As the world continues to evolve, so does the business landscape. In 2024, SMEs are expected to face a number of challenges and opportunities in the exporting sector. In this blog, we will explore what the future holds for exporting SMEs and how they can prepare themselves to stay ahead of the curve.
Economic Growth
According to the Office for National Statistics, the UK economy is expected to grow by 2.5% in 2024. This growth is expected to have a positive impact on Small and Medium Enterprises (SMEs) who export products or services or who are planning to export. The growth of the UK economy will lead to an increase in demand for goods and services, creating new opportunities for SMEs to expand their business and increase their revenue.
Additionally, the growth of the UK economy will lead to an increase in consumer spending, which will benefit SMEs that sell products or services B2C. However, SMEs that rely heavily on imports may face challenges due to the increase in the cost of imported goods and services. SMEs that export may also face challenges due to the potential appreciation of the pound, which could make their products or services more expensive for foreign buyers. Overall, the expected growth of the UK economy in 2024 is a positive sign for SMEs, but they should be aware of the challenges that come with it.
Digitalisation
The Electronic Trade Documents Act 2023 was passed in the UK on 20th July 2023. This act makes provisions for electronic trade documents and is expected to boost the use of electronic trade documents, particularly electronic bills of lading, in global trade. The act defines an “electronic trade document” as information in electronic form that, if contained in a document in paper form, would lead to the document being a paper trade document. The act also sets out the basis upon which trade documents can exist and be dealt with in electronic form under English law, such that an electronic trade document has the same effect as an equivalent paper trade document.
It is expected that more countries will implement their versions of the Electronic Trade Documents Act in 2024, or commence their own digital trade legislative processes. This will cause cross-industry standards to emerge, unlocking new forms of data that can enhance product allocation and risk decisioning as eDocs becomes the new customs standard for importing and exporting, part of “trade” moving towards digitalisation.
The Act is expected to have far-reaching consequences for shipping, international trade and trade finance. Due to significantly lower administrative costs, the UK government estimates that the Act could generate a net benefit of £1.14 billion in the British economy over the next decade for UK businesses trading across the world. However, practical questions remain as to how quickly market participants will adopt digital processes. Paper documents and electronic documents are therefore likely to co-exist for some time.
Altogether, the Electronic Trade Documents Act 2023 is expected to have a positive impact on SMEs by reducing practical difficulties with hardcopy documents, streamlining trade, shipping and finance, and generating growth.
Green Regulations
The EU’s Carbon Border Adjustment Mechanism (CBAM) is the world’s first carbon border tax, which aims to reduce carbon emissions by addressing an issue called ‘carbon leakage’ or offshoring emissions. This happens when companies transfer the production of goods to countries with lower emissions standards, often leading to an overall increase in emissions. The first stage of the policy, which will be phased in over three years, came into force on 1 October 2023. This initial trial phase is focused on high emitting sectors, including cement, fertilisers, iron and steel, aluminium, hydrogen, and electricity.
From 31 January 2024, companies importing goods into the EU will have to declare, in quarterly reports, the total volume of products imported and the quantity of emissions embedded within each product. The tax will enable the EU to match the carbon price of imports with that of domestic goods. It is intended that this mechanism will create a level playing field, bolster industry decarbonisation, and apply a carbon price to goods entering the Union.
CBAM’s adoption marks a significant moment in the history of carbon pricing. By putting a price on carbon, it becomes an immediate and impactful risk, something that will trigger individual companies, industries and countries.
The EU’s Deforestation Regulation prohibits the sale in the EU of products produced on land that has been deforested since 2020. When it goes into effect in 2025, the measure will apply to cattle, cocoa, coffee, palm oil, rubber, soy, and wood product. This regulation will have a significant impact on businesses that rely on these products. Companies will need to ensure that their supply chains are free from deforestation, and they will need to provide evidence of this to their customers. The regulation will also require companies to conduct due diligence on their supply chains to identify and mitigate the risks of deforestation. The EU’s Deforestation Regulation will take full effect from 30 December 2024.
In summary, the EU’s CBAM and Deforestation Regulation will have a significant impact on businesses. Companies will need to ensure that their supply chains are free from deforestation and carbon emissions, and they will need to provide evidence of this to their customers. The regulations will require companies to conduct due diligence on their supply chains to identify and mitigate the risks of deforestation and carbon emissions. This will require short term action, in line with long term plans to reach Net Zero.
Brexit
UK exporting SMEs continue to face a number of challenges in the post-Brexit era. These include the impact of a potential general election, further trade agreements to be negotiated since the UK’s exit from the EU, and the need to trade efficiently with the EU under the Border Operating Model and CBAM reporting.
A general election can have a significant impact on exporting SMEs. Based on previous general elections, it is expected that customer confidence will drop off as election day gets closer. UK SMEs are more likely to delay buying decisions until after the election is over, potentially due to the fact that during election run-ups, central and local government cannot make announcements or changes that could benefit or hinder specific candidates or parties. This uncertainty can make it very difficult for businesses that are dependent on certain legislation to make concrete growth plans.
The uncertainty surrounding Brexit’s imponderables has the potential to increase, which could lead to negative consequences for economic activity. According to a survey, conducted by GOV.UK, larger, more innovative, more export-oriented, and hi-tech SMEs are more concerned about the impact of Brexit on their business activities. However, the UK government is providing support to help SMEs navigate the changes.
For instance, the government has launched a £20 million SME Brexit Support Fund to help SMEs adjust to new customs, rules of origin, and VAT rules when trading with the EU. SMEs can also access the SME Brexit Support Fund to get professional advice on how to deal with changes to trade rules with the EU.
Global inflationary pressures
The continuing wars in Ukraine and Gaza and the attacks of the Yemen Houthi group on commercial ships have created global inflationary pressures that are impacting the supply chain. The commodity markets are in turmoil and financial markets have been highly volatile since the start of the conflict. The combination of supply chain bottlenecks, generous government spending, tight labour markets and a commodity shock triggered by the Russian invasion of Ukraine, have together caused inflation to shoot well above central banks’ target across many developed economies.
The inflationary pressures caused by the geopolitical risks is leading to higher prices for raw materials, transportation, and other inputs, which can ultimately lead to higher prices for consumers. The supply chain disruptions caused by the geopolitical risks is leading to shortages of goods, as lead times are extending.
The impact of inflationary pressures on exporting SMEs is significant. The rise in commodity prices has led to an increase in the costs of production, significantly impacting profit margins for as they have been unable to pass the costs on to the buyer. In addition, the rise in inflation has led to an increase in the cost of borrowing, creating difficulties for SMEs to access credit.
Whilst 2024 presents several challenges for exporting SMEs, it also offers opportunities for growth and innovation. SMEs that are able to adapt to the changing economic landscape and leverage digitalisation and green regulations will be better positioned to succeed in 2024 and beyond.
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