How Scots exporters can accelerate via new trading relationships - Andy Hodson comment

As the British government continues to target international trade deals, new export markets will be key to post-Brexit growth – here is how I believe Scottish firms can capitalise on the opportunities while managing the risks of trading in new markets.

Scotland has a rich history of exporting success stories – take the whisky and salmon industries, for example. However, Brexit and the pandemic have presented challenges for the nation’s exporters, with both issues raising trade barriers between the UK and its international partners. Indeed, the value of Scottish exports dipped in 2020 to £26.5 billion from just shy of £34bn in 2019.

While we can point to pandemic-related losses – accounting for more than fifth of the export economy – as remediable, it’s clear that Brexit presents a greater challenge in the long term.

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Our analysis points to the UK’s exporters being the slowest of Europe’s seven leading economies to recover to pre-pandemic levels. The introduction of Brexit-related border controls for imports will bring more disruption in 2022, given the UK’s high dependency on imported intermediary goods to supply exports.

'While we can point to pandemic-related losses... as remediable, it’s clear that Brexit presents a greater challenge in the long term,' says Mr Hodson. Picture: Glyn Kirk/AFP via Getty Images.'While we can point to pandemic-related losses... as remediable, it’s clear that Brexit presents a greater challenge in the long term,' says Mr Hodson. Picture: Glyn Kirk/AFP via Getty Images.
'While we can point to pandemic-related losses... as remediable, it’s clear that Brexit presents a greater challenge in the long term,' says Mr Hodson. Picture: Glyn Kirk/AFP via Getty Images.
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Whisky exports jump by fifth to £4.5 billion as industry recovers from Covid and...

Scotland’s export losses form part of a wider £100bn hit to UK exports created by Covid-19 in 2020. We forecast it will have recorded an £18bn uptick in 2021 when the official data is available in March, followed by £55bn in 2022, and £40bn in 2023. In short, exporters have extensive ground to make up if they’re to fulfil their growth ambitions and meet Westminster’s target of achieving £1 trillion a year in UK exports.

The good news is that new trade agreements are being pursued in an effort to recalibrate international relationships. While trading in the EU will be ultimately harder and more expensive for the foreseeable future, the UK continues to work closely, if not having a direct trade deal, with key major economies.

For those businesses that have relied on trade with the EU, this recalibration is likely to create both challenges and opportunities as they tentatively explore new markets. In doing so, and at a time when inflation and supply-chain disruption are increasing the risk associated with poor business decisions, it’s vital that firms are aware of the trading cultures of the new markets they enter and the value of the partners they choose.

Andy Hodson, risk director at Euler Hermes UK & Ireland. Picture: contributed.Andy Hodson, risk director at Euler Hermes UK & Ireland. Picture: contributed.
Andy Hodson, risk director at Euler Hermes UK & Ireland. Picture: contributed.

Financial health

An important go-to measure when assessing a new trading partner’s health should be its Day Sales Outstanding (DSO). This registers the average number of days between sales being made and payment actually being received. In the UK, the average DSO is 53 days, which is much better than in India (67 days) and China (89 days), but falls short of the 30 days in Sweden and New Zealand.

Keeping a close eye on the DSO of trading partners is crucial to accurately planning cashflow, but it can also provide a useful early indication of a buyer’s faltering finances. If a partner begins to extend its DSO, it’s usually an ominous sign that their cashflow is constricted – often a precursor to insolvency.

Legal variations

Firms mustn’t be fooled into a false sense of security by speedy payments, though. It also pays to have good knowledge and insight regarding the legal procedures of a partner’s home country, and how they go about debt collection.

For example, the trading gateway to the Middle East – the UAE – has good payment behaviour, with a DSO of 30 days. However, should a firm become insolvent, collecting payment may prove tricky.

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Insolvent debtors in the UAE face imprisonment. As a result, it isn’t uncommon for debtors to flee the country, disappearing and leaving the exporter with a hole in their balance sheet.

Fortunately, there are safety nets for exporting firms should their efforts to collect debts fail. For example, trade credit insurance is a tool widely used by exporters to protect themselves against unpaid debt. An exporter takes out cover against the value of the goods traded so that if they don’t receive payment for them, the exporter isn’t placed in a precarious position themselves.

With this risk reduced, it gives firms the confidence to trade with partners in more unfamiliar markets, knowing that unpaid invoices – and impacts on cashflow – are covered.

Driving trade

As well as paying close attention to firms’ financial performance, it’s just as useful to monitor the strains affecting the entire economy of the country in which partners are based. Geopolitical instability invariably introduces an element of uncertainty in individual businesses.

If exports are to continue to play a central role in the economy post-Brexit, it’s essential that firms do their due diligence as they begin to ramp up trading activity again. With the right approach, insight and experience, Scottish exporters can capitalise on Britain’s new trading relationships and continue to fly the flag for quality Scottish products on the world stage.

Andy Hodson, risk director at Euler Hermes UK & Ireland

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