Export Dilemma: How British SMEs can navigate international trade

Although British SMEs have demonstrated resilience in their international trade, they continue to encounter difficulties. Nonetheless, they can overcome these challenges by carefully evaluating their potential markets and taking appropriate steps to navigate through these uncertain times.

Small and medium-sized enterprises (SMEs) play a crucial role in driving growth and employment in the global economy. These businesses make up 99 percent of all businesses in OECD nations and provide 70 percent of all jobs. Additionally, they contribute more than half of the global GDP in high-income nations.

However, SMEs struggle with expanding internationally due to limited capacity for in-depth market research. As a result, their growth potential is often constrained by the size of their local market. Without the capacity for in-depth market research, many SMEs expand slowly and seize opportunities as they arise.

Despite the significance of international expansion, only a small percentage of SMEs engage in cross-border trade. In the European Union, less than half of online businesses, just 4 per cent of SMEs, sell to nations outside of the union, according to the World Economic Forum. This presents an opportunity for the global economy.

Furthermore, the COVID-19 pandemic has made international trade even more challenging for SMEs. Uncertainty regarding foreign markets and problems with the global supply chain have slowed export growth and exposed fragile SMEs in developing countries to supply chain risks, leading to job losses and bankruptcy.

However, exporting can be a game-changer for SMEs with aspiring growth plans . British SMEs generate twice as much revenue from exports, roughly 40 per cent of their sales through online channels. Now, these businesses must navigate the export dilemma and strategically expand beyond their local markets.

What is International Trade?

International trade refers to the transfer of goods and services between nations. Alternatively, imports and exports. There are two directions in which products and services are traded internationally. It can be imported – goods brought into a nation from abroad or exported - goods and services sold outside of the country.

Globally, most economists believe that trade between countries increases global prosperity. The standard of living in both countries rises when a person or business imports a cheaper good or service.

International trade can be advantageous to businesses in terms of diversification. It allows businesses to have a broader pool of prospective customers, which increases earnings and revenues, perhaps less rivalry in a foreign market that hasn't yet been penetrated, and potential gains from fluctuating currency rates.

Through international commerce, nations can access commodities and services that might not otherwise be accessible domestically and grow their markets. Market competition has increased as a result of global trade. This ultimately leads to more competitive pricing, which lowers the cost of the final product for the consumer.

Wealthy nations can employ their resources—such as technology, labour, or capital—more effectively thanks to global commerce. Different nations have various natural resources and assets, including land, labour, capital, and technology. This enables some nations to manufacture the same commodity more rapidly, cheaply, or effectively. They might, therefore, sell it for less than other nations. If a nation cannot effectively manufacture a good, it can receive it through trade with another nation that can. In international trade, this is referred to as specialisation.

International Trade in Britain

As one of the world's most active participants in international trade, the United Kingdom has long been recognised as a major participant in global trade, with foreign trade accounting for an impressive 57 per cent of its GDP in 2021, according to the World Bank. The World Trade Organisation (WTO) said the nation is the world's second-largest exporter of commercial services and the eighth-largest importer of products.

The International Trade Administration noted that Britain continues to be a crucial market for American exports of goods and services, despite the difficulties and unpredictability brought on by the Britain's exit from the European Union, high inflation brought on by rising energy prices, and the COVID-19 pandemic.

The ITA further said that in 2021, US exports of goods and services to Great Britain were $129.3 billion, an increase of 7.6 per cent from the previous year. This put Britain in seventh place among countries that receive American goods exports and first among countries that receive American exports of services.

According to Comtrade, the nation's top imports and exports in 2021 were gold, automobiles, petroleum products, telephones, data processing equipment, and medicines. Following two years of contraction due to the COVID-19 pandemic, the volume of exports of goods and services increased by 4.8 per cent in 2022 compared to 2021. Imports of goods and services increased by 8.4 per cent in volume (FMI). Additionally, with the rise of the digital economy, British SMEs have thrived internationally. In 2021, British SMEs made up 84 per cent of all British exporters.

Figures from Parliament revealed that the country exported £815 billion in goods and services in 2022, while it imported £902 billion, with 48 per cent of imports and 42 per cent of exports of goods and services going to the EU.

Meanwhile, as of February 2023, recent data from the Office of National Statistics (ONS) revealed that as fuel exports to EU nations fell by £0.9 billion in February 2023, the value of goods exports reduced by £1.1 billion (3.5 per cent); after taking inflation into account, the total amount of products exported decreased by £0.8 billion (3.1 per cent). The total trade for export as at April 2023, is £67,855 million, while for import is £72,660 million, according to ONS.

According to Comtrade, the Britain's top export destinations are the United States (12.7 per cent), Germany (8.7 per cent), Switzerland (8.4 per cent), the Netherlands (7.9 per cent), Ireland (6.2 per cent), and France (5.6 per cent). In contrast, Britain's top suppliers are China (13.2 per cent), Germany (11 per cent) the United States (8.7 per cent), the Netherlands (6 per cent) and Norway (5.2 per cent). Santander also noted that Britain's top trading partner is the EU, adding that Britain had negotiated trade arrangements and agreements in principle with 71 nations, including one with the EU, to diversify its economic partners.

Despite the challenges, Britain's robust and diverse economy thrives as a major player in global trade. With its impressive export and import figures, strategic partnerships, and resilient business environment, Britain remains an attractive destination for investors and traders.

Barriers to International Trade for British SMEs

Small and medium-sized enterprises (SMEs) face significant challenges when it comes to international trading. From navigating complex regulations to struggling with limited knowledge of foreign markets, British SMEs need help as they seek to expand globally.

A recent survey conducted by the CBI, Finastra, and YouGov sheds light on the difficulties British SMEs encounter as they attempt to engage in foreign trade. The survey, which involved over 200 financial decision-makers from British SMEs, aimed to better understand the financial views, objectives, and challenges that firms face when it comes to global expansion.

To compound matters, government policies that obstruct commerce internationally and safeguard home markets - known as trade barriers - can also pose significant challenges for British SMEs. These barriers include import and export permits, tariffs, quotas, subsidies, and standardisation.

Despite the challenges, the survey found that a significant proportion of British SMEs remain interested in engaging in foreign trade, with only 23 per cent of respondents indicating that they were not interested in doing so. However, the study found that just 44 per cent of the firms surveyed currently engage in foreign trade, suggesting that the perceived difficulties and lack of support may deter many businesses.

The survey highlights several common limitations British SMEs face when expanding globally. One of the most significant is the impact of Brexit, with 23 per cent of respondents identifying it as a major obstacle. Other challenges include being too small to trade globally (16 per cent) and needing to gain more knowledge of foreign markets (15 per cent).

Trade barriers could also come in the form of government policies that obstruct international commerce and safeguard home markets. These include import and export permits, tariffs, quotas, subsidies, and standardisation.

Navigating International trade for British SMEs

International expansion is attractive for many businesses looking to broaden their horizons and tap into new markets. However, it has its challenges. Lesley Batchelor CBE, former director-general of the Institute of Export and International Trade, highlights the importance of understanding the international market before diving in headfirst.

In her advice to businesses, Batchelor suggests conducting research on potential new markets to ensure a good fit. This includes pricing strategies, competition, regulatory requirements, and eligibility to sell goods or services in that country. According to her, failure to account for these factors can lead to missed opportunities or costly mistakes.

For those considering international expansion, Ian O'Donnell, lecturer on Business Growth at Coventry University and Director of Branding Agency Real Point, advises seeking the guidance of a mentor who has already navigated the process successfully. Thorough research is also critical to ensuring all aspects of international expansion are considered.

The Department for International Trade can be a valuable resource for SMEs, providing information and assistance in identifying suitable markets and building relationships abroad. O'Donnell stresses that there is no one-size-fits-all approach to selecting international markets, and businesses should aim to find the right match for their products and services.

CBI Chief Economist Rain Newton-Smith highlighted the role of fintech companies in supporting SME growth in foreign commerce. The International Trade Toolkit, developed with Finastra, provides advice and guidance to SMEs seeking to achieve their international market goals. The body estimates a new generation of SME exporters could raise £20 billion in additional British export revenues by 2030. The fintech sector is key in driving productivity gains and broader economic transformation.

In summary, understanding the international market is critical for businesses looking to expand overseas. Seeking advice from experienced mentors, conducting thorough research, and leveraging resources such as the Department for International Trade and the International Trade Toolkit can help SMEs achieve their growth objectives in foreign markets. By taking the time to assess potential markets and build the necessary connections properly, businesses can increase their chances of success and maximise their potential for growth.

Conclusion

As the backbone of the economy, SMEs are important for driving growth and creating jobs. By overcoming the export dilemma, these businesses can tap into new markets and unlock their full potential. However, this will require strategic planning, innovative solutions, and a willingness to take calculated risks. With the right approach and support, British SMEs can expand their reach and achieve success in the global marketplace.