SME export support and trade competitiveness

This roundtable was convened jointly by the Centre for Inclusive Trade Policy and the Confederation of British Industry. The event was held under the Chatham House Rule and took place on 22 October 2024.

Background

A joint CITP-CBI roundtable discussion was held to examine the challenges and opportunities facing UK businesses in international trade, with a particular focus on Small and Medium Enterprises (SMEs). The discussion covered various aspects of export support, regulatory challenges, and competitiveness issues in the context of changing global trade dynamics.

The discussion was wide-ranging but with some clear common themes and policy recommendations. This summary is not intended to suggest that there was a consensus of view, but provides an overview of the key issues raised, some large unanswered questions, and possible recommendations for inclusion in the UK Government’s forthcoming trade strategy.

Introduction

The roundtable highlighted that while international trade presents global challenges, many of the key issues facing UK businesses are domestic in nature. Participants emphasised the need to "get the plumbing right" at home to enable successful international trade. The discussion revealed that SMEs face disproportionate challenges compared to larger firms, particularly in navigating customs procedures, understanding trade agreements, and accessing appropriate finance for export activities.

The current global context, characterised by supply chain disruptions, geopolitical tensions, and increasing Environmental, Social, and Governance (ESG) requirements, is forcing businesses to adapt their models and strategies. These changes are occurring against a backdrop of regulatory divergence between the UK and EU, creating additional complexities for UK exporters. Participants stressed the importance of government support in addressing these challenges, particularly through improved information sharing, practical guidance, and targeted financial assistance.

SME challenges and support needs

The discussion highlighted how SMEs face unique challenges that require tailored support approaches. Understanding customs procedures and border issues often involves large upfront fixed costs. Given the limited resources available to SMEs compared to larger companies, such barriers can be prohibitively expensive and deter SMEs from exporting at all.

Providing timely and complete information to SMEs on how to navigate the bureaucracy of exporting can be a key factor in allowing them to join international markets. Participants lamented that the information provided by government agencies dedicated to export support is often insufficiently detailed and with insufficient knowledge to meet the needs of SMEs. The discussion also emphasised that small businesses should not be treated as a homogeneous group, as they have varying levels of experience and capabilities.

Clear communication of export opportunities was presented as a potential key opportunity. Many SMEs struggle to understand how Free Trade Agreements (FTAs) work, let alone new requirements such as the EU Carbon Border Adjustment Mechanism (CBAM), which will require firms to declare the carbon content of their products. If such requirements are not clearly communicated, many British firms might not be able to access the EU market in 14 months’ time, when CBAM will be implemented.

In addition, the modernisation of documentation and processes must be implemented with consideration for small businesses' capabilities and resources. Time constraints are often as significant as financial limitations for SMEs, making efficient and accessible support services crucial.

It was also noted that government guidance on how to deal with customs is often too vague to guarantee certainty for businesses to be compliant with regulations. Often, products are stopped at the border because regulations are subject to interpretation. Such uncertainty deters many SMEs from exporting.

Regulatory divergence between the UK and the EU

Regulatory divergence between the UK and EU emerged as a significant concern, particularly regarding future challenges. The speakers recognised that, over time, divergence between the regulatory environment of the UK and the EU is more likely to increase than not. This will pose severe challenges to firms that will have to deal with different standards, which, in some cases, might conflict with each other.

Moreover, the Windsor Framework is expected to lead to increasing divergence between regulations applying to Northern Ireland and the rest of the UK. In the future, exporting from Great Britain to Northern Ireland might be more difficult, leaving the smallest nation of the country more isolated.

A key question discussed was whether the UK will align with the EU on the Carbon Border Adjustment Mechanism. At present, it is understood that the UK Government will implement an EU-style CBAM but with some divergences, posing uncertainty about whether the two systems will be compatible.

Other regulations relating to chemicals, machinery and other manufacturing products will create additional compliance requirements. Finally, it was noted that, while the UK could implement regulatory alignment with the EU, such alignment would be unilateral. A unilateral alignment implemented by the UK only might help businesses importing from the EU but would be less beneficial to those who want to export to the EU.

Global trade dynamics

In recent times, the global trading environment has been shaped by several key factors, including the COVID-19 pandemic, supply chain disruptions due to geopolitical events, increasing focus on resilience, and growing ESG requirements. Rising energy costs stemming from the Russian invasion of Ukraine were identified as a particular challenge still affecting production decisions and investment patterns across various sectors.

These changes are forcing businesses to modify their operational models and strategies. Such readjustments are costly, and they often involve large upfront costs which some firms might not be able to sustain.

Government role and support

A shift was noted in the UK's trade strategy towards thematic rather than sector-based approaches. Participants emphasised the need for a comprehensive industrial strategy that includes investment strategies and encourages firms to adapt to global changes. The main points discussed involved:

• Access to information: There was consensus that better access to detailed, transparent trade and customs guidance is essential for small firms. Current government resources were seen as insufficient.
• Regulatory alignment: Divergence from EU standards, especially regarding the environment and sustainability, poses future challenges for UK exporters.
• Government role: The group discussed whether the government should intervene more actively to support businesses, particularly in addressing market failures where private decisions may not align with the broader social needs.

However, challenges remain in determining the most effective forms of intervention, particularly in balancing broad support against targeted assistance for specific companies or sectors.

The participants discussed the potential role of the Government in helping businesses to reorganise their activities in response to global challenges such as supply chain reorientation, pandemics and geopolitical events disrupting international trade.

On the one hand, firms that operate in free markets should understand how to deal with such challenges without public intervention. At the same time, firms are the ultimate drivers of economic growth, and the government might have an incentive to intervene. It was noted that government interventions should be limited to those instances in which the optimal decisions of businesses do not align with the optimum for society.

Information and expertise sharing

Beyond official information provided by the Government, the importance of peer-to-peer information sharing emerged as a significant theme, with successful examples of businesses sharing expertise and experiences. This approach has proven particularly valuable for SMEs, though capacity constraints can limit their ability to fully engage. The need for clear, accessible government guidance was emphasized, particularly regarding regulatory requirements and compliance procedures.

The new UK Government, elected in June 2024, has promised to produce both an industrial strategy and, closely connected, a trade strategy. The CITP convened a series of roundtables with various partners – Chatham House, The CBI, Resolution Foundation, and Fieldfisher LLP – each aimed at specific issues or an area of policy the new trade strategy will need to address.

Each roundtable convened a high-level discussion between policymakers from the UK and beyond, business representatives, experts and academics to identify core challenges and policy recommendations in each topic area:  a) trade and economic security; (b) trade policymaking within the UK; (c) Services trade and priorities for future negotiations’; (d) SME’s, export support and UK competitiveness; (e) agriculture, environment and food standards. A Discussion Note will be published summarising each roundtable.