The end of globalisation (as we know it)?
With free trade apparently under threat in the Western world, what does the future hold for UK businesses seeking international expansion?
First Brexit, then Trump and now the prospect of pro-nationalist parties gaining influence across Europe – globalisation is under fire across the Western world.
Against the backdrop of a more challenging and unbalanced global economic environment and with people and businesses everywhere facing greater uncertainty, free trade has become an easy target for politicians and some sections of the media who blame globalisation for a widening gap between rich and poor.
The great debate
The rise of the populist, protectionist agenda is just the latest reaction to a global economic system that many believe still hasn’t recovered from the 2007/08 financial crisis. Western voters are trying to ‘take back control’ by electing governments that promise to put a stop to the perceived excesses of globalisation.
Yet in China and other emerging economies the appetite for globalisation and trade understandably remains strong, given the benefits these economies have enjoyed over the past few decades thanks to external demand for their cheap labour and goods. China’s rise has been fuelled by exports, so it was no surprise to hear President Xi Jinping at the World Economic Forum defending the ability of globalisation to lift people out of poverty in Davos.
New world order?
The Brexit negotiations are only just getting underway and it’s still early days for Trump. The impact they have will take time to bed in, but it’s clear that the established order of global trade is likely to change.
The rules, freedom and ease of trade with the EU are our immediate focus and businesses will have to adapt accordingly. But the benefits of trade are so strong for both parties that its seems implausible that the EU won’t continue to be the UK’s most important market, followed by the US, for many years to come.
Theresa May’s meeting with Mr Trump in the first days of his presidency culminated in promises of a trade agreement and a continuation of the ‘special relationship’. Our common language, strong historical links and business culture have always made the US an attractive market for UK firms and this will surely continue.
But regardless of the UK’s future trading relationship with the EU and the US, British businesses may need to rethink their focus.
Refocusing our exports
Once free of the EU rules binding trade with the rest of the world, the UK will be able to negotiate new trading relationships. And British businesses have shown, time and again, their ingenuity at grasping new opportunities.
According to the Office for National Statistics, UK exports grew at a faster rate than total world export growth last year for the first time in over a decade, with businesses already increasing exports to non-EU countries.
So although UK exports to emerging markets are still much smaller than to the EU or US, they’re already becoming more important, partly driven by the successful economic growth of these economies, their emerging middle classes and growing consumer spending.
The UK’s largest export sectors are machinery, transport and business and financial services, with services in general rapidly closing the gap on exports of goods. But there’s a world of opportunity out there for scale-ups across innumerable sectors and there are good reasons to believe that Theresa May’s vision of the UK as a hub for international trade may be realistic.
Building global trading relationships
In January, the Government published its new industrial strategy green paper, which sets out how it will support businesses to develop in new sectors and increase exports. The paper calls for protectionism to be resisted and for global trade to remain free and open in order to support investment and exports – all integral to the UK’s industrial success.
The UK is the world’s fifth largest economy, with enviable businesses, scientific research and cultural prowess, enabling us to attract investment and talented individuals from around the world. China, Canada, India, Mexico, Singapore and South Korea have already said they want to discuss future trading relationships, and the Government has established working groups with key trade partners such as India and Australia.
‘Made in Britain’ still carries considerable kudos across the world and the UK’s long-established reputation for high standards, quality of workmanship, creativity and, increasingly, our technological know-how can give exporters a head start in new markets.
China’s flourishing middle class is still hungry for imports despite the slowdown in the world’s second biggest economy, and the country is nonetheless fast becoming the largest luxury goods market. UK exports to China more than doubled between 2010 and 2013, yet we still export more to Ireland than to China and Hong Kong combined.
The UK has a long history of trading relationships with the 52 countries of the Commonwealth, which make up about a third of the world’s population. A recent survey conducted by Lexis highlighted the unique opportunities of the Commonwealth for exporters looking to grow their businesses overseas.
India is the fastest growing large economy in the world, driven by its enormous and very young population. A staunchly pro-business Indian government has been going to great lengths to reduce trade barriers and make life easier for overseas investors.
The number of UK SMEs exporting to South America has nearly doubled since 2011, with the important gateway of Brazil topping the list, despite its onerous and complicated taxes. Argentina is enjoying a resurgence and has recently abolished import licences.
Saudi Arabia is the UK’s biggest trading partner in the Middle East, alongside other stable regimes in Kuwait, Qatar and Bahrain, where British-made luxury goods, especially cars, remain very popular. Then there are the opportunities created by the recent lifting of sanctions on Iran.
The ASEAN economic region, including Singapore, Malaysia, Thailand, Vietnam, the Philippines and the emerging IT hub of Indonesia, is home to 620 million people, a larger market than the EU. Singapore currently accounts for around half of UK trade to the region.
Many of the fastest growing emerging markets have undoubtedly become safer and easier places to do business, but expanding into new export markets is not without its perils. In addition to the currency, credit (not getting paid) and liquidity (not getting money back home) risks of doing business overseas, each country comes with its own challenges and opportunities.
Given the shifting global trade patterns that are likely to emerge in the years ahead, now more than ever UK scale-ups need to be on their toes and well prepared to make their way in the world.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.