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What Brexit Could Mean for Apparel and Sourcing

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To stay or not to stay has been the U.K.’s biggest question of late as it tries to decide whether it will remain a part of the European Union.

Voters will head to the polls Thursday to vote “leave” or “remain,” and there’s no telling which way the results will go as leaders and parties are split on the decision. The latest polls show 45 percent voting to remain, 44 percent to leave and 11 percent undecided.

Brexit, as the looming move is being called, has hijacked the news, been cause for heated debate and even deadly consequences with the killing of a pro-remain member of parliament—and yet, most have little understanding of what the whole thing is about.

Here it is in a nutshell: The EU is an economic partnership of 28 European countries that functions as a single market of sorts, allowing goods and people to move freely about the union. The euro serves as a single currency for 19 of the nations, which function under the EU’s own parliament.

Now some want the U.K. to leave the EU so that Britain can regain full control of its economy and its borders and rein in the rampant free migration many aren’t in favor of.

Others—British Prime Minister David Cameron and President Obama counted among them—want the U.K. to stay put in the EU bloc. They think its membership facilitates trade thanks to the open market access, that it boosts Britain’s status in the world and that migrant workers help fuel economic growth.

Looking at the numbers, Britain’s National Institute for Economic and Social Research said the U.K. economy could be as much as 3.2% smaller by 2030 if it opted for the exit.

The hot-button Brexit issues, to put it very simply, are the economy (will it suffer or flourish?), the migrant issue (is Britain better off with incoming workers from poorer European nations seeking work, or are they weighing on opportunities for British nationals?) and Britain’s identity (does the UK want to cede control to facilitate movement and trade, or is autonomy of higher value?).

Either way, Brexit could spell a lot of bad news.

“The immediate effect will be on the world’s financial markets,” Mike Flanagan, CEO of U.K.-based apparel sourcing consultancy Clothesource, said. “The dollar will rise sharply against the pound, there will be pressure on the U.K. government to adjust its interest rates (both ways), and virtually all the world’s major trading governments (except Russia’s) agree the decision will be one more uncertainty their economies can live without. That’s where the certainty stops.”

In the interest of simplifying matters further still, however, let’s focus on sourcing and trade.

How Brexit could affect trade

It’s not entirely clear how exactly Brexit might affect markets, but because a good portion of the U.K.’s exports are bound for the EU rather than the other way around, it would be safe to say these goods would be at risk if the U.K. was no longer part of the trade bloc, as they’d again be facing duties, tariffs and other barriers to trade.

What’s more, European leaders are reportedly not so keen to cut individual trade deals with Britain if it were to leave the union.

Looking outside of Europe, countries like Sri Lanka that trade regularly with the EU are already gearing for a potential backlash.

Sri Lanka reapplied for its Generalized System of Preferences (GSP) plus trade concession from the EU last week (it was pulled in 2010 over human rights issues) in hopes of protecting the nearly 40 percent of its exports that are bound for Britain.

“If the U.K. is not a part of the EU, we will lose the duty free benefit,” Sri Lanka’s deputy foreign minister Harsha de Silva told the Financial Express. “True, if U.K. exits, then we could renegotiate a FTA with the U.K., but they will have to do a whole series of FTAs with European nations and others before they get to us. That will certainly take a long time.”

India, another country engaged in sizable trade with the EU, has remained largely mum on the Brexit topic, but an article in The Hindu Monday suggested that a bilateral trade deal between a post-Brexit Britain and India would be far more likely than a trade deal between the EU and India.

The U.S. has been working on its own trade deal with the EU, the Transatlantic Trade and Investment Partnership (TTIP), and at the latest round of negotiations in New York in May, progress was called “solid” and leaders said they expected the deal settled before the year is done.

President Obama said in April just prior, however, that if the U.K. quits the EU, Britain would have to wait as long as a decade for a free trade deal with the U.S.

“I think there’s a real risk that, as Britons realise how little they’re getting from the rest of the world outside the EU, they’ll compensate by eliminating the trade deals inherited from the EU that aren’t even intended to give British business any benefits,” Flanagan offered. “Universal duty-free access for almost everything from the world’s 49 poorest countries. Similar benefits, dressed up as an incentive to better human rights to countries like Pakistan where persecution of Christians and attacks on women are commonplace. Similar deals with most middle-income countries in Africa, to whom Britain sells almost nothing, and throughout the Pacific and Caribbean.”

He added, “Most of those countries are apparel exporters: Britain was Europe’s largest importer of clothes from outside Europe in 2015. As we get used to Brexit, those countries are likely to find the competitive edge the British taxpayer gives them against China is taken away. Some of the world’s poorest countries may end up the real victims of Brexit.”

As Sri Lanka likely rightly fears, if Prime Minister Cameron is pressured to resign following a would-be Brexit, it may be years before fighting inside the country’s political parties quiets enough to produce a leader who can start serious negotiations with the EU’s other 27 members on how trade will be handled.

What about apparel manufacturing and retail?

The uncertainty that would surround a Brexit, and the potential job losses and decreased consumer sales that may come as a result, could be bad news for retail.

“High on the list of industries hit will be retail, already burdened with an excess of branches ripe for culling,” Flanagan said.

Britain is the largest customer after China for the other 27 EU members’ exports, so a failing market would hit jobs across the continent, leading to Europe’s apparel market—from late summer and for at least three to four years more—getting softer than it already is.

“This will be particularly damaging to countries like Bangladesh, where nearly half of the country’s entire manufacturing workforce depends on apparel exports to Europe,” Flanagan said.

Britain’s apparel manufacturing sector also depends heavily on the very immigrants from the EU’s poorer countries that the “leave” advocates want to be rid of. Those immigrants have been even keener to get to the U.K. of late thanks to the nation’s increasing minimum wage and protections for migrant pay and benefits.

“That immigration is the most common reason Britons have been switching to saying they’ll vote leave—and immigrants taking advantage range from minimum wage garment assemblers to highly talented (and well-paid) fashion and software designers,” Flanagan explained. “So a ban on easy, tax-subsidized jobs for other Europeans is likely. Which will severely damage both Britain’s new garment manufacturing growth, and its long-standing role as a key design center for most European mass-market retail brands, like H&M and Primark.”

The U.K.’s secession would also take a financial toll on the retail sector.

“Brexit could certainly cause some financial market volatility, which in turn tends to scare consumers into not spending, so both are related,” John Kernan, managing director for financial services firm Cowen and Company, said. “Wealth effects can be powerful as stock market volatility is particularly bad for high-end retail. Negative news is never good for retail, it scares people. It’s a herd mentality.”

The trouble with a pro-Brexit vote, as Flanagan put it, is that “We can’t even be certain what’s uncertain.”

Results of the Brexit vote are expected between 6:00 a.m. and 9:00 a.m. GMT Friday (between 11:00 a.m. and 2:00 p.m. EDT).

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