Supporting trade in a disruptive environment
The trade landscape is perhaps more unpredictable and uncertain than it has been in many years. Chris Spedding, Managing Director, Head of Corporate and Institutional Trade, Global Transaction Banking, Jeavon Lolay, Head of Economics & Strategy, and Martin Flint, Director, Working Capital Advisory, share their views on the trade outlook for 2021 and what businesses can do to prepare for the challenges and opportunities the coming months will bring.
1. What are some of the opportunities and challenges facing companies trading internationally as we head into 2021?
Jeavon: The COVID pandemic has caused an almost unprecedented global economic shock. The recovery until recently has been stronger than many originally expected, albeit global growth looks set to slow in the final quarter of this year after a surge in COVID infections in some countries. Importantly, while most countries went into the initial crisis stages at a broadly similar time, it is worth noting that the nature and pace of recovery is proving quite differentiated on a range of levels.
On the positive side for international trade, global supply chains have improved significantly, and China has already surpassed its (pre-pandemic) Q4 2019 level of GDP. Stronger Chinese demand is increasingly evident at a global level and represents a key tailwind for a lot of businesses struggling with currently weaker domestic or regional demand.
We’re also seeing different sectors facing very different challenges and opportunities as the recovery continues – for example, manufacturing is performing well relative to consumer services, as it is less impacted by the renewed tightening of social distancing measures in many countries and more closely aligned with the global recovery. We need to be mindful that some parts of the economy for now will simply remain more vulnerable to the path of the virus and any associated tightening in restrictions, for example hospitality and travel.
However, there is growing optimism that the combination of a possible vaccine, improved treatments and more effective testing will help bolster their recovery prospects in 2021.
Chris: From a UK corporate perspective, the factors that have the potential to really disrupt trade in 2021 are going to continue to be COVID-19 and Brexit. But, positively, what we've seen through 2020 is relatively quick responses to an extremely disrupted global environment. So, going forward, we can have confidence that as the COVID-19 situation continues, companies and supply chains will continue adapting to facilitate effective trading.
There will, however, still be a degree of logistical complexity for companies that are having to operate through lockdown environments, particularly in sectors we've already seen be impacted this year, such as hospitality, travel and aerospace sectors.
From a Brexit perspective, we would expect a degree of disruption as businesses get used to the new trading arrangements between the UK and European Union from 1 January, although we anticipate the level of disruption will start to abate through the first and second quarters as companies adjust.
We also shouldn't lose sight of the increasing focus on sustainability, and the need for companies to consider their trading environments and supply chains from an ESG (environment, social and governance) perspective. What we’ve already seen is that the disruption caused by COVID is creating an opportunity for companies to really refocus on how their supply chains and trading operations work with ESG in mind. And I'd expect that to continue across 2021, as shareholders and investors increasingly look at things through a sustainability lens as well as a financial one.
Similarly, another potential silver lining of the pandemic is that many firms will have digitised their operations to cope with the impact of COVID. Trade has traditionally been a very paper-focused operation, but lockdown constraints mean that companies are shifting to more efficient, digital ways of working and I expect that trend to continue through 2021.
Martin: The biggest trading challenge for companies over the coming year will be uncertainty. Consumer behaviour has shifted so it will be difficult to calculate demand based on historic patterns and businesses will have to adapt their operational processes accordingly. Misreading demand signals across the supply chain can easily lead to a build-up of inventory and businesses will have to reassess how they read the demand signals that come out of their markets, whether that’s by talking to their customers more or focusing on other signals rather than having a historic focus.
Supply chain resilience will continue to be a huge focus. Companies won’t just need access to the right materials, they’ll need to be able to access them at the right time to minimise their holdings.
2. What impact on trade to and from the UK do you expect the end of the EU Transition Period to have?
Jeavon: While there’s still a lot of uncertainty around trade following the end of the Transition Period, what is clear is that it’s not going to be business as usual. There is almost certainly going to be more friction as the trading relationship between the UK and EU alters from 1 January 2021. The extent to which things change will very much depend on whether a deal can be struck and also what this new relationship ultimately entails – there is much still to be confirmed and finalised at this juncture.
With or without a deal, trading with the EU will now involve more paperwork. In the case of imports the UK government has said that there will be a transition period of six months and so businesses will have more time to adjust. However, unless the EU changes its mind about immediate implementation, exporters will face increased paperwork from day one. These changes have the potential to raise costs and cause delays and bottlenecks at least in the near term, although businesses will make adjustments as they get used to the new arrangements.
3. How prepared are UK companies who trade with the EU to deal with Brexit?
Chris: On the positive side, businesses have now had a lot of time to prepare for Brexit. On the other hand, 1 January 2021 is fast approaching, and we still don't know on exactly what grounds we're going to be trading with the European Union and that is inevitably causing difficulties for some companies. What we're seeing and hearing from our clients is that there’s a clear correlation between preparedness for trading with the EU, even in the worst-case no-deal scenario, and company size.
Large companies that have the resources, infrastructure and time to prepare have done so and are confident in their ability to deal with whatever the outcome is. But smaller businesses simply aren’t able to prepare themselves for any eventuality, particularly given the fact they’ve also been dealing with a global pandemic. So, what I would expect to see is that, in the short term, larger companies will find it easier to trade in a post-Brexit environment, and smaller companies will need time to adjust and to gauge the level to which their operations will be disrupted.
For example, it is estimated that the number of customs declarations that the UK will need to process will increase by about five times compared to pre-Brexit levels, from 60 million per year to 270 million. This represents a very significant change in the level of process and paperwork that all companies will have to deal with.
Jeavon: It’s clear that both businesses and the government anticipate some level of disruption as we enter 2021. Preparation is crucial on both sides but what will also be key is how responsive government is in recognising and addressing any potential issues facing businesses once the new arrangement is in place.
It’s also clear that, due to the COVID pandemic, many businesses aren’t as prepared for the end of the Transition Period as they perhaps would have been, plus there are still COVID-related challenges to overcome. The end of the Transition Period brings another layer of uncertainty for those businesses which are significantly exposed to relationships with the EU in terms of trade. Minimising the short-term impact will be foremost on their minds as this year draws to a close.
The challenge will potentially be significantly more onerous for some sectors and businesses. Meanwhile, in the longer term, there is the potential to explore closer trading relationships with other nations.
Martin: Businesses are in a situation where they are having to plan for something without being completely sure how it will affect them. We know from past experience that when there’s friction around trade there’s a temptation for businesses to hold more inventory, and while larger businesses can absorb this and manage their working capital tactically, smaller businesses will find it more difficult to adapt. They’ll also potentially have to deal with longer lead times and other day-to-day challenges that come with moving goods across the border. And these challenges remain even if they go and look for new markets.
Chris: One positive sign we are seeing around preparedness is increased demand for Duty Deferment Guarantees, which we issue on behalf of companies that are looking to import from beyond the UK. For the first time, there will be duty paid on importing from the European Union and it’s encouraging that clearly companies of all sizes are getting ahead of that requirement and making sure they've got the financial facilities in place to be able to actually guarantee to get their goods across the border.
4. How can businesses boost their trade and working capital resilience?
Martin: Businesses that have stronger liquidity and working capital controls are typically better able to deal with uncertainty. They're already balancing cash and working capital, as well as profitability. And they understand the impacts they can have on their businesses. Ideally, good cash management should be embedded at every level of a company.
During lockdown, we saw a lot of companies embracing short-term methods to boost cash flow, like delaying payments. But these aren’t sustainable in the longer term and will add risk to your supply chain. Now it's about working with your suppliers and customers and understanding their health. What are your replenishment lead times? How are your customers paying you? Is that likely to change as we move to next year?
For many businesses it is about getting back to basics. Bolstering collections and credit management, setting credit limits, all these simple things that are really good business practices. As we enter 2021, lots of businesses will see their working capital profile change. Understanding that change and starting to adapt your business around that new profile is key.
5. What is Bank of Scotland doing to support customers looking to trade internationally?
Chris: Our focus is helping Britain trade and we’re continuing to support our clients, not only with trade between the EU and the UK, but globally. We've seen a steady trend, since the Brexit vote in 2016, of companies looking to diversify their trading into new markets beyond the European Union and we have a continuing focus on helping these businesses. We’ve built a global network of trusted partner banks to make sure we can help a company import from or export to any country, anywhere in the world.
The other area where we are supporting businesses is providing insights and thought leadership to help businesses of all sizes and across all sectors inform their trade activities. Our International Trade Portal gives clients access to a wealth of information to help them identify geographies and companies that they can trade with internationally. We also have expert trade specialists who are at our clients' disposal to help them understand how they can trade better, and more safely, internationally.
Jeavon: We’ve also launched the Lloyds Bank UK Recovery Tracker, which is a monthly report providing a view on how the world economy is developing after the pandemic. It gives an insight into what's happening on an international level, nationally and even at a sector level across the UK, to identify the markets that potentially could provide opportunities and other markets that may be experiencing challenges. We’re trying to provide as much information as we can to support not just our client base, but businesses across the UK.
To see how we can support your trade efforts, speak to your Relationship Manager about our range of international solutions and support, or contact our Trade Finance team.