How Will Brexit Affect Textile Industry?

Time: 2016-06-27
Summary: Companies that export textile, food, pharmaceuticals and certain plastics to the United Kingdom will be hit most by the effects of a Brexit, says KU Leuven's professor of international economy, Jan Van Hove.

Companies that export textile, food, pharmaceuticals and certain plastics to the United Kingdom will be hit most by the effects of a Brexit, says KU Leuven's professor of international economy, Jan Van Hove.



Cheaper pound and trade limitations

Economists say there are two areas the Brexit will hit Belgian companies the hardest when it comes to trade and retail: first and foremost, the exchange rate, because a currency devaluation will make imported goods (considerably) more expensive. At the same time, it will benefit British competitors. Immediately after the referendum's results were revealed, the pound dropped to its lowest level since 1985, compared to the dollar. However, as the euro also faltered compared to the dollar, the pound "only" lost slightly more than 5 % compared to the euro.


The second area is more of a long-term effect: If the United Kingdom is no longer part of a unified market, then it can create rules and impose tariffs that may slow trade. Likewise, the European Union can also harden its stance on the import of British goods. Plenty needs to be discussed between both sides before a clear impact can be seen. Considering the intensity of trade between the United Kingdom and the European Union, both trade groups will probably (need to) sit down and write down new deals.


It is far too early in the process to see which way these talks will go. Will the United Kingdom remain in the European Economic Area, like Norway and Iceland, or will it move towards the European Free Trade Association, like Switzerland? Maybe it will just create multi- or bilateral treaties with the United Kingdom or individual European countries? The UK's exit has to be pinpointed within the next two years, but there is no timeframe for any new commitments whatsoever.


Smaller industry may suffer

A range of particular industries would do best to get brace for impact. Professor Van Hove says the United Kingdom is very important for several small open economies in Europe. "This holds particular truth for Belgium, with more than 8 % of its export destined for the British market. Following Germany, France and the Netherlands, the United Kingdom is our fourth largest export market."

 

Belgian export to the UK consists mostly of cars (22.8 %), pharmaceuticals and chemicals. However, Van Hove does not think these particular industries will suffer the brunt of the Brexit impact: these are by nature very export-focused industries, very active outside the British market as well. British export's relative importance to particular markets is far more decisive and that means it will have more of an impact on textile and food. For some, the British market represents a 20 % market share in their export activities. "Unfortunately, these industries will be hit first when the UK enforces a more protectionist trade policy. This may mean that Belgium, more so than other European countries, will suffer from a Brexit."


An added issue for these industries is that they carry less weight in the European scale and will probably just be a bargaining chip in any possible negotiations between the UK and European Union. Trade limitations that may appear harmless at first could have very damaging effects in the long run.

 

There are obviously other things at play as well: the United Kingdom will no longer be bound by the European VAT rules; the weaker pound may cause inflation; the local economy can shift towards other areas and all these things make it very hard to predict a possible Brexit impact.


Analysts and companies are tallying the numbers

Several Belgian companies have already begun tallying the numbers: A.S. Adventure CEO Frederic Hufkens already told Belgian newspaper De Tijd the Brexit will cost him money as the exchange rate will have its effect, while a Brexit will also damage a consumer's trust. 

 

KBC Securities calculated the impact for a number of listed companies: Ontex relies on the United Kingdom for 16 % of its turnover and has no way to even that out with local production. However, the company can even out the short-term effects because it prepared for exchange rate fluctuations. A weaker pound will only result in a 1 % net profit drop.

 

Foam manufacturer Recticel gets 11 % of its turnover from across the Channel. If the pound drops 10 %, its net profit may suffer 15.1 %, according to KBC Securities. 8 % of Lotus Bakeries' turnover comes from the United Kingdom and its net profit would suffer 1 % if the pound dropped 10 % in value, but the company also has local factories.


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