Tackling the global trade challenge
Globalisation has yielded more opportunities for international trade than ever before, but expanded opportunities also mean increased complexity for UK businesses.
Article courtesy of American Express, sponsor of the IoD Open House Global Business pillar
It 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-utilised is likely to become ever more important.
And as both strategist and executor of the business plan, insight into this activity is essential for business leaders.
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, American Express’ 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. Nearly two in five (39%) 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.
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.
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 we surveyed agree that digital technology makes it easier to trade internationally.
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 several years away, we’re already seeing several companies use the system to help manage payments. That’s why we’ve recently announced a new partnership with fintech start-up Ripple for our US corporate customers sending funds to UK businesses.
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.
Exchange rate volatility is a major challenge
Another headache for FDs around international trade is exchange rates and currency volatility. Exchange rate volatility and economic changes are often the biggest challenges to both current and future international trade activity.
Nearly four out of five (79%) of the UK businesses we surveyed say that their organisation’s trade activity is affected by currency volatility, and that currency stability is the most important factor when deciding to trade in a new market.
While managing currency fluctuations can seem daunting, currency tools like forward contracts can mitigate against volatility by guaranteeing a fixed rate. Despite the vast majority of businesses we surveyed deeming FX contracts and options effective, less than half currently use 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.