Brexit: impact on textile industry in Africa

October 3, 2016

The economic impact of Brexit is for now and the foreseeable future, mostly that of added uncertainty and impending change. This makes any scenario-based analysis on the situation reliant upon a number of hypotheses and assumptions. Yet, highlighting the potential impacts of Brexit is a pertinent exercise for understanding and managing external risks.

 

In the short term, the UK’s immediate need to focus on negotiating its status with the EU will likely mean trade deals with non-EU countries are unlikely to change radically. However, due to the resulting uncertainty and the pounds’ strong depreciation, British business has already become more expensive. A weaker pound makes trade-deals more expensive for British business, leaving businesses to either shoulder the costs, or pass them on to consumers. Likewise, consumers are likely to tighten their belts and spend less.

 

As a result, companies that export textile, food, pharmaceuticals and certain plastics to the UK will be most affected according to KU Leuven's professor of international economy, Jan Van Hove. Many agree that the impact of Brexit on the fashion industry is daunting, and could jeopardies talent, manufacturers and retailers within the global marketplace forever.

 

Impact on trade

In early October 2016, the UK’s Prime Minister Theresa May, announced that the government would trigger Article 50 by March 2017 - this will start the process of the UK's exit from the EU. This process can take-up to (but no more than) two years. There are two broad possible scenarios for how Brexit may be negotiated. It is important to note however, that even within those two options, different versions and complexities may be negotiated.

 

A “soft exit”:  The UK leaves the EU but remains in the European Economic Area (EEA). An option which will likely not fare well with the British ‘leave voters’ as the UK would not control its borders and immigration. Similarly, the EU will not want to give the UK all of the best parts of the pie without pitching in any of the costs, especially after its very ‘raison-d’être’ has been rejected. Yet this would be the least disruptive option for all involved as there would be close to no change to the current economic system. The impact of Brexit would mostly remain that of two years of sluggish markets and uncertainty, but which non-the-less could lead to a European recession.

 

A “hard exit”: The UK is voted out of the EEA and European Single Market. This will allow the UK to ensure greater control over migration policy, one of the main arguments for those in the ‘leave’ campaign. The EU might also be inclined to push for this option in order to swiftly close Pandora’s Box, and dissuade others from leaving the EU. While this option seems to answer some of the main challenges for both parties, it is also the most disruptive option for all concerned.

Trade policy for EU Member States is conducted exclusively at the EU level. Thus in case of a ‘hard Brexit', all the EU trade agreements of which the UK is automatically part of, would need to be re-negotiated on a bilateral basis. If the UK is no longer part of a unified market, then it can create its own trade rules and impose (or not) tariffs. While this would give the UK more flexibility, it is also likely that its bargaining power would be considerably reduced without the weight of the EU block.

 

Sub-Saharan Africa

Analysts have stated that the Brexit would weaken trade ties between the UK and African nations. Firstly, because the renegotiation of trade agreements can be a lengthy process, and secondly because African countries are unlikely to be amongst the UK’s first priorities. Looking at the bigger picture, this is not likely to affect Sub Saharan Africa’s economy as a whole too much, as the UK only represents 5% of its total exports. However, this does vary from country to country, and for the likes of South Africa and Mauritius the impacts are more important.

The Mauritius Export Association (MEXA) has warned that revenues from the UK has decreased strongly, affecting largely the fashion/textile sector. Exports of Textile & Apparel to the UK amounts to Rs 6.5 billion, of which Rs 246 million is earned from yarn, together representing 13.5% of total exports, covering around 20,000 jobs, and 1% of the GDP of the country. While exports of the seven largest companies to the UK makes around 20-60% of their total exports; exports of the eight medium-sized companies are highly concentrated, representing at least 80% of their total exports.

 

In the long-term however, a post-Brexit Britain will be looking at strengthening its relationships with fast-growing emerging markets. The UK is likely to focus on the 19 Commonwealth nations in Africa, with which it shares a language, history, and system of government. This could present some real opportunities for Africa to build on bilateral trade that are more advantageous than the current EU deals. With a ‘hard Brexit', African governments may benefit from better negotiating positions than they are accustomed to having. Additionally, the UK would have the opportunity to demonstrate its commitment to open and fair trade by designing an innovative, pro-development preference scheme that builds on existing good practice.

 

Solutions for Mauritius

In the short-term, the bigger problem will be for those eight medium-sized textile companies highly dependent on the British market and who might not have the capital to last two years of uncertainty and a drop in consumer demand. With the African Growth and Opportunity Act (AGOA) providing the Mauritian textile industry with exemption from customs duties for their export products to the United States, the US would be a natural market to rely more on. Aside from looking at other markets and the short term macro-economic measures that the government could take to soften the blow, these companies will need to make the necessary structural, strategic and operational changes in order to ‘adapt or die’. Adapting to change must be a relentless, day-to-day activity, which begins with understanding externalities and exposures. 

 

While Mauritius is not one of the fast growing emerging market, it is part of the commonwealth and the most stable African nation, constantly topping the lists of the World Bank’s ‘doing business’ and other similar benchmarking tools. Therefore, while Africa may not be a priority for the UK - Mauritius might very well be a priority within Africa. Mauritius could ensure its place at the negotiating table by ‘getting its ducks in a row’, and starting stakeholder sessions with the most impacted sectors in order to discuss their needs and best possible negotiating positions. Those in the textile industry have an important role to play here, and could all together form a powerful lobby to impact any potential new trade-deal with the UK for the better.

 

(Sources: Royal African Society, Mauritius Export Association, Le Mauricien, The Brookings Institution, BBC news)

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