The protectionist threat to global value chains: Evidence from the Brexit shock in the UK textile and apparel industry

Patrizia Casadei and Simona Iammarino
Jul, 2024
#Trade and FDI
#EU / Western Europe
The 2016 Brexit referendum and Donald Trump’s election are often associated with the beginning of a new era of economic nationalism and protectionism, which have given rise to the cross-country emergence of discriminatory trade measures harming foreign commercial interests (Evenett, 2019; Gereffi, 2018). Between 2018 and 2019, governments worldwide introduced more than 2,000 contractionary trade policies to strengthen domestic industries at the expense of foreign competitors (Evenett and Frits, 2019). These new measures are creating a serious challenge to globalisation and international trade, which have experienced a slowdown since the 2008 economic and financial crisis (Mirodout and Nordström, 2020). This increased protectionism has been predicted to have profound side effects for international business activities and the configuration of global value chains (GVCs) (De Backer and Flaig, 2017; Van Tulder et al., 2020, WTO, 2020). Particularly, it may have consequences for the competitiveness of domestic firms involved in complex international production networks by reducing the benefits from sourcing abroad. Moreover, the impact of protectionist measures is likely to have a ‘cascading’ effect in the GVC context and to be amplified through intermediate goods that are exported downstream in the value chain (Cappariello et al., 2020).

One of the most globalised and leading export industries with a long history of protectionism is the textile and apparel (T&A) industry (Frederick and Gereffi, 2009). This is a classic example of ‘buyer-driven’ value chain, where firms such as retailers, designers and brand manufacturers, responsible for the most valuable activities in the value chain (e.g., research, design, branding, sales), play a key role in the organization of global production by linking dispersed networks of overseas manufacturing suppliers with final consumer markets (Gereffi and Memedovic, 2003). While the Multi Fiber Agreement quota system and its successor, the Agreement on Textiles and Clothing, were phased out in 2005, some forms of trade distortion have continued to affect the T&A GVC, whose exports in 2019 declined and were weighed down by political tensions and protectionist measures (WTO, 2020).

One key question is thus how protectionist trends and increased restrictions to trade affect international business activities and the configuration of GVCs. To gain insight into this topic, we investigated the implications of the Brexit trade shock - from the 2016 referendum until the formal UK’s withdrawal from the EU in January 2020 – for firms along the UK T&A value chain (Casadei and Iammarino, 2021). We relied upon data from an original survey carried out between June 2019 and January 2020 with 688 firms amongst 1) manufacturing suppliers and 2) retailers, designers and brand manufacturers as GVC actors involved into higher value-adding activities. This period was characterised by high uncertainty about future trade policy between the UK and the EU, with persistent fears of a no-deal option and the awareness of future increased trade costs under any possible scenario. While a last-minute deal with the EU was eventually signed in December 2020, non-tariff barriers such as market access restrictions, customs procedures, and administrative burden imply higher trade frictions for firms that operate internationally (Financial Times, 2021a).

The impact of Brexit on firms along the T&A value chain
The Brexit shock affected over 60 per cent of firms in the two groups under investigation. Overall, market uncertainty, sterling’s depreciation and a fluctuating exchange rate were major factors behind a large variety of consequences. Respondents complained about increased costs, particularly of imports, which resulted in higher prices, lower demand and reduced profitability of products. Firms pointed out a downturn in retail sales, following a substantial reduction in the purchasing power of UK costumers and an increase in the price of products, with several brands and high-street shops shutting down. A substantial number of respondents claimed to have experienced a slowdown in their businesses, with a reduction in profitability, investment plans and workforce. In addition to these implications shared amongst the two groups of firms, we identified a different array of consequences for suppliers and firms involved in higher value-adding activities.

Amongst Brexit-affected manufacturing suppliers (Figure 1), respondents mentioned a significant decrease in the number of orders from more cautious domestic and foreign retailers, particularly because of continuous rising costs as well as of unpredictable future tariffs and delivery times. Firms declared to have experienced increased foreign competition as well as stocked up on raw materials, which is a rather unsustainable precaution to counterbalance the impact of the shock. Indeed, anticipatory stockpiling involves additional inventory holding and depreciation costs that may reduce trade flows (Alessandria et al., 2019). Several manufacturers indicated to have lost old connections or established (or planned to establish) new ones along their supply networks, for example losing large retailers that moved production offshore, as well as switching from UK to other European or international suppliers or moving plants and warehouses to a EU country. Only 4% of manufacturers witnessed a positive effect, experiencing for example an increase in orders from UK retailers seeking to source more products domestically to avoid potential difficulties with foreign suppliers.
With respect to Brexit-affected retailers, designers and brand manufacturers (Figure 2), some respondents complained about a decrease in orders from UK, European and international buyers, and reduced ability to plan in advance and meet the demand of new potential foreign customers. Several firms claimed to have already applied (or planned to apply) changes to their supply and distribution networks, for example by moving production from the UK to the EU (and vice versa). This group of firms, particularly micro businesses usually constrained by less financial resources, appeared the most worried about the threats to their trading relationships within Europe and internationally. Concerns were reinforced by a negative perception of domestic manufacturing, which was defined as expensive and characterised by a lack of firms endowed with adequate technical skills, specialist expertise, and machineries. Only 3% of firms stated to have been positively affected by Brexit with an increase in sales particularly to the EU and US.

Did the degree and type of GVC integration matter?

The small share of manufacturing suppliers claiming to have been positively affected or non-affected by Brexit were weakly integrated into the GVC, with few if any links with foreign firms. For example, most firms that moved towards a more domestic supply chain through reshoring stated not to have faced any consequence. Indeed, trade shock and related uncertainty may lead firms involved in production stages dispersed across countries to secure timely delivery of products domestically rather than abroad (Harrigan and Venables, 2006). This may become an issue when the required competences are not available in the home country. Additionally, manufacturers supplying more international buyers were the most exposed to Brexit uncertainty, likely due to the increased cost of imported inputs that rendered domestic production more expensive and less competitive to foreign customers. The level of integration in GVCs seemed to be less significant for retailers, designers and brand manufacturers, although those businesses that recently implemented reshoring strategies were less affected by Brexit. The type of production phases offshored also influenced the impact of the shock, as manufacturing firms involved in backward linkages (i.e., intermediate inputs imported from foreign value chain partners) appeared more sensitive to it. Indeed, firms sourcing intermediate inputs and components that go into further processing may have a higher negative perception of shocks associated with a potential disruption of the entire production process in case of late/failed arrival of components (Harrigan and Venables, 2006).

What can we learn?
The 2016 Brexit referendum initiated a period of high uncertainty over future trade policy between the UK and the EU, characterized by persistent threats of increased restrictions to trade. We have shown how firms belonging to a traditionally highly globalised industry – textile and apparel – were negatively affected by the UK’s ‘protectionist’ decision to leave the EU. A variety of consequences, mostly linked to market uncertainty, were detrimental to the profitability and survival of firms operating both upstream and downstream this value chain, which showed clear signs of disruption and ongoing restructuring. Even before the signing of the new UK-EU deal, several manufacturing suppliers, retailers, designers and brand manufacturers had already applied changes to their GVC networks, with the aim of sheltering themselves from future trade frictions. Particularly as concerns manufacturing suppliers, unsurprisingly, firms more integrated into the GVC and offshoring inputs and components that go into further processing appeared more sensitive to the trade shock.

On 1st January 2021, the UK left the EU single market and customs union. As largely predicted in scholarly research (e.g., Dhingra and Sampson, 2019), many UK businesses, including those in T&A, are now struggling to effectively trade under the new UK-EU trade agreement mostly because of the Brexit red tape (Financial Times, 2021b). While it is clear that firms along the T&A value chain will have to deal with further changes to their trade exchanges and production networks, it remains to be seen to what extent such transformations will materialize and how they will affect the broader industry in the long-term. The Brexit case, however, emphasises how threats of future trade restrictive policies already affect the configuration of GVCs in addition to hindering international business activities even before contractionary measures are implemented.

As concerns policy implications, it is now vital for the government to help the sector thrive and continue trading with the EU by recognising its importance within the government’s conversations and by financially supporting the multitude of micro firms that have seen their supply networks disrupted by the red tape. Policy support is particularly crucial for restructuring the manufacturing sector, which in the long-term might face both an increase in domestic demand and a drastic reduction in linkages with foreign firms. A recent research stream has emphasized the role of the state as a ‘facilitator’ in the integration and upgrading of firms within GVCs, for example by promoting tax incentives, R&D subsidies, skill formation and training programs, and investment support (Horner, 2017). The development of new skills and capabilities, the adoption of more innovative machineries and equipment, the upgrading of product quality and production standards, and a deeper integration in some production phases of the value chain would boost the confidence of both domestic and foreign fashion designers and retailers. Also, the definition of a sector-specific trade strategy, including for example help for firms in exhibiting at trade shows in key overseas markets or investments for making domestic fairs and events more appealing to an international audience, would promote both exports and inward investments which are now urgently needed by the industry to remain competitive in the T&A GVC.

This blog post is based on the article: Casadei P & Iammarino S (2021) Trade policy shocks in the UK textile and apparel value chain: Firm perceptions of Brexit uncertainty. Journal of International Business Policy.
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Simona Iammarino

London School of Economics and Political Science

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