Spotlight on: global commerce risks and how to tackle them

International trade is a cornerstone of the economy for many countries and companies, including the UK.

However, recent issues affecting global supply chains – including Brexit, the Covid-19 pandemic and Russia’s invasion of Ukraine – have left the UK’s importers and exporters facing a range of challenges.

New checks on goods at borders have created paperwork and delays, and the end of free movement has contributed to haulier shortages, while new trade deals have done little to open up new markets.

Consequently, the value of goods exported from and imported into the UK will decline by 3.2% and 0.8% in real terms in 2023, research from business insurer QBE has found.

Exports will then fail to fully recover before 2026, reflecting the slowdown in world and UK growth.

Chris Wallace, executive director, QBE UK, said: “The coming years are likely to see governments across Europe and beyond looking to ensure access to critical goods.

“Some businesses will benefit from shorter supply chains, but few are likely to be able to insulate themselves from the impact of global events on trade flows.”

Understanding the risks

Trade in goods requires the physical transportation of goods to and from the UK.

This brings with it additional risks, as was illustrated by the coronavirus (Covid-19) pandemic and global supply chain problems which in part reflected problems with transportation.

The recent challenges faced by UK manufacturers involved in international trade were captured by a survey by the Office for National Statistics.

Exporters said risks related to the movements in prices affected them the most, with 43% and 35% reporting that changes in transport costs and exchange rates were the most challenging.

“One way we can look at the vulnerability of goods trade is to see what proportion goes to countries that have political differences with the UK”

Tariff barriers (in the form of customs duties and levies) and non-tariff barriers to trade (such as the additional paperwork required, and time taken for border checks) also ranked highly on the list of challenges to overcome. Problems with logistics, such as a shortage of hauliers, were also an issue.

Another risk for UK exporters and importers of goods relates to the reliability of their trading partners. 

QBE explained: ”One way we can look at the vulnerability of goods trade is to see what proportion goes to countries that have political differences with the UK. To assess potential issues, we use the voting patterns in the United Nations’ General Assembly resolution to deplore the Russian invasion of Ukraine.

“Only 10% of the UK’s goods exports go to countries that voted against or abstained on the resolution – but 33% of the UK’s goods imports were sourced from countries that voted against or abstained.” 

How to tackle the threats

After the Covid pandemic and supply chain crisis, the terms ‘friendshoring’ or ‘allyshoring’ were coined. Both mean only sourcing inputs from countries that are geopolitical allies.

While sourcing from and exporting to friendly countries reduces geopolitical risks, it may come with the drawbacks of increasing the costs of imports and restricting the size of potential export markets.

Another key strategy is to carry out market research on current and prospective trade partners. Companies should be informed about the risks surrounding the other party’s business locations, transport routes, potential barriers or major cultural differences that may harm the business.

This should also include potential political instability such as civil unrest, terrorism, or changes in government, which can disrupt trade and business activity.

“Buying insurance coverage is a way of mitigating financial losses in case something goes wrong.”

When possible, companies should also try to diversify their export markets and supply chains. This should lower the risk of one-off events in particular countries. This diversification should also potentially extend to the modes of transport and transport routes used to get the goods to and from the UK.

Contingency planning to prepare for worst-case scenarios, such as alternative sourcing options or backup supply chains, is also a sensible precaution.

Taking advantage of the products that financial markets offer to reduce risk can help. For example, taking hedging positions in financial markets can offset potential losses from adverse movements in exchange rates or commodity prices.

Wallace concluded: “The most effective way of minimising the risks involved in international trade is to ensure business activities are insured. Although nowadays shipping processes are quite safe, there is always some degree of risk.

”Buying insurance coverage is a way of mitigating financial losses in case something goes wrong. This can cover issues such as products damage, theft, and cargo losses.”