Apparel Sourcing Intelligence - Worldwide

A bad week for Brexit.

Theresa May keeps insisting “Brexit means Brexit”. But no-one in Britain can agree what Brexit means, how long it’ll take to get there or what Britain’s trade policy will be once it’s out of the EU.

Indeed, a leaked memo on November 7 indicated it would be about the first anniversary of the June Brexit referendum before the UK government decided its priorities.

Meanwhile, a substantial minority of British MPs continue to campaign against Brexit altogether – though most observers believe this is misguided: Britain’s Conservative party is currently committed to leaving the EU around spring 2019, has a working majority till then, and opinion polls indicate it would have an even bigger majority if Mrs May called an election before the one planned for 2020.

Several events coinciding with the US election results, though, seem to challenge that wisdom.

Committed Brexit advocates argue that the EU is so bad for Britain, any alternative to staying in would be better. But most people voting for Brexit had a slightly different view:

  • Many wanted immigration to be under some kind of control, if only in the way that Canadians need work permits to move permanently to the US
  • Others wanted easier trade with the world outside the EU, claiming EU membership was an obstacle to open trade with markets like the US or India.

Britain can’t start negotiating with non-EU countries till after leaving the EU, so Brexit means taking a considerable leap into the dark. I believe the past week has shed light on that darkness – and it might not be showing what Brexit advocates want to see.

Insight 1: India’s appetite for trade deals

India looks an excellent example of a country where a trade deal could make both sides better off. Its manufactures – especially clothing – could easily see sharp price reductions in the UK. India’s government claims to be committed to encouraging more manufactured goods being exported, because it sees manufacturing for export as the biggest potential source of new jobs for India’s rapidly growing population.

British businesses believe they’d sell more cars and insurance, and improve their Indian retail operations if India relaxed its barriers.

The EU’s been negotiating a trade deal with India since 2007: Brexit advocates claim it’s got nowhere because the EU’s members keep disagreeing with each other

So off went Mrs May to India. And found India was even less interested in a free trade deal with the UK than it had been with the EU. Instead of being more flexible with Britain than it had been with the EU, India added a new condition even to start negotiations: ““Education…will define our engagement in a shared future,” said India’s Prime Minister Narendra Modi “We must therefore encourage greater mobility and participation of young people in education and research opportunities.” More UK visas for affluent young Indians, in other words. And if the UK wouldn’t offer them, then Modi’s not interested in new job opportunities at home for India’s poor.

Mrs May isn’t interested, of course. She sees her mandate as controlling immigration, not increasing it. Modi either hadn’t been properly briefed, or deliberately raised the visa issue to kill further talk about trade.

Either way: the likelihood of a post-Brexit trade deal with India was a lot less on November 11 than it had been a week earlier.

Insight 2: America’s attractiveness as a trade deal partner.

Most Brexit advocates see a trade deal with the US as the real objective for life after the EU.

But Trump announced on October 22 that on his first day in office he would withdraw from the TPP – though some of America’s partners in negotiating the TPP had first agreed it in 2005, before the US was interested. There is no evidence Trump consulted any of the countries whose work he was bulldozing. With America now prepared to walk out of negotiations without any discussion, why would any potential partner risk wasting a decade in pointless negotiations: only for another future president to take against it?

Worse: among other October 22 announcements, Trump promised to work with Congress to introduce an End The Offshoring Act establishing tariffs to discourage companies from laying off their [US] workers in order to relocate. He will “fight for its passage within the first 100 days of my Administration”.

How can any country negotiate a deal with the US, knowing it intends to punish any firm likely to outsource manufacturing or business processes? What’s the likelihood Rolls Royce engines, for example, will be banned from selling engines to Boeing because it might hurt Pratt & Whitney? Or that BA might take sales from Delta or United? Or that Clothesource can’t sell a subscription to Gap because it’s a sale that might have gone to WWD?

The ETOA Act has attracted little publicity so far. But it strikes me as a completely destructive of any kind of trade negotiations between the US and the rest of the world.

Is there anywhere left for Britain to do business with?

Insight 3: Knock-on from Trump

Between now and September 2017,  five EU nations – Italy, Austria, Holland, France and Germany –  have elections planned. All now have growing populist movements with “favour the locals” ambitions that make Britain’s government look almost an obsessive advocate for European unity.

Now it’s almost certain that Britain would have voted to stay in the EU if the EU hadn’t been so adamant that Britain had to offer its full (and generous) range of social benefits to any arriving citizen of another EU country: give Britain an opt-out of one “basic right”, the other 27 argued, and every country would want to opt out of something else.

But the chances now that at some time in the next year, at least one other major member – very possibly France – will want something far more subversive to the EU’s principles if it’s to keep its newly popular populist party from demanding secession as well.

Can the rest of the EU really continue to tolerate the absence of Europe’s most committed free trader if France’s Marine Le Pen is demanding Customs inspections at every EU border?

Insight 4: Is China really that desirable a trading partner?

A US Congressional report issued on November 16, but written on October 9, makes gloomy reading for anyone thinking a trade agreement with China would be a good alternative to EU membership.

While the US-China Economic and Security Review Commission had never been a fan of closer links to China, its 15th annual report is more depressing than any of its predecessors about prospects for anyone expecting to sell more to China, which it claims has a simple view of businesses turning up on its doorstep. China, it claims

  • pursues import substitution policies,
  • imposes forced technology transfers
  • engages in cyber-enabled theft of intellectual property
  • obstructs the free flow of information and commerce.
  • is becoming a less welcoming market for foreign investors with a host of restrictions and anticompetitive laws that proscribe foreign participation in broad swathes of the economy and promote domestic companies.
  • extensively subsidises favoured local companies and sectors,  putting international competitors wishing to export to China at a distinct disadvantage.

“It has become all too apparent,” the report states, “that the CCP [Chinese Communist Party] has no intention of opening up what it considers key sectors of its economy to significant U.S. or foreign competition and control.” And According to the American Chamber of Commerce in China’s 2016 Business Climate Survey, more than three-quarters of surveyed US companies reported that they felt foreign businesses are less welcome in China than in years past.

So what does this mean for Brexit?

Who can predict? As the impact of Trump and growing hostility to free trade elsewhere sinks in, will leaving the EU’s Single Market really look so attractive in a year’s time?

Or could  a TPP2 be rapidly stitched together, with Britain rather than the US as its biggest English-speaking member? And could Britain tell the rest of the EU that the only way they’ll be able to join quickly would be if they dropped the ban on Britain negotiating elsewhere?

A scenario in which Britain’s voting to leave the EU last June meant staying in Europe’s Single Market, while joining Canada, Australia, New Zealand, Singapore and seven other countries in a global plan committed to free trade?

Wouldn’t that be nice?