Why Brexit Is a Golden Opportunity for the U.K. Art Market
Photo by Christopher Furlong/Getty Images.
The role of the state has always been somewhat of a double-edged sword in the art market. Governments support a robust art trade by actively promoting supply through funding of the arts, and stimulating private sales and investing through tax and fiscal incentives. The state is also the ultimate protector of the market, regulating trade within and across borders to reduce crime and malpractice, and to ensure that a nation’s cultural heritage is kept intact.
However, regulations and taxes can also add layers of costs and red tape to the market, causing disincentives to investment and stymying the healthy flow of transactions, as well as interfering in important cross-cultural exchanges and the production of works of art. These negative effects are not equally distributed between countries, which has had important distributional consequences, with sales concentrating on those centers around the world that have the most liberal regimes.
Art is a mobile, durable, and portable asset: Both buyers and vendors can and do use regulatory arbitrage to access the best sales terms, especially as the values of works climb higher. This is yet another reason why global sales have gravitated towards a few key market hubs like the U.S. and U.K., both of which have strongly followed the Anglo-Saxon model of low regulation, competition, and strong private property rights.
The U.S. has retained its leading position by a substantial margin in most recent years, accounting for 42% of the value of global sales in 2017, thanks in large part to its favorable regulatory structure for buying and selling art. Meanwhile, the rise of Asia over the last decade or so has been accompanied by a decline in market share in Europe. In 2003, the EU had a 53% share of sales; now, it has just 33%.
While there are many reasons for Europe’s decline, one primary factor is the perception that its regulatory structure makes it a costly and complex place in which to transact. Perhaps more worrying, the main reason for Europe still retaining a third of the market’s value has been that it can still count the U.K., without which it drops to just 13%.
Despite many attempts by the EU to level the competitive playing field in the Single Market for art, the U.K. has consistently retained a dominant position, accounting for over 60% of sales by value and being the primary center of international transactions. This has been a consistent picture since the 1960s, when the market moved from Paris to the U.S. and U.K. This relocation was due to the underlying shifts in the established bases of wealth and economic power, but also because of the introduction of a complicated system of taxes and royalties on art sales that drove both buyers and sellers away from France and towards more liberal trading regimes.
Wealth and a favorable regulatory environment (buttressed by a robust cultural infrastructure of expertise and institutions) are still two of the key drivers of where global art sales take place. These two determinants are one reason why the U.S., with its high concentration of high-net-worth individuals, as well as a legal and fiscal system that protects buyers and supports sellers, has become a global entrépot market that couples strong domestic trade alongside foreign trade. The latter, in particular, is facilitated by a liberal trading regime for art.
Similarly, the dominance of the U.K. in Europe has, to a very large extent, been dependent on successfully competing with global rivals to attract the best works of art for sale. The success of the British market is, therefore, highly vulnerable to fiscal and regulatory changes, which could put it at a disadvantage in an increasingly competitive market.
Brexit now provides U.K. and EU policymakers an impetus for regulatory review and potential change. Right now, this is a source of uncertainty within the art trade, particularly with regards to the terms of trade that may emerge between the U.K. and other EU member states, but it is also a golden opportunity for the U.K. to break out of the EU’s top-down mould of regulation and set its own legal regime for the art trade. Brexit will enable the U.K. art trade to propose that several art market-related EU directives be modified or deleted, most notably those centered on imports and exports, as well as on artists’ resale rights.
Currently, the level of import VAT is 5% in the U.K., the lowest rate allowable under EU rules. While it is the lowest in Europe, it compares unfavorably with the U.S. (0%) and China (3%). Coming out of Brexit, the U.K. could enhance its competitive position by lowering the rate or removing import VAT altogether (the latter move would take the U.K. back to the position it was in before 1995, when it was forced to comply with the EU VAT directive). More favorable rates could attract global sales, effectively bypassing Europe altogether.
However, if any rate above zero is introduced on intra-EU trade, this will represent a deterioration from the U.K.’s current position as a member of the Single Market for art. Given that the U.K. art market is dominated by extra-EU trade, which accounts for between 80% and 85% of both imports and exports of art by value, this may have a lesser effect on the overall value of U.K. sales, but may affect employment or ancillary business in the U.K., all of which needs to be analyzed and balanced. A silver lining for the remaining EU markets is the opportunity for one country to become the global entry point to the European market. France, being the largest, and already with import VAT of just 5.5%, appears to be the prime contender.
The U.K. also currently participates in an artists’ resale rights (ARR) regime, which was introduced in the EU in 2006 for living artists (and 2012 for artists’ heirs), imposing royalties in all member states, including countries that had never had resale rights before, such as Ireland, the Netherlands, Austria, and the U.K. Rather than being motivated by the support of artists, the primary intention of the introduction of the ARR was to smooth out distortions of competition within the EU in the Single Market due to the disparities in national laws. But it did so with the disadvantage of leaving all of the member states in an uncompetitive position compared with non-EU markets that have no intention of ever bringing in the legislation, such as the U.S., China, and Switzerland.
It has become increasingly clear that the art trade is relatively mobile and will take account of the differing costs of trading in various locations over time. There is a clear incentive for a vendor to relocate a sale if the cost of moving a work of art from one country to another is less than the amount of the royalty payable, and this is very much the case as prices rise. Gathering together current estimates on fees for works costing $50,000 or above, it would indeed be cheaper for a vendor to pack, insure, crate, and export an artwork to New York for sale than it would be for them to sell them in London or Paris with royalty. And it would be cheaper again to sell in nearby Switzerland, which also never had this law in its statute books.
While it is yet unclear if the U.K. will be able to fully free itself from the directive, the case of ARR in Europe shows the potentially perverse and negative impact the government can have on the market when the total economic effects of legislation are not included in decision-making.
While Brexit was a shock to the European art trade, change can bring opportunities. For the U.K., this is an opportunity to conduct a comprehensive cost benefit analysis of these directives and their implications for the future of the British art market, given the country’s newfound freedom to take decisive action on the outcomes.
For countries remaining, like France, there is also an opportunity to perhaps lead Europe in a new direction. The French market has a dynamic and vastly knowledgeable network of galleries, and is already in the process of overhauling its auction sector. A great example of market actors’ capacity to challenge policy was seen in recent years, when the government tried to increase import VAT on art in 2014 from 7% to 10%. The market rallied together and provided evidence to the government of how raising the tax would actually lead to a large loss in revenue, due to its negative effects on sales. The protestors succeeded not only in getting the hike prevented, but also convinced the government to introduce a new lower rate of 5.5%.
This worked because the dealer and auction sector collaborated in presenting one strong voice to government (as has been done by the British Art Market Federation in the U.K. for many years). It also presented an objective economic cost benefit analysis of the policy that looked beyond short-term revenues or emotive arguments, instead looking to the wider economic implications for the market. While the EU—France, in particularly—has always focused on hierarchical, top-down, command-and-control regulation, the success of both the U.K. and the U.S. in the global art trade seems to indicate that much can be learned from the Anglo-Saxon model, which relies on a framework of laws that protect the interests of participants in the market and allows the freedom to compete.
Most economists share the belief that if a market is working efficiently, it should be left alone. A fully-functioning, competitive economy should be able to satisfy consumer preferences optimally without intervention. Governments intervening in the market have the burden of proof of showing where parts of it aren’t working properly, and that, left to its own devices, the outcome will either be inefficient or socially sub-optimal.
There are certainly failures in the market for art, from potential failures of competition to the disregard for the many positive externalities the sector creates. There are also morality-based arguments that would suggest a role for the government in ensuring an optimal level of production and access. However, every government intervention has its own costs and consequences, and a full analysis of these is necessary to ensure that Europe does not become a second-tier market, trailing the U.S., China, and the U.K.
Dr. Clare McAndrew is a cultural economist who specializes in the arts, antiques, and collectibles markets. She is the author of “The Art Market,” an annual report published by Art Basel and UBS.