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What is the future for international trade?

Darren Rigden, Partner, Audit and Business Solutions
23/07/2021
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International trade continues to be challenging with the ongoing pandemic, impact of Brexit, shortages of shipping containers, increased raw material costs, increasing freight costs and shortage of hauliers coupled with backlogs in manufacturing. Many believe that we will be well into 2022 before international trade returns to pre-pandemic levels.

Current challenges facing international trade

Many of our clients and contacts remain concerned about further disruptions to supply chains, both through further outbreaks and also due to shortages and blockages in the supply chain resulting in an increased risk of business failures. Business’s continue to mitigate this through diversification of suppliers and geographical origins of supplies, but for specialist products this is difficult due to limited suppliers.

A big issue which has resulted from the pandemic and is showing no sign of easing is  the imbalance in international trade volumes and problems with loading and unloading of containers at ports meaning containers are in short supply and are often in the wrong location. Some routes are also being abandoned as hauliers look to use routes which enable the containers to be turned around more quickly, with a focus on delivery to ports where the in-land part of the journey can be covered quickly by train or unloaded in the ports rather than having to be transported long distances by roads. This, coupled with the cost of certain raw materials and pent up demand is significantly increasing the price of freight and products, with container prices tripling in some instances. Many of our clients are not expecting this to ease until 2022.

Joe Biden appears to be resulting in a more stable relationship between the US and the rest of the world, leading to fewer tariffs and a reduction in the risk of trade wars. However, there is still tension with China as seen in the press recently with the West accusing China of cyberattacks, and also continued tension with Russia.

As we come out of the pandemic, business will need certainty and support. On 23 June 2021 UK Export Finance published its annual results for 2020-21, which showed the government provided record levels of support for UK exports amounting to £12.3 billion in financial support for UK exports to 77 countries which supported 107,000 jobs. For those companies trading with Europe, the government also announced a £20 million SME Brexit Support Fund to enable companies to apply for a grant of up to £2,000 to pay for practical support for importing and exporting, several of our clients have taken advantage of this.

Working capital management remains a concern across all businesses, especially the collection of payments from customers and stock management in international supply chains. Companies are trying to balance holding enough stock to cope with disruption, with the cost of cash being tied up in stock and needing the cash to pay suppliers and employees. This is made course by sock shortages and a need to acquire stock as and when it becomes available.

Of course, for UK businesses, one of the biggest challenges over the past year and one which is continuing, is getting to grips with Brexit, especially from a VAT and Customs Duty perspective. These changes were significant and, at the start of 2021, created ’business-critical’ risks for organisations to deal with, both in minimizing the impact on their margins and ensuring the ability to continue to trade with their customers and suppliers. Rob Marchant has recently covered this in detail in an article for Forbes Online. Rob also commented on the fact that organisations are now largely entering a new phase of Brexit planning; whereby they are now able to review whether their arrangements are optimal, and to make changes where they are not.

The future outlook for international trade

As the UK exits the legal restrictions of lockdown and moves towards a more normal course of business there are many challenges.

Practical issues with dealing with the post lockdown climate in different countries, understanding the rules across borders, margin pressures, shortages of containers and drivers are all concerns facing international businesses.

Obtaining employees from overseas and dealing with issues such as quarantines are also issues continuing to hinder certain sectors including food producers.

The impact of tariff changes and, more importantly red tape, caused by Brexit also weighs heavy on those running international businesses.

In the short to medium term, there will be continued disruption in terms of supply chains and also transportation links as outbreaks flare up and ‘local’ lockdowns are put in place. This could impact upon the supply of goods from and through those areas. Components that are produced in those areas not being shipped could result in problems across supply chains and manufacturing processes increasing both costs and lead times. Many businesses are trying to reduce an over-dependence on China and Asia for raw materials and manufactured goods.

To counter the issues, technology will need to be continually monitored and improved to ensure companies have the ‘best of breed’ to enable them to capitalise on opportunities as the economy starts to recover and will also provide protection if the virus alters or new viruses emerge resulting in future pandemics. Different forms of communication such as video conferencing will continue to dominate, as many have seen the advantages compared to face to face meetings, for example through time saved by not travelling. The UK has invested in the technology sector and could therefore benefit from this in the coming months and years.

Cash will become tighter as government support packages are withdrawn and loan repayments start, rises in taxes are likely to compound this as governments around the world start to balance the books. To kick start growth, businesses need governments across the word to promote global trade and take steps to keep trade flowing by reducing red tape, particularly in relation to tariffs, customs and border controls.

Systems need to be continually improved and upgraded to cope with increasing red tape, more diverse supply chains and need to be more adaptable at short notice to cope with short and medium term disruptions.

Free trade agreements will play a critical role in any recovery and how these progress will have a major impact on how successful businesses will be.

There is an increased drive towards “the green economy” and this should stimulate trade. Cross border services are also increasing, with the WTO predicting that service ‘exports’ will overtake traditional exports in the next 10 years.

How can we help?

We can help at this critical time with the production of cashflow forecasts and business models, which need to be regularly monitored and updated as the situation changes. This is key to managing cash and therefore, essential for the survival of most businesses.

We can also help with finding additional funding to finance the business and increased working capital requirements. Linking in with the above, a professional firm helping with applications and forecasts can add real credibility. This can both speed up applications and make them more likely to be successful as finance providers will gain more comfort if professional advisors are involved.

For some there will be opportunities to merge or acquire businesses at lower prices, our Corporate Finance team can support with due diligence and transactional support. We are seeing a lot of transactions at the moment and there seems to be an appetite for listing companies as some investors are sitting on cash which they are keen to invest.

We have a Global Mobility team who can help with global mobility and ensuring companies have access to the right employees at the right time, a critical area at present with staff shortages in many sectors especially following Brexit and a fall in Europeans wanting to work in the UK.

Our VAT and Customs Duty team can help with tariffs and are currently very busy dealing with Brexit and keeping our Brexit hub up to date. There are lots of insights on our website along with live and recorded webinars addressing some of the issues that are arising. Some businesses may want to explore the use of customs duty reliefs such as Inward Processing, Returned Goods Relief, or Customs Warehousing to mitigate the cost of import tariffs. These are specific reliefs that can help alleviate the payment of import taxes when the goods do not remain in the country. The reliefs will be of particular interest to those organisations that temporarily move goods into a country for manufacturing/ processing, before moving on to another location. The crossing of a Customs border generally results in the payment of irrecoverable import taxes, so multiple movements and payments can have a damaging impact on margins.

Tax advice should also be sought to ensure any changes in structuring is efficient and is correctly budgeted for. Tax rates are likely to change in the longer term in order to pay for government support therefore tax planning will also be key to mitigate the costs to businesses in the future.

The next 12 months are likely to be as challenging as the past 12 months, and businesses will need to keep on top of events as they develop and ensure that they can take advantage of any support or tax reliefs provided.

Contact us

Darren Rigden
Darren Rigden
Partner, Audit and Business Solutions
Kent