Britain’s decision to exit from the European Union is likely to heighten the uncertainty in garments and other sectors in India. Karthik Muthuveeran analyses its impact on textiles.
The Brexit impact is not only limited to Britain, but also European countries. London has always acted as a financial hub, which gives access to capital markets of the world to Europe. But with Brexit, European Union will end up having a limited access to capital markets. In all likelihood, access to this market will form a key part of trade negotiations. There are as many pros as cons in Britain exiting the Europe.
Experts say, Brexit impact could lead to a rise in apparel prices. With falling pound it is likely to impact consumer prices and imports in Britain. The cost of a weaker pound impacts all retailers, which may be passed on to consumers, thereby making clothes more expensive for the end consumer.
Now, the biggest question is: Will Brexit impact the textile industry? If yes, which segments will be impacted?
Dheeraj Talreja, Commercial Director – South Asia, Middle East & Africa, Huntsman Singapore Pvt Ltd, says, “The UK is one of the key markets in the European Union, accounting for about 10-11 per cent of apparel exports from India and among the top three countries for India’s apparel exports. The key end-use segments are apparel especially knits. The historical referendum leading to Brexit, has created an impact on the UK economy and consumer sentiments which will have an impact on the Indian textile industry from short to long term.”
He adds, “The consumer sentiments in the UK have been adversely affected and it is too early to predict how the future will unfold until the formalities of Brexit are worked out in detail. The softness in demand is expected to continue in the near term.
Brexit has also created turbulence in the currency market and might impact apparel manufacturers due to currency impact.”
Talreja was also a bit optimistic. He says, “With every challenge, there arises opportunities and Brexit may create opportunities for Indian industries. The UK used to source high-end textiles from India before joining the EU. After which they switched to other EU nations such as Italy. With Brexit, and subject to the existence of an FTA between India and the UK which provides for preferential duties and taxes, there is a possibility for Indian manufacturers to increase exports to the UK. The segments which may benefit from such an agreement are apparel such as knitwear, shirting and other garments.”
Alan Little, Association Director, British Textile Machinery Association, thinks it is too early to give a statement as to whether it will affect the UK textile machinery trade as they are at least two years away from the Brexit becoming effective. He adds, “If we look at the stock market, the British FTSE has gained for four weeks in a row, but BTMA would still reserve judgment until later.”
The Apparel Export Promotion Council (AEPC) expressed its apprehension over UK’s exit of the European Union. Ashok G Rajani, Chairman, AEPC, said, “Britain is our largest market in the European union accounting for around 30 per cent of our exports to the EU. Its exit would significantly dilute the relevance of EU Free Trade Agreement (FTA) for us.
Also, the expected volatility in the markets and currencies will be coming at a time the industry is trying to revive from a five month decline since January this year.”
All the nations having trade relations with the EU including India are of the opinion that Britain should have stayed as that would have made it easier for them to move money, people and products from around the world. India has been holding negotiations with the EU to conclude a FTA since 2007. The apparel industry has been eagerly looking forward to the India EU FTA as the most important market expansion strategy as EU has been an important market for apparel. Though its share has come down over the years from 45 per cent to 37 per cent, due to strategic efforts at market diversification, it remains the largest market for India.
Rajani adds, “Brexit is not expected to impact the EU FTA process or timelines but the developments in that respect will take a backseat with Britain out of the picture. With Brexit on, the only way to expand business in the UK, would be through bilateral negotiations, which would mean a new set of negotiations and a longer timeline. At present India enjoys a 20 per cent tariff preference in the EU under its GSP programme.
It is to be seen how this gets impacted after Brexit, for exports to UK. It would also be interesting to see how the competition unfolds in the EU, with countries with zero duty benefit in EU also loosing out with Britain’s exit. The world waits with bated breath to witness the consequences of Britain exiting the EU, which were speculated to have widespread impact on all sectors.”
Even RS Jalan, Managing Director, GHCL thinks that the exit of Britain from the European Union will create ripples in the global economy and markets.
He says, “Consolidation of the currency will probably have a certain impact for exporters and they are going to lose some percentage of their monetary value because of currency volatility. But this distress will hopefully ease off in the long run. Britain from now on, will not be governed by guidelines of the EU and we hope that, as a nation, it will frame friendlier policies and laws which will facilitate in ease-of-doing business. We strongly hope that, as a nation, Britain will extend more of its support in terms of investment and capital flow in India and will be a freewheel in terms of entering into any trade agreement.”
“Brexit could possibly see the FTA being finally agreed upon. While Britain is free to enter into the agreement after exiting the EU, the chances that EU can also take this plunge seems likely to happen. A reasonable percentage of Indian apparel and garment is exported to EU countries and this may trigger the cause of entering into a FTA, adds Jalan.
Dr SS Rajpathak, VP – Commercial, Garware-Wall Ropes Ltd, thinks otherwise. He avers, “Brexit will not have any significant impact on technical textile exports, as Indian technical textile industry is quite robust and has a huge market potential across the globe. Though it is too early to react, Brexit came in just two days after the new textile policy was announced by the centre, which is focused on creation of one crore jobs as well as enhancing manufacturing and exports. Reiterating Brexit’s nominal impact on the textile comes from the fact that the entire West Europe accounted for less than 7 per cent of the total fibre and yarn exports in 2015-166, whereas the UK stood at just 0.2 per cent. Interestingly, Europe makes up for 46 per cent of apparel exports of which Britain’s share is 40 per cent.”
GSP will play a major role post Brexit as India currently enjoys 12 percent tariff preference in the EU under its Generalised Scheme of Preferences programme. Although Europe is a large market for India, it is more or less saturated now and hence high value added products, in all probability is expected to pick up in the coming years.
Adds Dr SS Rajpathak, “However on the other hand, EU being a major destination for readymade garments with UK being a lead market, Brexit could be a concern to the garment exporters as they have been trying hard for conceiving a separate trade treaty with Britain.
Overall, India’s strong macro-economic environment and a stable, predictable and transparent policy regime would not only effectively combat the Brexit impact but will also nurture India as an attractive destination for investors in a volatile global scenario thereby fuelling further growth.”
Textile machinery manufacturers’ body India ITME Society does not see any immediate threat from Brexit, its Chairman Sanjiv Lathia has said. He adds, “England is not a big buyer of textile machinery. Textile manufacturing moved away from England long ago to China. So we don’t see much impact on Indian textile machinery manufacturing.”
Lathia says, “Though it is too early to react, it has come just two days after new textile policy was announced by the Centre which focuses on creation of 1 crore jobs as well as manufacturing and exports.”
Sanjiv Khandelwal, Co-Founder and CEO, XSTOK.com, says, “With the referendum to quit European Union, the impact on India’s textiles export to Great Britain will be minimal although it is a major market for apparels made in India. However, there could be initial turmoil due to structural changes and fresh negotiations being finalised. In perspective, EU imported textiles worth $235 billion in 2015 from the world.
Of this, UK accounted for 15 per cent or $35 billion.
Thus, the country is one of the largest markets for textiles including fibres, yarns, fabrics, apparels and other textile products. However, it is not a major supplier of this industry and thus will have negligible impact on sourcing.” For India, export to UK account for less than 7 per cent of total textiles but more than 10 per cent in case of apparels. In 2015, exports to UK aggregated $2.41 billion including $1.81 billion of apparels alone. This shows that trade between India and UK becomes pertinent for apparel. Although it is a large market for India, it is more or less saturated now. But it will be a growing market for high value-added products in the coming years.
“The major impact of Brexit will be on booked export orders of textile and handicrafts because both the currencies will be affected due to Brexit,” said the Indian Exporters of Textile and Handicrafts.
Impact on other countries
Like many other countries, economists and analysts in Dhaka also expressed apprehensions about probable negative impact of UK’s exit from the EU, among which are losing duty benefits on Bangladesh’s exports, decline in remittance inflow and volatility in the foreign exchange market. Dhaka Chamber of Commerce and Industry (DCCI) has also urged the Government to immediately take into account possible consequences and take precautionary measures to deal with the developments, besides requesting the Government to initiate focused bilateral discussions with UK to find alternative way outs and avoid unforeseen economic repercussions. In the wake Britain’s exit from the EU, the Government has now reportedly decided to form a committee to fix the next course of action.
It may be mentioned here that Bangladesh enjoys full duty- and quota-free access to the EU for all its exports with the exception of arms and armaments under EU’s ‘Everything but Arms’ arrangement. Since UK left the EU, Bangladesh now will have to renegotiate trade agreement with the UK after two years, since the decision of leaving the EU will come into effect after 2018 only.
As far as bilateral trade ties between Vietnam and the UK are concerned, experts are of the opinion that the situation will remain a little tough at the moment, but there will be no major impacts from the Brexit in long term. Vu Duc Giang, Chairman of Vietnam Textile and Apparel Association (VITAS) is of the opinion that UK’s decision to leave the EU will have certain impacts on the roadmap to realise FTA between Vietnam and the EU in the coming time. In the immediate term, export orders to the UK are unfazed. There will certainly changes in the longer term but I believe there will be no severe impact for Vietnam’s textile industry.”
EU trade surge in TT and clothing goods
E xports of man-made fibres outside of the EU have regained their rate of growth these past years and rose by +4.5 per cent in value during 2015. There were some changes in the ranking of the EU-28’s main customers, although the US remained the EU leading customer. Despite the downward trend in the production volume of thread and yarn, in 2015, the volume of exports outside the EU was unchanged. The value increment noticed (+4.8 per cent) stemmed above all from the price of the raw material imports which became more expensive with a weak euro.
Woven fabrics’ exports went down for the first time in several years (-0.4 per cent). Regarding the main buyers of European fabrics, Morocco held onto top place with an increase of +2.1 per cent in value, thanks to its purchasing of discontinuous synthetic fibre fabrics (+13.6 per cent). 2015 was a somewhat difficult year for the knitted fabric representing 5.7 per cent of EU-28 textile exports. These exports remained almost stable in value terms. Morocco and Tunisia were still the main buyers of these articles even if trends were different.
Exports of carpets recovered in value (+2.6 per cent), with slightly higher unit prices (+2.1 per cent). This sector accounted for a little over 4 per cent of textile exports. Customer-wise, the US and Switzerland were the main buyers. In 2015, exports outside the EU of home textiles recorded growth (+4.7 per cent on average).
Of all the products in this category, the main one – bed linen (with a share of 38 per cent) - saw its exports climb by +9.2 per cent. Switzerland and the US were still the two major buyers of home textiles.
Technical Textiles continued to represent a very large share of textile product exports outside the EU.
This change was reflected in a +5.3 per cent increase. The US was the main customer in this category by a broad margin – buying 19 per cent of goods, an increment of +13.4 per cent.
EU-28 menswear exports still accounted for 23 per cent of total exports in the clothing sector thanks to +3.8 per cent growth in value terms. Mirroring the situation of menswear, womenswear exports outside the EU-28 increased +6.3 per cent. This sector accounted for more than 40 per cent of all clothing exports outside the EU.
The 2015 evolution of imports indicates a growth in all products of the value chain, with the largest increase in technical textiles and womenswear. With production of textile products in the EU-28 on a downward trend, foreign demand for man-made fibres edged up slightly by +6.3 per cent in value terms. With a 28 per cent market share in terms of volume, South Korea was still the main supplier. Owing to the continued shrinkage of activity in the downstream, the volume of imports of yarn and thread from outside the EU slightly increase (+2.4 per cent), they also felt the backlash of the euro’s fall. As was the case for all other imported textiles, the euro’s decline brought about an 8.1 per cent increase in the value of imports of all types of woven fabrics. Imports of cotton fabrics represented the lion’s share in value (31 per cent) and rose by +2.4 per cent.
About 87 per cent of the value of EU knitted Fabrics’ imports were divided up among three countries: Turkey, China and South Korea. Imports originating in these three countries progressed by respectively +39 per cent, 36 per cent and 12 per cent.