Article

The changing import landscape

Importers are used to feeling unloved: governments like to champion exports, as they are seen as a source of competitive advantage. But importers are also vulnerable to instability and uncertainty in the global economy, with potentially serious repercussions. So, what should they be doing about it?

While the UK is obsessed with Brexit, globally there exists a plethora of other political and economic risks, from the US-​China trade conflict to rising populist nationalism, a global economic slowdown and creeping protectionism.

Companies face significant shifts in regulations and barriers that could disrupt their business and reshape the export-​import landscape. Some are looking at ways to protect themselves, and these include currency hedging, restructuring supply chains or seeking alternative sources for materials, components, and other goods and services.

“Whether it’s currency depreciation or other changes to trading arrangements, importers tend to feel the impact most immediately,” says Allie Renison, head of EU and trade policy at the Institute of Directors. “It’s also the area that has the biggest impact in terms of the connection to consumers.”

In the UK, manufacturers and retailers are stockpiling goods in case a no-​deal Brexit holds up imports at the borders. Industrial groups such as Jaguar Land Rover, Airbus and Siemens are stockpiling parts; Unilever is stockpiling Magnum ice cream, and Pets at Home is increasing its stocks of food.

Compared with Brexit, things such as US-​China trade tensions may seem a less immediate worry for UK importers. The Organisation for Economic Co-​operation and Development (OECD) estimates that tariffs imposed so far by the US and China will leave output in each country around 0.2–0.3 per cent lower by 2021, with mild negative effects for other countries in the short term.

If pressures worsen, however, UK importers will certainly be affected. “Some businesses worry about the double whammy of rising protectionism and having to deal with the challenge of Brexit at the same time,” says Adam Marshall, director general of the British Chambers of Commerce.

Of the top ten risks expected to grow in 2019, seven are connected to the political environment, according to the World Economic Forum’s Global Risks Report 2019. More than 90 per cent of business leaders and experts said they expected economic confrontations and frictions between major powers to deteriorate, with a similar number expecting multilateral trade rules and agreements to erode.

Since the financial crisis, G20 countries have been operating an increasing number of non-​tariff barriers to trade. The World Trade Organisation reported $588 billion of new, import-​restrictive measures such as tariff increases, quantitative restrictions, import taxes and export duties in the year to last October, more than seven times larger than that recorded in the previous annual overview.

Donald Trump’s US administration has applied tariffs on steel and aluminium to trading partners around the world. Canada and Mexico were forced into renegotiation of the North American Free Trade Agreement (NAFTA), which became the US-​Mexico-​Canada Agreement (USMCA). The US has also imposed tariffs against China, covering about half of the country’s exports to the US. President Trump has, in addition, deprived the WTO’s dispute-​settlement process of judges, eroding its theoretical ability to hold Washington to WTO rules.

WTO director general Roberto Azevêdo warned recently that mankind was heading for an economic and political “Dark Ages” if it allowed the open global trading system to unravel.

Where there is friction or potential stress, there is also opportunity

Andy Demetriades, Caxton FX

Globalisation, credited with helping the world economy to expand at its fastest pace in recorded history in the decades before the financial crisis, has stalled. Trade as a share of world gross domestic product – a measure of openness – rose from 24 per cent in 1960 to nearly 61 per cent in 2008, according to World Bank data. By 2017, it had slipped to 56 per cent.

The last period of significant “deglobalisation”, between 1914 and 1945, encompassed two world wars, economic depression and trade protectionism. That does not necessarily mean the world is heading back there, but we do not know yet whether this is a temporary pause or the start of a long-​term reversal.

The future direction will be crucial for the UK’s import-​export economy when, or if, it leaves the European Union. The government hopes that a “global Britain” will make new trade deals around the world, which would inevitably create openings for imports as well as exports.

“As a trading nation – and, my God, we have made a lot of that in the Brexit debate – we are basically pinning our hopes, post-​Brexit, to a freer, frictionless, global trading environment,” says John Glen, economist at the Chartered Institute of Procurement and Supply. “What would our negotiating power be in a world that was thrown into flux with regard to the trading and free trade equilibrium if we were outside the EU?”

The UK has run an annual trade deficit in goods and services and on its current account every year since 1998. Its biggest import partner in 2017 was Germany, followed by the US, the Netherlands, China and France, according to the Office for National Statistics (ONS). Imports from EU countries made up 52 per cent of the total. Imports from China increased eightfold between 2000 and 2016 – more than treble the overall rate.

The future pattern will be shaped by developments in world trade and the UK’s role in it. These will also determine whether Britain becomes a more or less open economy. In 2016, UK imports amounted to 30 per cent of GDP, according to the OECD, a figure that’s double that of the US (15 per cent) and similar to France, but below the EU’s 40 per cent average and well below countries such as Ireland (105 per cent), Belgium (83 per cent) and the Netherlands (80 per cent).

The ONS says 6.5 per cent of registered businesses import goods and 3.8 per cent import services. By comparison, 4.6 per cent of businesses export goods and 5.5 per cent export services (2016).

What can importers do to protect themselves? Andy Demetriades, director of treasury solutions and partnerships at currency exchange provider Caxton FX, says his company urges clients to take a global view. “Where there is friction or potential stress, there is also opportunity. What new markets are you looking at? Where else can you source the raw materials you need? Have you looked at different distribution channels?”

Importers are vulnerable to exchange rate volatility. The pound fell by 15 per cent against the dollar after the EU referendum in 2016, though it has since partially recovered.

Mr Demetriades says more companies are looking at hedging their currency exposure. “There are a number of ways in which any small business can hedge,” he says. He encourages them to consider a “flexi” forward contract under which they commit to buy a fixed amount of currency in the future at a fixed rate but can draw down on it in increments at any point in the contract. This will help those that have an idea of what their requirement is likely to be, but not exactly when they will need it.

“In most cases, pragmatists will be looking to hedge exposure both in currency and supplies, to the tune of about 60 to 70 per cent of their forecast requirements for the coming year,” he says.

Ms Renison says steps that companies can take include currency swaps and forward contracts, along with seeking out domestic suppliers for materials, components and goods, and building up production capacity in the UK rather than overseas, though “that is not a short-​term fix”.

She adds: “There are certain things they could do but, quite frankly, talking to a lot of employers, particularly when it comes to Brexit, they are so dependent on the policy outcomes that there is a limited amount of mitigating steps they can take.”

Mr Marshall says the UK has not, so far, seen a huge degree of import substitution. “Where people can, they are shortening supply chains and finding domestic sources, but in a lot of cases they are saying that would be a lot more expensive and waiting to see what happens with Brexit.”

He adds: “Some say there just aren’t the domestic suppliers for what they need. We are a highly integrated and interdependent economy: in sectors from food and pharmaceuticals to automotive and aerospace there is a degree of integration that cannot easily just be sorted domestically.”

Some are looking afresh at things such as trade credit insurance, Mr Marshall says, while others are trying to build up working capital so they can create buffers of supplies. “I would hope that financial institutions will work closely with businesses on their working capital in what is going to be a time of significant change,” he continues.

Mr Marshall urges the government to do whatever it can to simplify processes and procedures for importers, “particularly in the context of Brexit, but also more generally, so that we can do everything we can to maintain the supply of both raw materials and finished goods”.

Globally, many companies with supply chains appear poorly prepared for the risks. A 2017 survey by Deloitte found that 53 per cent of companies had a high or critical dependency on their suppliers, but almost nine out of ten were not fully prepared to deal with uncertainties. A study by the Business Continuity Institute found that 69 per cent of companies did not have full visibility over their supply chains.

Steps they can take include building up stocks of key components, identifying back-​up suppliers or using technology to scour news sources and datasets to identify emerging problems. Some are developing centres of excellence to improve supply chain expertise or collaborating with other companies to share intelligence about potential supplier failures. Many, however, wait until problems materialise before taking action.

Small businesses face particular danger, some observers believe. “They are always going to be vulnerable because they are small and the money risk is greater,” says Lesley Batchelor, director general of the Institute of Export and International Trade, which has importers among its members.

Whether it’s currency depreciation or other changes to trading arrangements, importers tend to feel the impact most immediately

Allie Renison, Institute of Directors

Mr Glen says: “We have built sophisticated supply chains that were financed on the expectation that cashflows regenerate quickly. If your cash cycle becomes much longer between money out and money in, it can bankrupt you. Obviously, firms with smaller balance sheets and smaller cash reserves are more exposed.”

Mr Marshall agrees that it will be a steep learning curve for companies that have been importing from the EU without experience of handling friction. But, he adds: “On a more positive note, I think small companies are more agile in situations of change and are more quickly able to retool or reorientate their supply chains in the face of events they can’t control.”

The current climate, you might think, would underline the value of an importer’s role. After all, the world must have equal amounts of exports and imports unless it achieves a trade surplus with Mars. Successful economies export things they specialise in and import things they do not.

The global economy is interdependent, with companies importing materials and components and then exporting finished products. The United Nations Conference on Trade and Development says 80 per cent of trade takes place in “value chains” linked to multinational companies.

We are unlikely, however, to see politicians starting to champion importers. Imports are blamed for Britain’s persistent trade deficit and for undermining jobs by competing with domestic suppliers.

Ms Batchelor says: “I am not sure that we should be celebrating importers. I think we should just be accepting that importers are part of the landscape. We really need to be encouraging people to buy British and to encourage people to export more. We can’t afford to keep on buying more than we sell.”

She warns that, if the UK opted for low or zero tariffs in a no-​deal Brexit scenario, it would give a short-​term boost to imports, but cause long-​term economic damage. “If imports become cheaper, existing manufacturers are going to be squeezed out, so we will have fewer manufacturers to export and the balance of payments is never going to balance.”

Importers, it seems, will always remain unloved.

TOP TIPS FOR IMPORTERS

  • Assess global risks to your business and the likely severity of their impact
  • Make sure you have full visibility over your supply chain
  • Prepare contingency plans, including identifying alternative sources of supply
  • Don’t panic – triggering emergency plans prematurely can be expensive
  • Explore options for currency hedging
  • Look to increase working capital if there is a threat of disruption
  • Look at producing closer to home in the long term
  • Seek out opportunities: there are always winners in uncertain times

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