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UK firms grapple with Brexit trade reality

British businesses are creating a new trading footprint around the world, according to a new report, A New World for Global British Business, from Lloyds Bank and Aston Business School.

As the UK prepares to conclude its exit from the European Union, nearly one in five British exporters (18%) have already changed trading partners to divert business outside the EU, showing that businesses are actively looking at new export markets. An estimated £50bn billion of exports have been diverted since the Brexit referendum result in June 2016.

Brexit uncertainty impacts UK exports to EU

Aston Business School analysed 340,000 quarterly export transactions made by 26,000 UK exporters over a five-year period, finding that relative growth in export values towards the EU countries have decreased by an average of 8.7% per year.

This is driven solely by Brexit uncertainty as those diverting trade beyond the EU have primarily opened up trade relationships with established emerging markets within the BRICS (Brazil, Russia, India, China, South Africa). Firms have also diverted trade to countries the UK has traditionally strong relationships with, including Commonwealth nations Australia and New Zealand.

Separate polling of 1,200 British businesses undertaken in October for the report finds 24% of all UK businesses and 29% of exporters have reviewed and made changes to their supply chain because of Brexit and 26% of exporters say they have diversified to create new opportunities outside the EU.

“While the clock is counting down to the end of the UK’s post-EU transition period, British businesses are building toward the future and forging new opportunities around the world," said Gwynne Master, global head of Trade for Lloyds Bank. "These findings are the start of a new chapter in the story of global British business and trade. This year in particular, our business customers have faced a myriad of challenges not least of which is the global pandemic. Despite this businesses are taking big strategic steps that will change the shape of their import and export business and the future of this great trading nation for years and decades to come."

Further expansion planned

The report found plans are underway for further expansion beyond the EU. According to the polling, a third of exporters (34%) and one in six (16%) of all businesses plan to expand into new markets around the world. It also highlights business continuity plans, with 17% of exporters and 13% of all businesses saying they are stockpiling to ensure continuity of service post Brexit. 

The biggest shifts in trade diversion were by firms who export the least, which switched as much as 46% of new export growth to non-EU markets. For the next quartile up, this figure was 19%. Yet the analysis found that it was primarily firms who have the highest export values which were benefiting from the changes.

The research suggests that in some cases they might have taken the place of those trading less - potentially due to their ability to better manage, absorb and diversify the potential risks of a post Brexit world, and the likelihood that they are highly productive firms which export multiple products or services. This is shown through the increase in growth in export values towards both intra and extra- EU countries despite there being a slow down of the exporting of new products and destinations within the EU as a whole.

“The shift in diversion we found goes against conventional ‘trade gravity’ models, in which countries geographically close to each other tend to do more trade," commented Jun Du, professor of Economics at Aston Business School and director of the Lloyds Banking Group Centre for Business Prosperity. "Instead from the referendum through to today we see exporters exploring new trading partners around the world. Our concern lies with the vulnerabilities faced by businesses that export less, forging these paths while lacking the infrastructure and scale of multinational firms as this reverse in trade gravity typically means higher costs and greater risk exposure. More needs to be done to help British businesses of all sizes navigate the future of international trade.”

While evidence suggests trade diversion is already underway and British businesses are preparing for the unknown, insights from key business leaders tell us that there are still many key lessons to be learned. Mitigating risks, managing overseas expansion and building understanding and awareness are all central to the success of opening up new trading opportunities beyond the EU in our post Brexit world.

UK businesses remain positive despite supply chain concerns

Meanwhile, research from HSBC UK has found that more than two thirds of UK businesses have a positive outlook on international trade for the next two years, despite the exceptionally challenging year they have just been through. The latest HSBC Navigator report found that 68% of British businesses remain positive about international trade compared to 63% in France and Germany.

However, trade optimism from UK firms is down 18 percentage points from last year, representing the largest fall in Europe, alongside firms in France. Despite this, more than three out of five (61%) UK businesses say they have no plans to stop or reduce trading with existing trade partners in the next two years.

But, more than half (51%) of UK firms expect international trade to become more difficult in the next year while only 16% feel it will become easier as businesses face into economic headwinds presented by the pandemic and the end of the Brexit transition period.

“It’s encouraging to see that, despite the extremely difficult external environment that we are living through, UK companies have not lost faith in the power of international trade to grow their business," said Ian Tandy MBE, head of Trade for HSBC UK. “There is understandably concern for the months ahead as we continue to tackle the pandemic and, with just one month to go until the end of the transition period, we’d encourage businesses to take time to understand how their operations could be impacted in January and put contingency plans in place. I am confident the innovation and entrepreneurial spirit of our businesses will carry firms forward with momentum into the next year as they continue to search for growth in markets around the world.”

Supply chain concerns

The research also identified that a large majority (90%) of business leaders have concerns about their supply chains as they deal with the impact of COVID-19 and economic uncertainty. These are particularly focused on increasing costs, stability and suppliers being far from either target customers or their own business.

To alleviate these concerns almost a third (31%) of UK businesses are selecting suppliers based on how effectively the country in which they are based has managed COVID-19. While more than a quarter (28%) have increased use of digital or technology (28%) and the same number are selecting suppliers based on operational resilience and their ability to deliver quickly.

“Supply chains have been tested like never before and many business leaders are now understanding the importance of having transparency through each layer of their suppliers," Tandy added. “As firms look to 2021, increased resilience and increased usage of technology within supply chains will be of the utmost importance. We’ve seen businesses keen to diversify their suppliers to provide greater geographical contingencies and also incorporate innovative technology into their day-to-day business to streamline operations and help protect them from unpredictable economic uncertainty. These changes will be essential for businesses to thrive and grow in the months and years ahead.”

Case study: Framptons

HSBC UK customer Framptons is an award winning family owned manufacturing business based in Shepton Mallet in Somerset which specialises in contract packing and egg products. Founded in 1898 the business has more than a century in the food industry and decades of experience manufacturing egg products and beverages including plant based milks, flavoured milks, juices and water.

The business knows how beneficial international trade can be and exports products around the world, from the USA and Canada to Asia.

“International trade is key for us to ensure we have a wide choice of raw materials to develop the best products we can for our customers," noted Jon Edwards, finance director of Framptons. “I agree that, despite the challenges, there is positive sentiment around global trade and we’ve certainly been experiencing growth in our export business. There is a huge opportunity for our industry to take our goods to the world under the ‘Made in Britain’ stamp which is recognised globally as a mark of quality and heritage.”

In order to build resilience in their supply chain through 2020, Framptons has built up stock to keep the business operating.

“We’ve managed our stock levels based on the perceived reliability of supply chains while carefully managing our working capital," added Edwards. “The pandemic has introduced a large amount of uncertainty into the reliability of suppliers so to combat that we’ve been increasing stock levels to ensure our own internal supply chain can cope with extended lead times.”

About the surveys

The Lloyds Bank Business Barometer research is carried out monthly on behalf of the bank by BDRC Continental. This survey was conducted with 1,200 companies from 1-15 October covering all sectors and regions of the UK. The results are reweighted to match proportions by size, sector and region of the total business population, as published by the Department for Business, Energy and Industrial Strategy and the Office for National Statistics.

Aston Business School estimates that approximately £50bn in export value has been diverted away from the EU since the Brexit referendum result in June 2016. This is based on an annual trade diversion value of approximately £10.5bn, calculated from June 2016 to December 2018 and the assumption that trade diversion follows the same trend as before to end 2020 [which comes to £47.25bn in total]. The Aston Business School analysis is based on HMRC firm trade transaction-level data for the period 2012-2018, differentiating between export flows towards intra EU- countries and extra - EU countries. This amounts to 340,000 quarterly export transaction records by more than 26,000 UK exporters.

The HSBC Navigator repor surveyed more than 10,000 businesses in 39 markets with 1,000 of those in the UK.

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