Cross-Border Trade In Products: Current Landscape for SMEs

5 minutes reading time

In the period since the UK left the European Union (EU) on 1 January 2021, small and medium-sized enterprises in the UK (SMEs) have been forced to navigate a landscape defined by increased red tape and border controls, supply chain issues, the impacts of a global pandemic and, more recently, geopolitical problems including the conflict in Ukraine.

These events have had significant consequences for SMEs, particularly those which trade in products internationally. The IMF has described the notable recent trends of “disrupted trade, supply chains and remittances”, and, indeed, SMEs have had to find ways to adapt to these challenges.

This article considers why these events have had such a significant impact on SMEs over the last 18 months before discussing the challenges present for SMEs in the current landscape and what actions SMEs should take to mitigate those challenges moving forward.

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The challenges of Brexit and the pandemic

It was recently reported in a study conducted by the LSE Centre for Economic Performance that, in the period following the UK’s exit from the EU, there was a notable “steep decline” in the number of trading relationships that UK businesses have with EU businesses, which fell by a third.

These issues have been attributed by many commentators to the significant increase in “red tape” as a result of the EU-UK trade agreement (Trade Agreement). Examples of this include:

  • The complicated “Rules of Origin” (RoO Rules) which need to be applied in order to qualify for zero-tariff treatment;
  • The need for customs checks and declarations in respect of imports and exports (being a departure from the “free trade” arrangements prior to the UK’s exit from the EU); and
  • The application of tariffs or customs duties to certain goods (including those that do not comply with the RoO Rules) has discouraged many SMEs from trading with the EU.

Whilst SMEs were grappling with the new regime implemented by the Trade Agreement; the Covid-19 pandemic compounded these issues by creating a period of uncertainty and insecurity just a few months into the post-Brexit era. 

The pandemic quickly placed supply chain issues under the spotlight. The sudden onset of compulsory lockdowns, closures of manufacturing facilities, staff shortages and fluctuations in demand across the world significantly impacted the flows of products and raw materials. 

Whilst certain sectors were hit worse than others, for those SMEs which were adversely impacted, the combined effects of Brexit and the pandemic created one of the most challenging environments in recent history for SMEs to operate within. 

The challenges of Brexit and the pandemic

Current landscape: green shoots and geopolitical issues

Whilst Brexit and the pandemic have clearly had a notable impact on SMEs and international trade in products, there have been some recent indicative green shoots of recovery.

It is notable that exports from the UK to the EU have recently been returning to their pre-Brexit levels. Commentators have suggested this is a possible sign that businesses in the UK and EU have gradually adapted to the new regime under the Trade Agreement.

Additionally, the UK has signed free trade agreements with Australia (December 2021) and New Zealand (February 2022) since leaving the EU. More recently, the UK has opened discussions about possible free trade deals with Mexico and Switzerland. These agreements will encourage SMEs to consider expanding or relocating their supply chains into new territories with different opportunities.

These are, however, fairly early signs of recovery, and the challenges created by the Trade Agreement continue to impact the many SMEs whose principal international trading relationships are with the EU. The increased regulation and compliance under the Trade Agreement continue to place strain on SMEs who deal in specific products such as alcohol, cosmetics and electronics and which require a significant amount of paperwork.

Additionally, whilst commentators have noted the easing of Covid-19 measures, SMEs remain cautious about the ongoing impact of Covid-19. In particular, the uncertainty of the likely effect of different variants of the virus, as well as the notable difference in the approaches taken to measures in different countries across the world, continue to be a cause for vigilance. By way of example, the localised lockdowns in China continue to be strictly enforced and have created supply chain problems for importers, many of whom have made efforts to localise their supply chains as a result of the pandemic.

More recently, the current geopolitical situation in Europe has created further challenges for SMEs. As well as the humanitarian crisis created by the conflict in Ukraine, there have been considerable impacts on trade relations, with a sharp rise in commodity prices, sanctions and immense damage to infrastructure in Ukraine causing a vast array of complications.

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Mitigating the risks

Clearly, these continue to be challenging times for any SME that deals in overseas trade in goods and each SME will have its own concerns and obstacles to overcome. There are steps which SMEs should be mindful of and measures which can be taken to mitigate these risks:

  • Carry out audits of your supply chain: identify the possible fragilities and where there could be significant impact without a contingency in place; 
  • Work on contingency plans and the diversification of the supply chain to avoid over-reliance on particular suppliers which could be vulnerable;
  • Budget for the likelihood of further increased supply costs in your business plans, projections and forecasts, as well as possible further Covid-19 measures;
  • Use specialists for compliance issues on overseas trade, product compliance and duties; 
  • Document the decision-making process and ensure you have adequate assurances in place from your manufacturers and suppliers around the RoO Rules and other compliance points; 
  • Explore possible opportunities in light of the new and forthcoming free trade agreements, including possible previously unexploited markets; 
  • Carry out an audit of your existing contracts; consider where possible risks might exist (e.g., long-term supply commitments, fixed prices, unilateral price increases, border customs responsibility) and whether anything can be done to mitigate these risks (such as a re-negotiation of terms or, in the context of the ongoing geopolitical issues, possible termination due to force majeure events and/or frustration of the contract); and
  • Consider updating your contracts for overseas trade issues in light of the risks mentioned in this article and the current landscape; it is possible to mitigate certain risks through the effective use of counter-party warranties, indemnities, and limitation of liability clauses.

SMEs need to be ever-more mindful of the current and likely future challenges surrounding international trade-in products. Careful planning will ensure that SMEs are well placed not only to navigate those risks but also to exploit the opportunities which the current landscape presents.

International Trade in Products v2

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If you have any queries in relation to cross-border trade in products, you can contact our Commercial Solicitors below.

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