Small businesses worldwide faced unprecedented challenges in 2020 and 2021. The global economic crisis caused by the coronavirus pandemic was the worst since the Great Depression, and small businesses have been disproportionally disadvantaged by successive lockdowns and disruption caused to global supply chains.
Many UK small businesses that trade with the EU, our largest and closest export market, have also had to become familiar with customs processes for the first time following the end of the transition period on 31 December 2020. Others have looked on as in-principle trade deals are signed with new markets further afield, wondering how to take advantage of this new global drive. Although SMEs are working hard to adjust to the UK’s new trading relationship with the EU, many have experienced disruption and additional costs, with a significant number choosing to stop exporting permanently or temporarily.
As we look beyond post-pandemic recovery as an independent trading nation, the UK Government has a unique opportunity to help drive growth and economic recovery by unlocking the export potential of the UK’s smallest businesses. The benefits to the wider economy of supporting small firms are clear – following the 2008 recession, nine in ten people who moved from unemployment back into the workforce did so by working in a small business or setting one up through becoming self-employed.
Small firms make up the vast majority of businesses in the UK but are under-represented in international trade. Previous FSB research has identified the barriers that deter small firms from exporting, from finding overseas customers to navigating foreign regulations. Small firms are less likely to have access to the resources required to meet the upfront costs and challenges of exporting, so Government support is often the first port of call for small businesses interested in internationalising. This is not to say that small firms are inadequate or helpless; by contrast they can be incredibly agile, innovative and disruptive compared to large incumbents. We know that small businesses that have secured smart, on-demand support have gone on to great things for society and the economy; that is the approach we are trying to evolve and improve so that more small businesses can follow. By using its forthcoming export strategy to commit to targeting its support towards small and micro enterprises, Government can add the much-needed economic fuel injection – creating more first-time exporters and encouraging existing exporters to reach new markets.
For Government support to reach all businesses that would most benefit, it is important to build an accurate picture of the small business exporting landscape and the challenges they face. Government will be able to use the new Trade Act to gather accurate data to build a more detailed understanding of small business needs, which will help to target support initiatives towards the areas where they are most needed. Small businesses are already embracing the opportunities of digital transition. The coronavirus pandemic accelerated this digitalisation shift and showed how innovative small businesses are. This trend will only continue, and the Government should build on its work to champion paperless trade under the UK presidency of the G7 by promoting the WTO Joint Statement Initiative on e-Commerce and the UNCITRAL Model Law on Electronic Transferable Records.
Increasing small business participation in international trade requires everyone to come behind a clear and focused agenda of reforms for the new world of global trade. For the first time after the pandemic, our report sets out recommendations for policymakers to adopt and see a step-change in exports, fostering a new culture of exporting among the UK’s smallest businesses. From the creation of a new central digital hub for expertise, best practice and resources, to new flexible funding that small firms can use to access tailored support that suits their business and their prospective new market. We look forward to engaging with Government to unlock the export potential of the UK’s SME community.
For details of our recommendations in full and our supporting evidence download our complete report.
The majority of small firms’ decisions on where to export result at least partially from a direct approach from overseas markets. The following recommendations set out ways the Government could help businesses move from a reactive to a strategic approach to international trade.
Target ITA support at micro and small businesses
Government support is often the first port of call for small businesses looking for export advice, and one of the most frequently used forms of support used by small firms is the Department for International Trade (DIT) network of international trade advisers (ITAs).
- Target ITA support at micro and small potential exporters.
- Provide ITAs with access to all relevant Government resources.
- Build further peer-to-peer learning opportunities into ITA services.
- Explore introducing accreditation and quality assurance for ITAs to deliver consistency of offer and support.
Improve the implementation and promotion of FTAs
Free Trade Agreements (FTAs) are one of the most powerful means of removing barriers to trade. They offer businesses preferential market access, lowering tariffs, and streamlining compliance requirements such as product standards. However although FSB research shows that preferential trade agreements would be the most useful factor in small firms increasing their export ambitions, just 18 per cent of small businesses exporting to the rest of the world (outside the EU) have made use of the preferential terms of access already available to them in FTAs. Administrative costs, a lack of resources and low levels of information about foreign markets, together with a lack of communication around the practical benefits of FTAs for small firms can contribute to the low take-up of preferential terms.
- Include Small Business Chapters in all ongoing and future bilateral FTA negotiations.
- Establish a dedicated team and online information portal for each FTA negotiated.
- Improve promotion of FTAs following examples of international best practice.
The following recommendations are intended to help small businesses to understand the processes of international trade, from concluding foreign contracts to navigating customs procedures.
Equip small firms with the knowledge they need
Beginning their export journey can be daunting for small businesses. They need to consider many potential challenges including: building a robust business proposition and export strategy; understanding their finance options including export finance; negotiating international contracts and payment terms; and navigating customs procedures. Equipping small firms at all stages of the export journey with the tools they need will help to take away the ‘fear factor’ of small business participation in international trade.
- Explore expanding the roll-out of the Export Academy across the English regions.
- Further funding to access private sector expertise around customs processes.
- Highlight the opportunity that establishing in Northern Ireland can provide to GB businesses.
- Provide guidance on how to mitigate the risks of international trade, including late payments.
- Improve UKEF’s offering to small businesses.
Create a central digital hub for Government resources
Satisfaction with DIT digital services is low: according to a report from the National Audit Office under half of DIT’s clients reported that services to identify export opportunities were good at meeting their needs. Despite the large amount of information held on Government department websites, including HMRC, DIT and the GREAT.gov.uk platform, small businesses report that navigating these resources is difficult and time-consuming. The lack of a single central repository for export advice affects users’ experience and information overload may deter them from pursuing their export ambitions.
- Create a central online hub for export resources across all relevant Government departments and initiatives.
- A dedicated online or telephone inquiry service.
- A digital by default approach to the provision of Government support.
The costs of internationalising are often prohibitive for small businesses and navigating new markets can present cultural and regulatory barriers. Firms may need to dedicate considerable amounts of capital to investing in new resources, adapting their products or carrying out market research so that they have sound knowledge of potential new markets. The following recommendations encourage Government to help small businesses as they begin actively exporting through providing incentives to overcome the upfront costs and support to navigate new markets.
Deliver expanded funding programmes
Small businesses operate on tighter margins than their larger peers and are less able to take on the upfront costs associated with entering new markets. Financial support is therefore seen by FSB members as one of the most useful tools in helping small businesses to achieve their international ambitions.
- Deliver funding that can be used for a range of support, looking to examples of best practice.
- Make funding accessible to all firms with export potential.
Reinforce the links between innovation and export support
Evidence shows that the more innovative a small firm is, the more likely it is to export successfully and to generate growth from its exports. FSB data from 2018 shows that small firms that are ‘innovators’ are more likely to export.
- Equip ITAs with information on relevant Innovate UK services.
- Clear signposting to opportunities provided by different support agencies across the UK.
- Consider merging Government innovation and export services.
Provide robust in-market support
Small firms have a smaller reach and more limited networks in comparison to larger businesses which affects their ability to establish relationships with potential international customers or collaborators. Making use of in-market support systems and networks from DIT staff and Trade Envoys to diaspora links can play an important role in overcoming these challenges.
- Equip overseas DIT offices with necessary resources to provide high-quality support to potential exporters.
- Commit to supporting the export ambitions of ethnic minority led businesses.
- Support diaspora engagement work engagement work undertaken by devolved administrations and complement with work on connecting and reinforcing links with the diaspora that considers itself linked to England, Britain or the UK.
- Facilitate market research by considering reducing or scrapping fees for the use of the Overseas Market Introduction Service for the smallest businesses, looking to innovative programmes across the UK’s nations.
- Commit to expanding the creation of DIT regional hubs, following the example of the North America Export Portal and the Europe Trade Hub.
The preceding recommendations will not be enough alone to foster a culture of exporting among the small business community. To maximise the long-term impact of export support measures, it is critical that the Government has access to robust data to inform future policy. Support measures must also be accompanied by Government support for international efforts to establish quicker, less costly and less bureaucratic trade processes. The following recommendations suggest how this may be achieved.
Gather accurate data on exporting activity
An export-led recovery requires effective export support to boost small business participation in international trade, which in turn requires in-depth understanding of small business needs. Robust datagathering is essential to build an accurate picture of the small business export landscape and to understand the trends and challenges of international trade for both goods and services. Much of the research around SME exporting focuses on current exporters, and although FSB’s 2016 report Destination Export: The small business export landscape explored trends among small firms based on export status (Exporters, Lapsers, Considers and Non-considerers) further research is needed.
- Include non-VAT registered and non-employing businesses in data gathering under the Trade Act to build an accurate picture of the small business export landscape.
- Monitor and analyse how small businesses use funding programmes to target Government support more effectively.
Support paperless trading
Small businesses often report facing documentation overload when engaging in international trade. Requirements to provide multiple hard copies of trade documentation pose an important administrative burden and reliance on wet ink can lead to processing delays. Although laws recognising the equivalence between paper-based and electronic transactions in some circumstances have been adopted by 158 countries, the acceptance of paperless trade is far from global. The UN Global Survey on Digital and Sustainable Trade Facilitation (2019) found that the global average implementation level for cross-border paperless trade is at 36 per cent. The digitalisation of trade documents increases the efficiency and lowers the cost of cross-border transactions and, according to research from the International Chamber of Commerce (ICC), moving to a fully digital system at global level could generate £25 billion in new economic growth and significantly increase business efficiency for SMEs by 2024.
- Continue to promote the UNCITRAL Model Law on Electronic Transferable Records and the WTO Joint Statement Initiative on e-Commerce.
- Monitor the implementation of digitalisation measures.
Promote global trade facilitation
While red tape and complex customs procedures affect businesses of all sizes, the simplification, harmonisation and modernisation of international trade processes are particularly beneficial for smaller firms. Government can contribute to a small business-friendly multilateral trading environment by taking a leading role in international discussions on trade facilitation.
- Commit to fully implementing the provisions of the WTO Trade Facilitation Agreement.
- Work within the WTO to promote the December 2020 MSMEs package in the lead up to MC12.
- Commit to supporting a global de minimis threshold of $1,000 for customs duties.
Download the full report
For full details of our recommendations, data and references download our report in full as a PDF.