Where should businesses set their trading sights over next year and what common trade challenges can FDs tackle to improve performance? These are questions being asked in a globalised world that for UK companies will increasingly be defined by Brexit.
The UK remains a uniquely connected major economy, despite its rapidly changing economic landscape. Globalisation has yielded more opportunities for international trade than ever before, but expanded opportunities also mean increased complexity.
Globalisation also poses new challenges; while tariffs are still relatively low, there has been a sharp increase in non-tariff barriers. Knowing where to focus your international trade efforts and which valuable trade partners may be relatively under-used is likely to become evermore important.
And as both strategist and executor of the business plan, insight into this activity is essential for CFOs and FDs.
Trade is expanding, but cautiously
Against a backdrop of Brexit, it’s reassuring to see that the UK’s appetite for international trade remains strong, and turbulence is not deterring financial decision-makers when it comes to their trade ambitions.
In fact, our Fresh Frontiers study shows that businesses of all sizes believe that opportunities for international trade are increasing, and that half are looking to trade with new countries over the next 12 months. Almost 40% of UK businesses currently trading internationally plan to increase their volume of trade over this period, and almost half (44%) expect their revenue from trade to increase.
This research also gives an insight into the markets UK businesses are currently targeting, and where they plan to look in the future, with the USA, Germany and China remaining popular trading partners for UK businesses.
Ranking UK businesses currently trading with Looking to trade with in the next 12 months:
1. US (41%) US (17%)
2. France (32%) China (16%)
3. Germany (30%) Canada (13%)
4. China (20%) Australia (12%)
5. Spain (15%) France (12%)
Interestingly, UK businesses are far more optimistic about trade with these markets than they are about trading at home. Nearly three quarters (73%) say that they expect to see business growth through international rather than domestic trade over the next year, further underlining the view of trade as a catalyst for growth.
However, while most companies are confident in their global trade strategies, leadership teams seem to be taking a cautious approach to trade plans, with many describing their trade strategies as ‘measured’ or ‘risk averse’.
With this in mind, the key question is whether they are looking to the right geographies and regions to unlock future opportunity.
The top untapped trading partners for UK businesses
As part of the study, American Express commissioned the Centre for Economics and Business Research (Cebr) to identify the countries with the most untapped trade potential for UK businesses.
This economic modelling involved exploring current trading relationships, combined with potential trade patterns based on economic prescriptive drivers, such as business environment, corruption and transparency, economic performance, regional trade agreements and current trade flows.
While these rankings should not be seen to dictate which relationships should be prioritised over others, they help give an indication of where additional growth may come from, complementary to existing trade flows.
According to the study, the top 20 untapped markets for UK businesses are as follows:
9. The Bahamas
Perhaps unsurprisingly, the US tops this list. Its size and strength as a global trade power, along with its special relationship with the UK, help secure its place at the head of the list of regions with untapped trade potential. Good news then, that UK businesses say they are setting their sights here.
However, the analysis also shows that there are lucrative opportunities closer to home. Bigger markets such as France, Denmark and Germany offer opportunities owing to their economic size and performance, along with the deep levels of market access the UK enjoys through current EU membership.
But future growth potential also exists in relatively niche, under-explored markets across continental Europe, such as Luxembourg, Finland and Austria, which many companies could be well placed to explore. CFOs will no doubt be keeping a weathered eye on economies around the globe in 2018, but it’s reassuring to know that new trade opportunities do not always necessitate looking across oceans.
International payments remain challenging
For FDs engaged in international trade, making sure your business is set up to deal with export finance is crucial. Managing this can place a significant strain on internal resources. This is backed up by our survey findings, with three quarters of UK businesses stating that international trade is becoming increasingly complex and that making and receiving payments abroad is overly problematic.
Support from suppliers is crucial here, and good payment solutions can help financial teams navigate the supply chain and payment complexity – and in turn achieve the trade expansion your business is aspiring to.
New digital technology that can make trading internationally considerably easier already exists; the vast majority (91%) of the UK businesses surveyed agree that digital technology makes international trade easier.
Digitising the tools and products used to manage payments can help speed up international payments and take some of the strain away, allowing the finance team to work more efficiently and even enable negotiation of payment discounts.
And don’t discount the newest of technologies here, either. Blockchain, for example, can reduce the cost and complexity of international payments – and while the widespread use of this technology may be a number of years away, we’re already seeing several companies use the system to help manage payments.
With delays in making payments negatively affecting the supply chain, there’s a clear need to make these processes more efficient. FDs and CFO have the opportunity to make significant positive gains through better management of this area.FX forward contracts, and only 29% use FX Options – despite the clear message that those who do find these effective.
Large organisations are also far more likely to use both FX forward contracts and changing payment terms than SMEs, suggesting that finance teams in smaller organisations have a clear opportunity to improve their performance and processes when it comes to global trade.
With new technologies providing solutions that help overcome trade barriers, there has perhaps never been a better time to assess fresh trade potential around the globe. In a changing world, smart businesses will invest the time now to plan their trading path into 2018 and beyond – and the support and involvement of CFOs will be key to unlocking new markets or territories.