The impact of recent disruptive events, including geopolitical tensions, the pandemic and climate-related risks, on global supply chains and supplier relationships have been well-documented. In this roundtable discussion, GTR and Barclays bring together trade and export experts to examine the effect such events are having on global exporters in terms of their ability to trade internationally, their export markets, and their access to finance and support.
- James Binns, global head of trade and working capital, Barclays
- Rebecca Harding, independent economist and CEO, Coriolis Technologies
- Sam Lowe, partner, Flint Global
- Tim Reid, director, head of business group, UK Export Finance
- Shannon Manders, editorial director, GTR (moderator)
GTR: We’re in the midst of a new era of trade which has become increasingly entangled with geopolitics. At the same time, we’re seeing a drive towards economic nationalism. What does that mean for globalisation and multilateralism? What are the risks to global trade and export flows?
Lowe: The public narrative is that we’re moving towards a period of localisation, friend-shoring and the like. But when you look at global trade flows, they tend to be fairly stable.
Perhaps what we should expect is not necessarily trade flows to diminish at the aggregate level but rather that the composition of these trade flows may start to see some changes. This is being driven by a number of factors, including concerns around certain technologies being shared with the Chinese – a desire to onshore battery production, for example – and the likely increased intervention by governments when it comes to the export of dual-use products.
People are quite comfortable with the narrative of this bifurcated world of western democracies versus the autocracies in China, Russia and elsewhere. But that narrative is very reliant on a benevolent US. The US has a role to play throughout all of this as the buyer of last resort – the great demand hub. My concern is that when you look at total trade as a proportion of GDP and use that as an illustrative metric of a country’s reliance on international trade, the US is not that reliant on international trade at all. As an economy, it is quite self sufficient. So it is able to put up barriers, restrict trade, onshore manufacturing and reduce efficiency gains without taking a big hit.
If that’s the direction of travel, countries such as the UK, Japan, South Korea and elsewhere that are more reliant on an open rules-based system, are going to struggle because they need the US to uphold that system. The next US election will provide more insight into how this will unfold. But even under the Joe Biden administration, we can see that trade liberalisation and openness isn’t necessarily top of the agenda.
Harding: There’s a popular misconception today that trade is the same thing as globalisation. If we think about what trade is, it’s what businesses do every day – and the economics of it is very simple. We will always need to trade, which perhaps helps answer the question that Sam raises about what’s going to happen to trade flows. We will always see trade as a certain percentage of GDP for the simple reason that there are always going to be things that we don’t have that we need to buy from other countries.
What is under stress at the moment is the definition of globalisation. The way we defined globalisation in the 1990s was as the disappearance of economic, social and cultural borders between nation states, with these states being subsumed into global networks where capital and people flow freely across borders.
What has happened since the financial crisis is we’ve seen the erosion of that particular globalisation narrative. This has been driven by the rise of the Global South, which has created the perception among the Global North that there’s something unfair going on, that governments and businesses are putting resources into growing supply chains located elsewhere, and not focusing on their domestic population. This sense that globalisation has created inequality has fuelled a populist narrative, which has given rise to Brexit, Trumpism and the like. It’s also given rise to trade as a central narrative in a nationalist context, and trade has become an important element of reason behind slogans such as ‘Make America great again’.
So we’re not talking about globalisation in the same way as we used to, which – going back 20 or 30 years – was all about connection and inclusion. Now we’re looking over the fence and saying: ‘Perhaps we shouldn’t have let semiconductor production go quite as far afield as it has. Maybe we’ve lost some of our intellectual property.’ We’re trying to shut the stable door after the horse has bolted.
I think understanding the history of globalisation is very important, because it then helps us realise why trade has become weaponised and – given the Russia Ukraine crisis and sanctions regimes – a domain of warfare.
GTR: As trade relationships break down in some parts of the world, and are built up in others, what impact does this have on the exporting community? How does this affect their ability to trade internationally?
Reid: Although there are challenges, I’m optimistic for a number of reasons. Here in the UK, there are a number of companies looking for ways to grow – and exporting presents a great opportunity to do so. The role of UK Export Finance (UKEF), working with financial institutions, is to help facilitate some of those exporting opportunities.
Binns: We have all of this geopolitical volatility and supply chain shock, which is moving very rapidly at the moment. At the same time, there’s been a lot of talk in the industry about nearshoring and reshoring. But the reality is that it can take decades to move supply chains in certain sectors, which creates a two-speed dilemma. The shifting geopolitical environment requires companies to react almost immediately to identify the risks and the concentration in their supply chains, but they don’t really have the capacity to do so in the short term.
We’ve seen shifts in production in the past, and its going to be interesting to see how supply chains adapt in the longer term as a result of some of the volatility that has emerged in the last three or four years.
In the meantime, all of this disruption is increasing risk to supply chains, which means they’re carrying higher inventory levels. Simultaneously, inflation is at an all-time high, which means raw material prices have skyrocketed, and so has the cost of working capital cycles. As such, companies need more working capital support and funding to be able to sustain their business activities, especially if they’re looking at new growth opportunities such as exporting.
As Tim suggests, collaboration amongst all financial institutions is important so that we can collectively support supply chains with the increasing working capital and risk mitigation needs they will have as we continue in this very volatile environment.
Harding: Coriolis Technologies and the Institute of Export & International Trade produce a data set called the UK Exporter Monitor. One of the things we found is that the number of UK exporters has started to fall back, as has employment amongst those businesses that export. Exporter revenues, however, have not dropped as much as would be expected. This is especially the case amongst larger businesses, which are likely reaping some efficiency gains as they are forced to become leaner in line with rising costs.
So although we understand that trade values are increasing, this is against a backdrop of lower overall exporting volumes. That’s where the pressure that James is talking about is really beginning to build, and where the most support will be needed. Big increases in prices mean a limited number of goods coming in, which is likely to affect exporters’ ability to manage their supply chains.
GTR: Has the situation changed the type of support that exporters need from their governments and financiers? What is the role that export credit agencies (ECAs) play in this new environment?
Reid: The situation has demanded agility and the ability to adapt to what’s going on in the market and to help exporters execute against that strategy.
One of the things UKEF has been very focused on is finding ways to support customers more flexibly. We’ve started to offer support that is less contract-specific and more focused on working capital, as well as provide greater financial flexibility around supporting the renewables and transition sectors as we help develop those supply chains.
What we have seen is an opportunity to support a broader range of companies, all the way from SMEs, who might be looking for export insurance or general working capital, up to the major multinationals, who for example might be looking to support a UK investment programme that will ultimately be used to increase export activity.
We’re working very closely with the banks to make sure we are developing our product range to support as many customers as possible. It’s a hand in glove relationship to make sure we are working to structure transactions to assist exporters in the best possible way. That can be helping domestic companies facilitate exports through the provision of working capital, or it can be providing finance to buyers overseas, where UK contractors and suppliers are involved in financing those projects.
Binns: It’s incumbent on all of us to work together to maximise the efficient and necessary provision of working capital funding and risk mitigation products and solutions to businesses in all countries in which we operate. Innovative and agile ECAs like UKEF are a vital part of providing the level of working capital appetite and capacity that clients need going forward.
Harding: That kind of support is vital to companies like Coriolis Technologies, which as a fintech company is an exporter of services.
Services exports, whether that be financial services or professional services, are traditionally difficult to define contractually, which can make it very difficult to find export finance. Companies like ours that operate in that sector need a great degree of flexibility to help unleash the capital that is available to us as exporters. As an industry, we need to better understand the service sector domain and become more familiar with our value chains as well as our supply chains.
Binns: We’ve talked about the provision of finance and working capital to help exporters. Equally important is the need to help companies deal with issues such as the complexity of new markets, trade barriers and the increased cost of transport logistics. This is particularly challenging for SMEs, who don’t necessarily have the resources available to deal with those complexities and the associated costs. If we’re going to grow exports across the SME sector, we need to help these companies reduce the level of complexity, understand new markets and access those markets through economies of scale, such as consolidation of shipments and various other measures. The significance of big buyers to global supply chains is obvious, but we should never forget the importance of SMEs across all jurisdictions in terms of prosperity and driving those trade flows.
Lowe: That’s an important point. Politicians often wonder why companies aren’t more excited about trade deals, and why they’re not taking up new exporting opportunities. The reality is that it’s really complicated to enter a new market. Finding out what the requirements are, and meeting them, is expensive. Often for smaller businesses, in the first instance there are probably still growth opportunities domestically that could be easier to explore. There’s an information deficit, so the more that can be done to provide people with instruction on how to export, the better. I think there’s a role for the government to play in performing some of those functions, at least at the early stages, in terms of providing advisory support in a structured way.
Reid: UKEF is introducing the UK supply chain to some of these overseas projects by running supplier fairs and other events. We try to help broaden knowledge, both of the projects overseas and of the UK supply chain, which might have a role to play in those projects. It’s all about connecting the dots and enabling companies to find the right opportunities and the right contacts.
GTR: As the UK negotiates new trade deals, how important are they? What tangible benefits do they bring to the exporting community?
Lowe: At a macro level, are many of the new free trade agreements the UK pursues going to deliver large gains in economic growth relative to a situation in which those agreements don’t exist? No. It’s very marginal once you do the modelling.
However, do these free trade agreements deliver opportunities for companies already engaging in trade with those nations, who may be able to move products more cheaply than before because of the tariff reductions or removals? And do they potentially grant new market access opportunities for companies, who can now sell into those markets more competitively than before? Another softer factor is does politicians talking a lot about a certain country and a trade agreement make some people think about exploring the opportunities by joining a trade mission, or exploring new relationships? Yes.
So there are certainly benefits from these new agreements.
Going back to a point made by James earlier, supply chains don’t move overnight. New export relationships don’t develop overnight either. Helpfully, trade agreements have really long lead-in times, which enables companies to start scoping out the potential benefits of making use of them before they start putting in the work.
Reid: Anything we can do to remove barriers and make things easier for UK companies has got to be good news. As Sam says, some of those benefits may simply be about increasing the awareness of the opportunity.
GTR: Going forward, what are the trends that will help drive a more inclusive model for global trade? What can institutions such as the ones you represent do to facilitate this?
Harding: The most important thing that we need to be focusing on right now is sustainability and environmental, social and governance (ESG) in the round.
The trade industry needs to take a step back from the concentration only on net-zero aspirations and think about what we need to measure, how we measure it, and how we ensure that this is something that everybody understands as being achievable. There’s a tendency amongst some to put everything around sustainability in the ‘too difficult’ box. But at a basic level, if you look at the product that a company produces, that will tell you everything about its sustainability status, including how much it moves around the world, whether it’s got high greenhouse gas emissions, and if it’s on the dual-use goods list.
According to Coriolis Technologies’ data, some 80% of the value of world trade is unsustainable when matched against the Sustainable Development Goals. We have to shift the dial. We have to raise the profile on this and turn it into something practical.
Reid: The sustainability agenda in the broadest sense is of critical importance. To that end, UKEF no longer supports overseas fossil fuel activity and we’re very focused on building capacity around renewables and transitions projects. Since 2019, we’ve provided over £7bn-worth of support to sustainable projects around the world.
In addition to that, as an industry, we need to continue to be agile and responsive. What works today might not be what we need in three to five years’ time.
With that in mind, UKEF is going to continue to build our network of international export finance executives around the world, including in some of the emerging markets, to try and make sure that we can help identify new opportunities for UK exports.
Lowe: In terms of sustainability, I’m interested in how the different interventions by the larger states, including the US, EU, UK and China, combined with industrial policy objectives, such as the desire to onshore the electric vehicle (EV) supply chain, will interact with one another insofar as not everyone can onshore the entire EV supply chain. Someone’s going to be more successful than everyone else. What will also be interesting is how the people who are less fruitful react to those that are more successful.
In terms of more general inclusivity and bringing more companies into the international trading system, I am interested in the move from the physical to the virtual world. As more economic activity moves into the virtual space, it will provide new opportunities for companies to trade globally because the requirements to move across borders will be reduced. But it will also bring new pressures. Governments instinctively want to regulate areas in which a lot of economic activity takes place, and they will need to think carefully about how they regulate in a way that doesn’t put a dampener on all of the opportunity that a virtual environment unlocks for companies of all sizes.
Binns: The key trends that are going to transform trade in future years are technology and digitisation – increasing our use of digital solutions to take the cost out of cross-border trade, making it more inclusive – as well as ESG and sustainability.
The enabler to all of that is standardisation and interoperability, which is a big challenge at the moment and impedes our ability as an industry to digitise trade and align on common ESG frameworks and standards.
In the digital space, we need to increase interoperability through greater standardisation of Application Programming Interfaces, which will be critical to the viability of integration between digital systems. We also need to address the legal frameworks in which we operate. The United Nations’ Model Law on Electronic Transferable Records gives electronic trade documents the same legal standing as their paper-based counterparts, which then makes that documentation more transferable across different platforms and jurisdictions.
A similar analogy can apply to ESG and the need to adopt common sustainability standards across different geographies.
These are the opportunities that will really transform and advance how we trade with each other on a global basis.
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