The World Trade Organisation’s latest outlook for global trade makes grim reading. The Covid-19 pandemic could cause a drop in world trade of bewteen 13% and 32% in 2020. The trade community has been watching inventory stock plummet since February and while at the outset of the crisis this was simply a supply chain disruption, the complete global lockdown of our daily lives has caused a drop in global demand for goods and services like no other in recent memory. Even the IMF, which has been one of the more optimistic global forecasters over the last decade, is predicting a drop in global growth of up to 3%.
Within all of this mayhem, spare a thought for the smaller businesses that form part of the global supply chains that define the way in which global trade works. These businesses are at the end of the supply chains and reliant on payment of invoices for their finance. They may have well have contracts to supply goods or services to players further along the chain, but if the whole trade system grinds to a halt, then these invoices are not paid; the contracts are not honoured – very simply because the goods at the end are not delivered to the client.
Take medical supply chains as an example. The Covid-19 pandemic has meant that, in spite of all the multilateral trade agreements that existed before the crisis, there have been 91 countries introducing restrictions on exports of medical equipment, including ventilators and face masks. Only one country, Germany, has liberalised its export regime. Perhaps unsurprisingly, 80 countries have liberalised their import regimes – but if countries can’t export, these measures will not have an impact on what is exported from elsewhere. The result is gridlock, frustration and, ultimately, even in sectors which are in high demand, a really tough time for the SMEs at the end of these complex and inter-connected chains.
This is clearly an issue for the supply of medical equipment, but it holds elsewhere as well – in fact more severely in other sectors. Here is the problem: if I am a small exporting business with a turnover below, say, £5million, then I probably do not know about export credit agencies and I almost certainly fall outside of the banks’ commercial banking reach. I therefore rely on the contracts I have and the swift payment of invoices to fund my business through cashflow. Even if I am supplying an essential good or service, I will find it really difficult to access support schemes because I am too small and reliant on my invoices, not working capital loans or turnover. If the invoices against a contract stop being paid because the goods at the end of the chain aren’t being delivered or demanded any more, then my business runs out of cash very quickly. Because I am looking to have an invoice financed rather than a loan, I fall outside of the current government Covid-19 support structures.
In the UK there are 550,000 exporting SMEs according to the British Business Bank. They contributed around £200bn to the UK’s economy in 2019 according to Coriolis Technologies estimates. The majority are in service sectors, including digital services and ICT, and many are microbusinesses so although they have small turnovers and contribute very little to the overall value of trade, they contribute substantially to the “value added” in trade – that is, the innovative high-end functioning of a supply chain.
These businesses are unlikely to qualify for current government schemes because of their size and the way they are financed through trade “receivables” (that is, their contracts and invoices). UK Export Finance is fighting a rear-guard action to ensure that as many of these businesses who are eligible for funding are able to access that funding, but the activity does not have the same level of profile as the CBILS schemes. As a result, many perfectly viable exporting businesses will fail during the crisis because world trade has dropped off a cliff, not because they are intrinsically bad businesses.
If just one fifth of these businesses fail, it is a direct loss to UK export revenues of around £40bn, based on 2019 figures. Most will be struggling at present simply because the government schemes are not suited to their very specific needs. Yet because they are likely to contribute so much to “value added” trade, they are a much bigger long term loss to the UK’s future prospects. The government urgently needs to provide tailored support for them if this gap is ever to be filled.