LONDON, United Kingdom — “We’re undergoing a structural transformation in which politics is being redefined along the fault line of globalisation… Those that embrace globalisation, and those that are left behind by globalisation," Alexander Betts, Leopold Muller professor of refugee and forced migration studies at Oxford University, told audiences at VOICES, BoF’s first annual gathering for big thinkers last December.
As growing internet access, travel and trade have accelerated the integration of global markets and the worldwide exchange of ideas, information, people and products, some have benefited far more than others, giving rise to a surge of nationalism across the Western world, rooted in a rejection of globalisation and reflected in the election of Donald Trump in the US and Britain’s vote to leave the European Union. “When we look at the [Brexit] voting maps, there is an almost-perfect correlation between the voting patterns of those who wanted to leave, and the hollowing out of labour-intensive manufacturing,” explained Betts. “Those who wanted to stay live in areas where the dominant sectors are professional, financial, technological and innovative.”
With its global supply chain, international talent pool and dependence on new wealth creation, upward socio-economic mobility and optimism to fuel spending, fashion has benefited greatly from globalisation and stands to suffer in a new political reality that could give rise to new curbs on the free movement of people and products, and breed greater uncertainty at a time when many consumers are already feeling less secure.
New barriers to trade
For fashion, the most drastic consequence of the political shift away from liberalism is the resurgence of protectionist trade policies. Many fashion businesses have spent years building up global supply chains and outsourcing vast swathes of their production to manufacturing hubs in China and South East Asia. In fact, about 97 percent of clothing and about 98 percent of shoes sold in the US are imported from overseas, according to the American Apparel and Footwear Association.
As one of his first actions as president of the US, Donald Trump pulled out of the Trans-Pacific Partnership, a 12-nation agreement that was designed to encourage trade between a bloc of countries — including Vietnam, Japan and the US — by reducing import and export duties. Trump has also threatened to introduce punitive tariffs and quotas to restrict the importation of goods from countries like Mexico and China.
In bid to encourage businesses to reshore manufacturing, the US president has backed a so-called “Border Adjusted Tax” prompting fierce opposition from a coalition comprising over 100 companies from Nike to LVMH. The measure would be “absolutely crippling” for businesses, says Robert Burke, chief executive and chairman of Robert Burke Associates, a retail advisory firm. “It would virtually put businesses out of business immediately… Brands have spent years and years developing production and mills in foreign countries. [They] are not set up for a quick change on this. If there is going to be any kind of evolution in bringing jobs and production back [to the US], it has to be done strategically.”
Certainly, reshoring production would allow some businesses to play on the appeal of movements like “Made in America,” which have been gaining momentum. But the West — after losing ground to Asia for decades — currently lacks the skilled labour pool and the modern equipment necessary for mass garment manufacturing. What’s more, the high cost of labour in the US and Europe would also all but eliminate product margins and make it impossible for companies to maintain current prices. “Some [American workers] are making $15 or $16 dollars an hour — in a day, they make more than someone in Bangladesh makes in a month,” says Edward Hertzman, founder and chief executive of Sourcing Journal, a trade publication focused on fashion’s supply chain.
The industry has struggled to sell clothing that is manufactured overseas for exorbitantly low rates... how are you going to get people to buy clothing that’s four or five times the price?
Indeed, according to Americans for Affordable Products, the coalition formed to oppose the “Border Adjusted Tax” plan, the tax could result in a 20 percent price hike on everyday items including clothing. In today’s subdued retail market, this would be devastating. “The industry has struggled with getting people to buy clothing right now that is manufactured overseas for exorbitantly low rates unless it’s discounted heavily, so how are you going to get people to buy clothing that’s four or five times the price?” asks Hertzman.
The situation in Europe is equally bleak. “If the new [post-Brexit] trade agreement is not favourable and suddenly we have all of these additional taxes and import duties put on stuff, that’s going to affect the pricing of products coming into the UK,” says Fflur Roberts, global luxury manager at Euromonitor. “Somewhere along the line, someone’s got to pick up that bill… I’d imagine at the end of day the consumer will have to pay.”
While the actual terms and conditions of Britain’s departure from the EU remain unknown, it would be “politically untenable” for the UK government to pursue a so-called “soft Brexit” option where the country remains part of the European single market, explains Dr Peter Holmes of the UK Trade Policy Observatory. A more likely scenario would see the UK losing its favourable trading status and “dealing with the EU like any other member of the World Trade Organisation.”
“Ultimately, anything that limits free trade is not good for global business,” says Mario Ortelli, a senior research analyst at Sanford C. Bernstein.
Curbs on talent migration
The decline of liberal values across Europe and the US has also manifested itself in calls to restrict immigration. Less than two weeks after his inauguration, US president Donald Trump issued a highly controversial executive order barring anyone from seven Muslim-majority countries — including Syria, Iraq, Iran and Sudan — from entering the country. (The ban has now been lifted following legal challenges.) Meanwhile in the UK, Prime Minister Theresa May has refused to guarantee EU citizens living in the UK the right to remain after Brexit. In turn, British citizens’ freedom to live and work anywhere in the EU will almost certainly be revoked. For the fashion industry, which depends on a global talent pool, restrictions on immigration are bad news.
“Brands have a worldwide audience. They need to have an understanding of the world. In order to do so, they must be able to access and hire the most qualified profiles in every field, from entry level to C-suite,” says executive search consultant Floriane de Saint Pierre. “Companies absolutely need to hire the talent they need — so to have free movement of talent.”
A tightening of immigration policy will likely not have a huge impact on top-level personnel. “If you’re the best design director in the world and you’re based in the UK and Bernard Arnault wants you, he’s going to get you — whatever the political situation is,” says Moira Benigson, managing partner of specialist executive search firm The MBS Group. “Top-level design talent usually don’t have a lot of constraints to get a working visa in the US or Europe, because they are very skilled individuals with a unique skillset,” agrees Ortelli. But some of the fashion schools that train top design talent‚ like London’s Central Saint Martins, would certainly suffer from stricter border controls. “Generally, schools that are not international will be less interesting,” says Benigson.
And the situation is very different at lower levels of the fashion industry. In the UK, 15 percent of workers in retail and related wholesale operations were born abroad, with 6 percent coming from the EU, according to Oxford think tank Migratory Observatory. Across Italy and France, many of the highly skilled artisans working in the manufacturing ecosystems of large European luxury brands come from all over the world, says Ortelli. “The limitation of visas could be dreadful for this sector.”
Dampening tourist flows
Rising uncertainty, a less welcoming political climate and restrictions on travel would also undermine tourism, a key source of sales for the global fashion and luxury industry. Indeed, according to a 2015 report by Bain & Company, a consultancy, tourists are responsible for more than half of the luxury goods spend in Europe.
“If you make it more difficult for people to travel around, the consequence is that the touristic flows will probably decrease,” Ortelli says. The drop in tourist travel to Paris following a wave of terror attacks in Europe, demonstrated just how dependent sales of fashion and luxury goods are on tourism.
And while tourists from the seven countries barred from entering the US don’t account for a significant portion of the country’s fashion and luxury spend, these sorts of restrictions send off-putting and unpleasant signals to all potential visitors. “Even people from countries that aren’t on the list — lots of people generally won’t feel like they’re welcome or won’t want to go to the US,” says Roberts. “Likewise in the UK, people just don’t feel welcome.”
Of course, some brands, like Burberry, have enjoyed short-term gains as, in the immediate aftermath of the Brexit vote, Britain briefly became the cheapest place in the world to shop for luxury goods after the pound fell to a 30-year low against the dollar, attracting tourists to the country. “But the exchange rate won’t be as low as this forever. Or, failing that, retailers will eventually adjust their prices,” says Roberts.
Eroding consumer confidence
Whatever the long-term policy outcomes, recent political shifts in the US and Europe are feeding increased anxiety for many, with serious implications for the emotionally-driven fashion industry. “In the US, there’s so much anxiety on the streets and so much uncertainty, it’s going to affect overall spend,” says Roberts.
In America, the election of Trump caught many by surprise. The rich, who may benefit from Trump’s plans to cut taxes, are feeling more buoyant than most. “The very high net worth consumer is relatively confident that there are going to be tax cuts… and that they are going to end up with more money to spend,” says Burke. “But overall, the consumer is very uncertain about what the future holds and is in a wait-and-see mode.”
“Uncertainty is not good for luxury spend,” adds Ortelli. “Luxury is supported by economic growth and stability. The consumer buys luxury products when they are reassured that they can afford their mortgage and the school fees for their kids.
“It’s a business of happiness.”