abandon using the euro, and to increase barriers against immigration.
This all adds up to great uncertainty in the financial markets, and serious risks of economies slowing down. With the growing popularity in France and Italy of parties opposed to membership of the euro, the common currency’s future again looks uncertain.
But it also means there’s practically zero likelihood of any changes in trading relations between current EU members, or with nations outside, for at least the next two years.
In the US: clear and present uncertainty
President-Elect Donald Trump made several firm commitments on Oct. 22 prior to his November election victory.
- He would fight to get 10 new acts through Congress by April 30, including:
- Offering reductions in personal and corporate tax
- Discouraging companies from laying off U.S. workers in order to relocate
- Ensuring open jobs are offered to American workers first
- Among 19 acts on his inauguration day (Jan. 20), he’d:
- Announce withdrawal from the Trans-Pacific Partnership (TPP)
- Announce his intention to renegotiate NAFTA or withdraw from it entirely
- Direct the Secretary of the Treasury to label China a currency manipulator
- Direct the Secretary of Commerce and U.S. Trade Representative to use every tool under American and international law to end foreign trading abuses immediately
Since then he’s confirmed his intention to withdraw from the TPP – but it hadn’t been approved, so the decision to dump it merely stops buyers and sellers speculating about something that may never have happened anyway.
The plan that worried our industry most was probably the one “to direct the Secretary of the Treasury to label China a currency manipulator” – followed by plans to treble duties on Chinese imports if China didn’t accept America’s world view.
Since then, he’s indicated who he wants to be that Treasury Secretary: ex-Goldman Sachs honcho Steven Mnuchin – and Mnuchin’s priorities in a Nov. 30 interview, didn’t seem quite the same as Trump’s:
- Mnuchin was clear that his number one priority was bringing taxes down – possible only by steering a Bill through Congress. Which might not be that easy.
- Mnuchin wasn’t enthusiastic about being told to find China a currency manipulator, and even less interested in instant duty hikes. IF, he said, his department found China manipulating rates, they’d start the tortuous process laid down in law to negotiate with China. Mnuchin wasn’t altogether disagreeing with Trump: he simply wasn’t going to be forced into precipitate action against the world’s largest country just because his boss had made an intemperate commitment.
In the same interview, Trump’s pick as Commerce Secretary (ex-International Textile Group owner, Wilbur Ross) came up with completely different priorities. This talk of higher imports, he said, “are the last thing…The real trick is going to be increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports.”
Many Trump opponents like to seize on differences like these within his team as demonstrations that Trump wasn’t serious. They might, of course, be precisely what crops up whenever a leader hires like-minded managers: they all see different ways of skinning the same cat, and end up with a subtly different plan from what the boss envisaged when he went out hiring. Or Trump and his team might not even realize they disagree.
For instance: what are the plans to renegotiate NAFTA, ban offshoring and fight alleged foreign trade abuses? All a bit less clear.
- Trump revealed on Nov. 30 his immediate answer to offshoring wasn’t the new Act of Congress he’d promised in October: it was directly threatening the holding company of a business planning Mexican relocation with cancelled Department of Defense orders, and offering millions in tax breaks.
- Ross’s Nov. 30 priority with foreign trade deals isn’t hunting out “trading abuses”: it was dealing with rules of origin, whereby in his words “stuff can come in from outside the boundaries of the treaty countries.” Highly technical details in foreign trade treaties – which might damage U.S. interests more than cheap foreign labour, but are likely to take a great deal more effort to change than just threatening a 10 percent duty hike.
- Trump almost immediately made his disagreements with Ross clear. In a Dec. 4 tweet, he promised “There will be a tax on our soon to be strong border of 35 percent” for companies moving operations offshore.
So seriously mixed messages about what Trump’s team are going to do. But many promises that, the minute they move into the White House, they’ll start doing things that will almost immediately hit the way apparel’s sourced.
It’s just tough to predict what, precisely.
Meanwhile in Asia…
The moment Trump announced the TPP was dead, China told America’s former TPP negotiating partners they’d all make terrific members of grand Pacific-centric trade deals China was trying to sponsor.
In fact, these are deals (one restricted to countries round the Pacific, the other originally only including Asian countries) have been discussed for a while, but China now thinks it’s making the running. And they’ve both been in Trade Negotiation Hell – the zombie world of endless talks about talks, with little clear idea of objectives or delivery dates – for years. China’s excited that America might have lost interest in such deals, so it can be the pivot of these endless diplomatic beanfeasts – but no-one’s suggesting either will see the light of day this decade.
So expect no significant change for several years in the regulatory framework controlling how Japan, Australia or New Zealand import their garments.
But for suppliers…
One other set of consequences. The immediate prospect of tighter U.S. import restriction will inevitably affect supplier investment in many Asian countries – and that probably includes the past couple of years’ investments by Asian companies in U.S. spinning and weaving (would you invest in a country that would try to fine you if you decided to close?)
So will the longer-term doubts over the EU’s composition and the future of the euro. The next year or so is unlikely to see many suppliers decide to build new factories for exporting to the West.
And for economies?
Now there’s the real uncertainty. And for most people in our industry, it’s the health of our economies that drives profit: uncertainty over things like tariffs are usually little more than an irritation.
It’s hard to believe Europe’s long-term political uncertainty is helping its economy – but Britain’s has survived the shock of its referendum decision remarkably well, and year-on-year GDP growth in the Eurozone is currently about the same as in the U.S.
There’s no end of complaints from Trump opponents about his potential for economic damage – but most financial indicators have if anything improved since his election victory.
It may turn out that the real lesson of the past six months’ political turmoil is that it all this matters more to commentators than to shoppers deciding how much to pay for a new dress.
And what really makes a retailer or brand successful is how well they understand those shoppers. After all: commentators haven’t been too clever predicting political outcomes this year, have they?
Mike Flanagan, CEO Clothesource. Clothesource offers consultancy on the world garment industry using the wide resources of The Clothesource Knowledge Base – the most comprehensive collection of information anywhere about sourcing for the apparel industry. He can be contacted at Flanagan@clothesource.net.