NatWest’s Head of Working Capital & Trade Products Mirka Skrzypczak made the perspicacious point last week that so long as digitisation efforts remain incohesive, we will have a fragmented recovery from the COVID-19 pandemic. Skrzypczak need not stop there; the current Santander Trade Barometer anticipates a much stronger recovery from the US than UK and European counterparts, pushing more domestic pressure for policy reform to ‘catch up’. As trade digitalisation progresses, UK exporters compel the Government to re-address Parliamentary structure, accept e-commerce, speed up legislative changes, and conduct more Government-to-Government (G2G) negotiations. UK-US trade reached an all-time high of $140b in 2019, but new US Secretary of State Antony Blinken revealed that a decent Free Trade Agreement (FTA) could take “some time”. With Joe Biden in no rush to negotiate a formal arrangement, should SMEs be holding their breath? This is the second in a three-part series of articles summarising the Global Trade Reviews Conference of 2021; read ahead to understand its advice for SME owners.
How Necessary is a US Trade Deal?
Many see a prospective US FTA as essential for a fully functioning UK economy, particularly given the diplomatic and financial history between the two nations; it would, however, be a mistake to perceive the FTA as a necessary condition to emerge from Brexit solidly. If a UK-based company already has exporting relationships in the US, a formal FTA is unlikely to make or break your trade structure. This was the point echoed by Barclays’ Head of UK Trade & Working Capital Divyesh Modi. There are already some mutual recognitions in place for equipment in certain sectors (although not all). If your company already has access to some degree of trade in the United States, Modi recommends owners to appreciate the somewhat growing consensus that a US FTA arrangement would likely significantly benefit only a few players; most people won’t profit immensely. Nevertheless, that is not to deny the burdens of the tariffs and regulations that SMEs would be forced to meet in trans-Atlantic trade; an explicit agreement for free trade would make life much easier for those SMEs. However, for those who already have their foot in the door, they must face an ultimatum: go direct to market, or use a distributor?
Richard Paxman, CEO of Paxman Scalp Cooling, posits that whatever decision the SME makes, the most important thing is to be familiar with the supply chains securities, to establish communication early, and to explicate a reimbursement pathway from the get-go. Overheads involving infrastructure, storage of equipment, mutual recognition and adherence to agency requirements, are just a few of the necessary conditions to meet when trading with the US. Founder of The International Trade Consultancy Lucinda O’Reilly accentuates that SME owners should find the right advisors for accounting and launching services; while it may seem expensive initially, having exemplary consultants will save tens of thousands down the line. Paxman also revealed that his company used a different business model in the US for a pay-for-pay structure, although that may not be the best decision for everyone; everyone talking at this conference was explicit that the best decision making will be unique to your business and your sector. Modi chimed in making the important point that, according to a study conducted by Barclays, the UK has an incredible reputation for international standards, with 10,000 customers willing to pay a premium to have the UK manufacturing label on the product. O’Reilly also stated that, at least for her industry, US standards were absolutely comparable to UK and EU standards. General conclusions between the speakers for SME owners were, first and foremost, don’t hold your breath for a UK-US FTA—do your research now. Modi recommends SMEs to make the most of Banks’ management tools that are accessible to them. O’Reilly concluded calling for owners to have faith, believe in yourself in an ever-increasingly complex market, and be ambitious; just establish your communications early.
What Should the UK Exporter Prioritise?
As mentioned above, UK Finance’s Managing Director Stephen Pegge referred to the Santander Trading Barometer pointing to a relatively accelerated economic recovery from the US; this has put pressure on UK policy makers to catch up, so the UK does not lose its competitive edge to more responsive and less developed nations. As the country emerges from Brexit, it is important for Britain to define itself as a flexible financial powerhouse, and that needs to be done sooner rather than later. Despite a concurrent rush of US private equity acquisitions (such as the nascent Morrisons takeover), we stand to lose prospective clients and banks to other more business-attractive nations. The two big factors involve the digitisation of trade as well as the cross-border recognition of various standards for goods and services. It is more important than ever for an SME owner to appreciate any fragilities in its supply chain, so an increased focus on the depreciation of non-ESG operations will prevent retrospective error down the line.
Caroline Dawson, Partner at Clifford Chance, made the important point that oftentimes FTAs often leave large gaps regarding cross-border trade. She mentioned how the instantaneous co-operation at the G20 following the 2008 financial crisis sets a precedent for what collaboration can achieve, and for 2021 we should be seeing cross-border services at the front and centre of negotiations. The Secretary General at the International Chamber of Commerce Chris Southworth concurred, positing that policies should be focused on the harmonisation between regulation and risk proportionality, particularly for SMEs. In fact, the cost of digitisation might be disproportionate for SMEs—a point the moderator, Former Engagement Director at ACT, Peter Matza, could only agree with. Legislative updates should see a refinement of processes and costs and understand how to better distribute costs to those enterprises with less working capital and solvency. Dawson reiterated that there is a huge demand for the services from SMEs, it just needs to be unlocked through modern policy making. The current parliamentary structure, which can often involve trade forums, may entail such differing opinions from those within the same industry that any incoherence will frustrate adequate representation. It is therefore important for any company, not just SMEs, to be prepared for the shift into e-commerce; to be prepared to read and file electronic documents instead of paper ones and ensure that all financial obligations can be completed with the new medium (such as recording, litigation considerations, et cetera).
While banks are moving towards a digitisation strategy, and the ICC is developing a global digital standards initiative, there is still a long way to go. This will inevitably push the onus onto SME owners themselves. The important thing is for owners to be conscious of supply chain fragility. This involves being aware of the countries where operations lie, of potential political risks, of any lack of mutual recognitions, and to make the most of available management packages to maintain solvency. Also worth noting is how ESG concerns are being integrated into the chain; while many emerging markets are hydrocarbon driven, you can bet your buck they will burn through their reserves over the next few years. The transition to digital commerce will streamline operations incredibly, saving indelible amounts of work and money from cross-checking and labour overlaps—it is therefore incredibly important to make sure SME owners are aware of how they can fulfil financial obligations with electronic documents. Furthermore, the recognition of trade standards and qualifications will be unique to each SME owner (depending on the service they provide, and to where it is being provided). There is a lot for the UK Government to do in order to adequately address the needs of trade gap deficits and support packages for those with less fluidity.
There is confidence that the UK Government is addressing the needs of SMEs and other financial institutions at a pivot point in the country’s history. That said, many are relaying a favouring consensus that it is better to speculatively prepare than to hold one’s breath for lucid policy. It is critical for SMEs to know their supply chain and fiscal operations like the back of their hand; any errors encountered when the economy opens up will likely be mistakes being made right now. To prevent retrospective failures, SME owners should prepare their infrastructure for electronic trading, communicate early with consultants and distributors, and conduct due diligence on trading partners. The reputation of UK standards is a luxury not to be taken for granted, and neither are the financial tools and packages banks are currently offering. One step at a time—that’s the mantra for sustainable solvency.