International trade, one of the leading engines of global economic growth, is now facing the most challenging geopolitical environment for generations. UK businesses, more than ever before, now need the right practical, promotional and financial support to grow sustainably by exporting. In the last 20 years, the value of global exports has doubled, despite the 2008 global financial crisis. We spoke to Trade Finance Global to get an update on international trade and key considerations for finance professionals.
UK businesses are superbly placed to take advantage of global economic growth, around 90% of which is expected to be generated outside of the EU by 2030. The demand for British goods and services is a credit to the United Kingdom, an exemplary and highly capable export market, with world-leading financial institutions and one of the most successful global economies. Yet with exports only worth 30% of GDP in the UK, which is far below that of Germany, the UK government has to implement an export strategy enabling businesses to get access to a larger proportion of international trade which will help drive productivity, GDP growth and economic prosperity.
The world’s two largest economies are now embroiled in a trade war that shows no signs of abating. This has lead to market uncertainty, fear and concern for businesses that trade internationally.
In July 2018, the first set of tariffs came into effect as the US imposed a levy on $35bn of Chinese imports, which provoked a swift retaliation by China. In August, the US and China both imposed the second phase of tariffs, which took the total to $50bn on both sides. In September, the third wave of tariffs came into effect. This saw the US add a 10% tariff on $200bn of Chinese imports. In total, 12% of total imports to the US are now covered by tariffs. On the same day, China enacted tariffs on $60bn of US goods. The next moves will most likely be qualitative measures, which could make business conditions difficult for US firms in China and vice versa. Businesses are now anticipating a long trade winter between the world’s superpower economies.
Despite, and partly due to, the geopolitics, there has been recent growth in trade finance and structured trade as a whole. Global supply chains are rebalancing and businesses are seeking new finance lines to facilitate trade from new regions such as South America or ASEAN. Asia Pacific emerging markets are going to be increasingly important to UK businesses, alongside established trade partners, with increasing product flows and extra investment required.
The shifting markets present an opportunity for SMEs which are able to secure appropriate finance lines to allow them to expand their trade.
As a business, there are some key considerations to take into account if you trade internationally, especially in the current economic climate, and with the March 2019 Brexit deadline fast approaching.
Mitigating Risk in an uncertain Geopolitical Climate
Failure to prepare – prepare to fail. It’s important to understand that in the case of a no Brexit deal, there are certain things that businesses will need to consider. Businesses will have to implement systems, processes and contingencies around trade tariffs/customs, payment fees and charges as well as employment considerations for non-UK nationals. Scenario planning and having real plans in place for a possible no Brexit deal and reverting to WTO trade rules is critical to ensure businesses continue running smoothly.
Preparing your finances
Cash flow management is key to the smooth operation of any businesses. It might be a consideration to have sufficient funds available, plus a cash buffer/contingency as a rainy day fund for any unwanted eventualities, necessary (expensive) business investments or last-minute expenses. Talk to your bank, a finance broker, or funder, as well as your treasury teams to ensure sufficient backup funds, are available.
Most businesses source some of their products or services from outside of the UK. It may be a good idea to do a RECCE of all of your external suppliers, and in the case of a no deal Brexit, or perhaps short-term price inflation, having numerous suppliers on your record which offer similar services to your own suppliers can’t be a bad idea.
Managing FX volatility
In June 2016, the value of GBP versus major currencies dropped significantly as a result of the UK referendum to leave the EU. If this is the case, for importers, it added a significant cost to doing business. Looking at FX strategy, speaking to currency specialists, and hedging accordingly should be a key function of treasury and cash management specialists to mitigate these risks.