Despite an uncertain trade environment, people will always want to buy denim, jeans and clothes

Despite an uncertain trade environment, people will always want to buy denim, jeans and clothes

There's no doubt the perceived impact of globalisation, Britain's decision to leave the European Union, and a US presidential election campaign tinged with protectionist rhetoric are casting a shadow of uncertainty over the global apparel industry and its supply chain. But potential ramifications are still some way off, according to a panel discussion at last week's Kingpins denim sourcing show in Amsterdam.

"In trade terms, nothing is likely to change for two years," Mike Flanagan, chief executive of sourcing intelligence consultancy Clothesource, says of Britain's Brexit vote.

"If you're doing business with Britain you cannot know what's going on in two years' time – but you have almost total certainty about what's happening for the next two years: we will remain part of the EU."

Likewise, Bob Antoshak, managing director at Olah Inc, the New York-based marketer of denim fabrics, considers it will be "hard to see Washington moving very dramatically unless there's a really dramatic mandate that comes from the American people," following next week's US presidential election.

Also speaking in the discussion on 'Politics, Trade and the Economy – What's Next?' Andrew Olah, founder of the Kingpins event and CEO of Olah Inc, believes manufacturers will continue to need global production to deliver orders, "because customers are always going to provide cheaper and cheaper garments. And they [will] keep going [to lower wage countries]."

Dr Christian Schindler, director general at the International Textile Manufacturers Federation (ITMF), agrees. "What's certain is that there will be trade in the future too; there will be production around the world, so sourcing destinations are not only based on trade agreements."

He continues: "Trade volume will increase, the global population is increasing, global GDP is increasing, China has created a middle class of 500m people, so the big markets are now in Asia, and the future of retail is also in Asia. Life goes on: people want to buy denim, jeans, clothes, and there will be more people to buy them in the future."

While Matthijs Crietee, secretary general of the International Apparel Federation (IAF) adds: "As a company, all you can do is look at the scenarios that are possible and then look at your own situation and what it could mean for your company – but don't over-react."

Winners and losers

Globalisation has undoubtedly been good for the apparel industry in general, but there have been losers too.

"Globalisation – or increasing free trade – has helped a lot of people enormously; more people have been dragged out of poverty in the developing world in the last 20 years as a result of what we do than at any time in history," Flanagan says.

"But a lot of people have done badly out of it, particularly the very poor in the West, in Europe and North America – and those people are hurting and they're making their voices heard."

Globalisation is good, but it must be managed, agrees Dr Schindler. "Many textile companies in Europe have disappeared, but those that are left have survived and either created niche markets or have gone into technical textiles or have become experts in specific areas of apparel. The key here is compensating the losers in economic terms and not leaving them behind."

In Canada, Olah explains, "the perspective is that globalisation has cost us our entire manufacturing industry. And there are lots of nations that cannot compete, even developing nations. So there are losers in both the developed and the developing nations."

"Under the old regimes of quotas and restricted trade, from our industry's standpoint I think we had less choice in terms of what options were available to offer customers," Antoshak notes, adding: "At the same time some of those customers have done extremely well from a more globalised economy, whereas others have been left behind.

"A fundamental challenge going forward on trade policy, I think, is whether the political mechanisms will help support and compensate those who have fallen behind because of globalisation, while at the same time not roll globalisation back, because it has been a positive force in the world. Globalisation has made variety possible, has made alternative sources possible."

Globalisation or localisation?

But is the apparent backlash against globalisation and free trade likely to mean an end to having clothing made abroad?

"In the short term, the argument that we'll all be making near to the customer is very good on paper," says Flanagan. But he adds that in both the US and Europe "the number of people working in apparel manufacturing has declined every year for the last 20 years", as has the amount of garments made in Western Europe and North America.

The reason, he believes, "is the almost impossibility of finding local staff to make clothes. And there's no evidence anyone has found a solution to that, except for freer immigration. And the one threat to globalisation – which is Britain leaving the EU – actually denies access to highly skilled Eastern European migrants. So in Britain's case we will see fewer garments made in Britain."

Driven by a restructuring of sourcing opportunities after the end of the quota system, Dr Schindler points out that at least 50% of world investment in new upstream textile machinery – such as spinning, weaving, knitting, finishing and texturing equipment – between 2004 and 2010 was in China.

"In the last five years, China's share has fallen very slightly, [but] it's not as if China is going to disappear," he notes, pointing to strengths that range from manufacturing clusters, to the availability of fibre and manpower, and the opportunity to relocate to cheaper regions within China. "This is not possible anywhere else in the world."

However, Antoshak observes: "One of the ironies is the fact that globalisation is going full circle and becoming localisation; there are companies that have come back and done very well in the US market, and in many cases the investment behind these new mills are coming from Asia."

In the more labour-intensive apparel industry, "the sewing goes where labour costs are low," Dr Schindler notes. Even so, looking into the future "technology will play a huge role, because automation will eventually also make its inroads into apparel production; many people don't see that yet, but we already have companies where robots are doing part of the work.

"So I see some shifts within Asian countries and to other countries in Europe, South America. But I don't see Africa taking off any time soon."

Flanagan agrees automated manufacturing is likely to be the biggest disruptor to the trend for sourcing abroad.

"At some point in the next 50 years [this is] going to be much bigger than it is today and it makes a great deal of sense for automated manufacturing to be located close to the consumer and, as is often the case in the US, close to where the raw materials are."

Crietee notes that trade flows are not necessarily affected by higher rates of duty, "so even if you're getting a more difficult climate for trade globalisation I don't think it's [manufacturing] coming back."

He points out that "apparel exports from near-sourcing countries like Tunisia have been decreasing over the last ten years, while imports from countries in Asia are increasing," – even though Tunisia is closer to the European market and benefits from zero tariffs compared to China's 12%.

Likewise, Dr Schindler notes that investments in Vietnam are also driven by "proximity reasons with regards to suppliers from China, cheap labour, good support from the government, cheap energy. Whether or not there is a tariff to the US at the moment doesn't seem to make a difference."

Manufacturers of the future, wherever they are, "will be forced to have global production to deliver orders," Olah believes, pointing out that "if you're a supplier in Bangladesh you might get 65-70% of the business but the other 30% of the business model should be invested to support the group of suppliers that your customers need, because the customers are always going to provide cheaper and cheaper garments."

Brexit: opportunity or threat?

"We're getting a conflicting overall view on Brexit for business: politicians are having to negotiate and negotiating means being vague for as long as possible. But for business it is important that there is clarity about what's going to happen," explains Crietee.

He believes companies should not over-react, "but really focus on your specific situation and a couple of scenarios that could happen," such as a so-called 'Hard Brexit' where the UK will lose all of its trade agreements.

"If you're buying all your products from China, probably not much is going to happen because you're not trading under a preferential agreement anyway. But where most of it is coming from Turkey, where Turkey has a customs union with the EU, well then the effects are going to be very big."

Brexit is "not good news for anybody; it's a lose-lose situation economically and politically," is the view of Dr Schindler.

"The retailers and brands have higher input costs which will squeeze margins, and they'll increase prices which will make it more difficult for them to sell, so consumers will not demand as much as before; possibly they will ask suppliers for even lower prices due to the lower pound," he continues.

Antoshak points out that initially after the Brexit vote "the market went in the other direction, sales went up, the economy seemed to strengthen. But it's interesting how world markets seem to work: now the pound is under a lot of pressure, the price of imports is more expensive, and for certain basic products such as clothing, prices are going to be even higher.

"On balance I'm of the opinion that without intervention [from the Bank of England] inflation is going to become a problem for a lot of British consumers, and in turn weigh down the economy of Britain."

Flanagan agrees that the biggest uncertainty during the two years that Britain goes through the process of leaving the EU "is how bad will British inflation be, how deeply will British currency depreciate."

But he also believes "the British government is quite relaxed about seeing the currency depreciate a lot; it is not prepared to increase interest rates, which it believes will damage the economy more than depreciation of the currency."

Instead, he points out that in volume terms, the UK is Europe's largest importer of clothing from outside the EU – and is "on nearly equal footing with Japan as the world's second largest apparel importer."

Emphasising this point, he says: "The volume of clothing imported [into the UK] is bigger than China plus Russia plus Brazil plus India put together. And there is no way in the foreseeable future that will cease to be the case. So wherever you're making, the British market is probably more important to you than you realise."

He also adds the Brexit process is unlikely to begin until March of next year and has to be finished within two years, "so we won't be out until the very earliest spring 2019. Until we are out we cannot negotiate [trade deals] with any third countries.

"Britain is not remotely interested in closing its borders to trade. Brexit was a movement against immigration, against corruption in the EU, against the cost of the EU and against absurd regulations coming from the EU. It is not against trade."

US trade policy

On the other side of the Atlantic, trade has become a big issue in the US election – and for Antoshak, the key question of how trade policy may be impacted "will depend on whether the election is narrowly won one way or the other, or whether there's a significant landslide in favour of one party or the other. And I think that will come back to manifest itself in things like TPP (the Trans-Pacific Partnership trade deal).

"Yet there's also business realities of global supply chains that will not be easy to ignore; so what that turns into will be unplotted territory. I think we are in a precarious situation."

Flanagan thinks it unlikely that any new trade agreements are going to be signed for the next few years. "Apart from that, we're saying nothing is really likely to change; we're not saying trade is going to decline, simply that no new deals are going to be done."

But the point he emphasises is that "there is a real risk governments have decided, or will decide, to do things that are not in our industry's interests. And yet there has not been a single, credible argument from any retailer or brand in public that TPP, if it's passed, is of any benefit whatever to American shoppers or voters.

"Unless the industry persuades voters and shoppers that these trade deals are of some use to them, then what is the point of wasting taxpayers money on having civil servants negotiate them?

"If we're not prepared to say how many jobs they would create or why they're good for shoppers, the public will draw the conclusion that there's some cynical politician's motive behind all this, and they'll keep on voting against them."