Brexit: The Consequences of Hostile Relations with the EU

It has been 4 years since the results of the Brexit referendum on June 23rd, 2016 and the world waits with bated breath to see the deal penned down by the negotiations between representatives of the European Union and the United Kingdom. Spurred on by the wave of nationalism and fueled by issues of unrestricted migration, high budget contributions, restrictive trade policies and the bureaucratic nature of the European Parliament, the UK decided to withdraw its membership from the European Union. Uncertainty in the financial and investment market has led to a free-fall in the value of the GBP, as the threat of excessive tariffs and trade barriers looms large in light of a no-deal situation. FDI flow into Britain has slowed down to a trickle, as wary investors wait for 31st December 2020, which marks the end of the Brexit transition period.

Countries like India and Bangladesh, which used Britain as a launching pad for the larger European market, have increased trade with their former coloniser; India now stands as the UK's 17th largest trade partner (Office for National Statistics Pink Book for 2019 Goods and Services). The large influx of Indian workers into the UK, along with the more than 800 Indian companies which have set up operations there, ensure that signing a Free Trade Agreement with India is a priority for smooth trade to continue. An important aspect of trade between these economic giants is the high demand for premium goods by affluent Indians, and the ability of English luxury brands to satisfy that need.

However, Brexit threatens to derail this trade. According to Walpole, the trade body for the British luxury sector, sales are estimated to grow to between 52 billion pounds and 60 billion pounds if the UK and the EU cannot secure an agreement, in contrast to the value of 65 billion pounds otherwise. The sector is worth 48 billion pounds to the economy, with 38 billion being exports, and provides direct employment to over 150,000 people. The luxury car segment, headed by brands like Jaguar Land Rover (owned by Tata Motors), Bentley and Rolls-Royce, is lobbying to secure open European borders for its outsourced and multi-national manufacturing processes, while fashion brands like Burberry, Harrods and Mulberry vie for easy access to top designers from places like Milan, Paris and Barcelona.

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While the underlying economics is static, differences in assumptions and focus of study have led to a dearth of material on Brexit’s impact on luxury markets in other research papers. It is also not correct to correlate economic openness and productivity growth without an empirical backing, which necessitates the requirement of looking at this from a long-term perspective.

The implications of hostile relations with the EU on the luxury goods market are worrisome, as restrictions to the free movement of manpower and materials across the continent severely hamper the ability of companies to enjoy profitable margins. While established brands may escape this conundrum by passing on the costs in the form of increased prices to the customers, indigenous startups serving a critical consumer base have no choice but to double-down their expenditure, in an attempt to increase sales exponentially. A stark reality which faces these brands is the possibility that their primary non-EU importers (USA, China, India) use this recent upheaval in global trade to negotiate better trade terms with the European Union, leaving the UK in a lurch. It is also imperative for London-based companies to locate talent internally, as closed borders may become the new normal soon.

There is also a strong likelihood that the UK might join the European Economic Area, for access to a single market for movement of goods, capital and labour. While this move is beneficial for Indian companies as they retain access to the European market, British companies will continue to be subjected to conservative policies of the Union. The country might also accede to the World Trade Organisation, in hopes of setting its import-export policies. Key companies, especially in the luxury automobile segment, are looking to secure favourable bilateral treaties with major importing countries. More liberal policies (eg. relaxed competition laws) would entice countries like India to contribute higher amounts as FDI, with Indian companies carrying out mergers and acquisitions with UK-based companies.

Finally, the surplus amount tied up in EU budgetary payments can be invested in the enhancement of vocational training institutes, to train skilled designers and workers for manufacturing premium fashion goods. Brexit can therefore, in the long run, pave the way for India's integration with the rest of Europe and strengthen its trade relations with the UK. Once the dust settles, the UK is likely to overcome the short term recession and emerge as a liberal independent economy.