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The COVID-19 pandemic and international trade Contents

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4UK Government response

Trade finance and insurance

40.In addition to the sector-specific interventions taken to ensure the supply of certain essential goods (noted in Chapter 2), the Government has undertaken a range of other policy actions to help businesses trading overseas. Trade finance is used to finance international trade flows. According to the Global Trade Review, “it exists to mitigate, or reduce, the risks involved in an international trade transaction.”128 A range of trade finance products exist, such as letters of credit, supply chain finance, export and agency finance, and insurance. It is estimated that 80% to 90% of global trade, valued at US$10 trillion, depends on trade finance.129 UK Export Finance (UKEF) is the UK’s export credit agency. It works with around 100 private credit insurers and lenders to provide trade finance to UK businesses. It does not compete with the private sector but steps in to support exports which might not happen otherwise.130 We will be examining the work of UKEF in greater detail in a forthcoming inquiry which will be launched shortly.

41.Trade finance is generally viewed as low risk, with low default rates; however, it has been vulnerable to financial shocks. Following the 2008 financial crisis, there was a US$1 trillion shortfall which created long-term access challenges for small and medium enterprises (SMEs).131 It has been suggested that the pandemic could cause a similar shortage. In April, the Financial Times reported that “trade finance appears to be drying up even more rapidly now, as international banks reassess risks and local lenders in some countries struggle to access dollar liquidity.”132 The International Chamber of Commerce said “the COVID-19 crisis therefore risks further exacerbating longstanding constraints in the trade finance market” and estimated that US$1.9 trillion to US$5 trillion capacity in the trade credit market would be required to support a V-shaped recovery.133

42.The British Exporters Association (BExA) said the Government’s response to the impact of the pandemic on business “has been positive in message but has been lacking in delivery.”134 It explained that British businesses were facing trade finance challenges due to goods being delayed in transit tying up cash flow; customers requesting extended payment terms on delivered and future orders; being unable to finance invoices where trade credit insurance is not available; increased short-term borrowing costs due to lack of market liquidity; and access to short-term working capital and banking facilities affecting both ends of the supply chain.135 In response to these challenges, UKEF said it was working with HM Treasury and “taking a pragmatic approach to supporting businesses during this period.”136 It emphasised that its existing range of products would be “vital in supporting UK exports.”137 This included a guarantee of up to 80% of bank loans for exporters experiencing cashflow constraints through its Export Working Capital Scheme and guarantees to lending banks to support overseas buyers of UK exports. In addition, it was accelerating the launch of its General Export Facility and Export Development Guarantee to provide guarantees for working capital and capital expenditure.138 UKEF has also extended its Export Insurance Policy, which helps exporters recover the costs of an order terminated due to events outside their control, to cover 180 countries including transactions in the EU, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland and the USA. The Secretary of State for International Trade said the purpose of this was “to help companies concerned about the impact of COVID-19 to export with confidence.”139 In evidence DIT told us that UKEF’s Trade Finance Division has received 264 applications for support since March 2020, of which 106 were approved for support by the end of June. 75 SMEs have also been supported over the same period.140 In addition, the Secretary of State told us the Government would be launching a series of “bounce-back export strategies” for the technology, agriculture, consumer goods and automotive sectors; including specific support for SMEs.141

43.BExA welcomed UKEF’s ability to support transactions in wealthy countries but expressed concern that “the demand may overwhelm UKEF’s current resources.”142 The British Ceramic Confederation and Engineering and Machinery Alliance (EAMA) also said the extension of the Export Insurance Policy was helpful for their members. However, the EAMA noted that it was not yet clear how effective UKEF’s overall support had been.143 Further, the Confederation of British Industry (CBI) said that “business wants to work with UKEF to develop and promote new products, including those designed to support working capital for exporters such as the General Export Facility, and to bring in new sources of non-bank finance such as inventory finance.”144 BExA also called for UKEF to be more active in insuring UK exporters experiencing payment delays and improve its product offering “such as revolving lines of credit for smaller business and re-introduction of the Letter of Credit guarantee scheme.”145 A report by the National Audit Office (NAO) on support for exports by DIT and UKEF found that “UKEF does not conduct a customer survey, which could help it better understand the specific needs of smaller businesses.”146 In oral evidence, Ms Truss said:

UKEF is working on a number of schemes to support the recovery as well, to make sure that businesses have the guaranteed finance to be able to expand their businesses for export. We also want to make sure UKEF is serving small and medium-sized enterprises, so we are developing new products to support that as well.147

44.The EAMA and CBI also highlighted access to Trade Credit Insurance as an issue, due to firms finding it difficult to assess credit risk and increased indebtedness. The CBI said: “without action to address this problem, there is a risk that export credit facilities will come under greater pressure.”148 On 4 June, the Business Secretary announced that the Government would provide a £10 billion guarantee to ensure continued access to Trade Credit Insurance. The scheme will be delivered through a reinsurance agreement, covers domestic trade, exports and imports, and will run to the end of the year (backdated to 1 April).149 In evidence, the Secretary of State indicated that she was satisfied that access to Trade Credit Insurance had been resolved and directed any businesses still facing difficulties to their local trade adviser.150

Conclusions and recommendations

45.We welcome the steps taken so far by UK Export Finance to support businesses trading overseas and the Secretary of State’s announcement of “bounce-back” schemes for certain sectors, including specific support for SMEs. We commend the steps taken by the Government to ensure continued access to Trade Credit Insurance for businesses and welcome the Secretary of State’s assurance that this issue has been resolved. There is a need for continued vigilance about such problems, and swift resolution of them when they arise. The pandemic has created a range of unforeseen challenges for businesses. We recommend that UKEF be flexible in its response, to ensure that the widest possible range of sectors can avail themselves of its support. Further, we recommend that UKEF consult quickly and widely with businesses on the development and rollout of its new products, to ensure any feedback can be considered in the design phase.

Export promotion

46.We received some evidence which suggested that export promotion will be a key feature of the recovery from the pandemic for businesses trading internationally. The CBI said it “will matter as much as trade policy.”151 According to the Government’s 2018 Export Strategy, trade promotion for exports seeks to address “key market failures, such as the lack of information on the benefits of exporting or on international commercial opportunities, that deter UK business from engaging in or developing their export activities.”152 DIT is responsible for export promotion at the national level through a network of overseas and regional UK offices with field teams of sector-specific International Trade Advisors.153 In addition, it coordinates the cross-government delivery of the GREAT campaign, which is active in 144 countries and across 252 DIT / FCO posts globally, and forms a key element of the Department’s existing Export Strategy.154

47.We received evidence that access to timely information about the support available from DIT, market intelligence, and sector-specific data for exports, is a challenge for businesses; and there is a need to strengthen the relationship between DIT, trade associations and local government.155 The difficulties in accessing information were highlighted in a recent survey of 924 business leaders on their responses to the pandemic, carried out by Opinium on behalf of logistics firm One World Express. This found that 51% of respondents felt they did not have the knowledge required to expand their businesses internationally and almost two-thirds were not aware of the support available from the Government.156 Further, the NAO said that DIT plans to target its bespoke support at larger businesses while directing smaller businesses to digital services on its website.157 However, it found that these services “are not yet meeting the needs of some exporters” and there was “evidence that businesses are using these services less.”158 Research by the Policy Institute at King’s College London previously found that firms had a preference for face-to-face engagement with export promotion services over self-service offerings.159 The Secretary of State told us DIT had been engaging with businesses during the pandemic via webinars, talks, the Department’s website and its network of international trade advisers.160 The Department’s “bounce-back” scheme for the agri-food sector includes additional initiatives, such as webinars produced in conjunction with trade associations and devolved governments; and one-on-one e-commerce export clinics.161

Tradeshow Access Programme

48.The Tradeshow Access Programme (TAP) was highlighted in evidence as an area requiring revision to support export promotion in response to the pandemic. TAP provides grants to SMEs, research and education institutions seeking export opportunities towards the costs of exhibiting at trade shows overseas. The Programme has an annual budget of £6.5 million. Grants range between £500 and £2,500, and are limited to six per organisation.162 Frontier Economics is currently undertaking an evaluation of TAP due for completion in April 2021.163 Written evidence that we received made the following criticisms of the Programme: reduced levels of funding through grants in recent years; a limit on the number of grants available to organisations and all grants received since April 2009 counting toward the total; and a lack of multi-year planning for funding.164 The postponement of trade shows has disrupted TAP this year. UK Technology for Agriculture and Genetics (UKTAG) called for a fresh start for the Programme once it can resume and the removal of the six-grant limit. Export Partners UK (EPUK) said the Government should establish an “enhanced” TAP, which is “properly” resourced and “led by industry with government.”165 It argued that in the longer-term, it would like to see three-year planning for TAP.166 The ABHI said increased TAP funding and support “could do much to help kick-start company exports post-crisis.” It suggested an initial target of £15 million, a relaxation of the six grants cap, and early clarity on the scheme for 2021–22.167

49.More immediately, UKTAG said “emergency funding is needed to bridge the gap in export promotion activity until international trade shows and events can resume later this year.”168 In oral evidence, Paul Alger, International Business Director of UKFT and chair of EPUK, told us that EPUK would like the Government to “wipe clean the Tradeshow Access Programme slate”, to enable businesses that have previously availed themselves of TAP to access that support again.169 He said EPUK had had “very good and robust” conversations with the Government and it had been receptive to the concept of online trade show and seminars.170 On 9 June, Ms Truss announced the Government’s “bounce-back” scheme for the technology industry, which includes a new DIT platform, due to be launched in September. It aims to:

supercharge UK tech engagement on the global stage and mitigate the impact on firms unable to attend international industry events and investor meetings. This will include a greater presence at international industry events and access to virtual trade shows and virtual event platforms to support international buyer-seller meetings and companies-to-investors introductions.171

In questioning about TAP, the Secretary of State said DIT would be raising the limit on the number of times each firm could use the scheme and confirmed it is exploring virtual opportunities to sell products overseas.172

Conclusions and recommendations

50.Export promotion will play a key role in supporting businesses to recover from the pandemic. The Government will need to think outside the box and find non-traditional, digital ways of helping to sell British products overseas. We welcome the innovations proposed in the “bounce-back” scheme for the agri-food sector, and the announcement that the technology industry will have access to an online engagement platform for export promotion from September. We look forward to seeing similar offerings for other sectors.

51.For businesses to benefit from export promotion, they need to know about what support is available to them. We recognise that DIT is making some headway with communicating its export promotion offering, but it needs to do better and be more effective. We recommend that the Department improve the quality of its communication by ensuring it is adapted on a sector-specific basis and prioritising face-to-face engagements with trade advisors (via digital platforms at present) over self-service digital offerings.

52.We welcome the Secretary of State’s commitment to increase the limit on the number of grants that firms can access under the Tradeshow Access Programme. Business is in need of support now, and we ask that an announcement be made on this as soon as possible, so that firms can have clarity on their eligibility for the scheme. The Government must also ensure grants are available for businesses to participate in virtual trade shows and seminars. These steps should be taken without awaiting the outcome of the TAP evaluation, which is not due to conclude until 2021. We recommend that this evaluation consider the long-standing issues with the programme, including the limit on grants and the level of funding available.

Digital trade

53.The pandemic has accelerated trends in digital trade and e-commerce, with the WTO noting that it has led to increased use of electronic communications, online shopping and teleconferencing; and created growth in business-to-business e-commerce.173 The Professional Business Services Council said the pandemic had accelerated the acceptance of digitalisation by some services providers. TheCityUK said this had sharply increased data flows. Both organisations said these were trends which were unlikely to be reversed.174 John Drummond, of the OECD, told us that to maximise the opportunities of digital trade there is a need to invest in infrastructure and connectivity; strengthen and enforce intellectual property rights; and facilitate electronic transactions and access to payment systems.175 Vivienne Stern, of Universities UK International, cited regulatory barriers and help in promoting the quality of digital education through the Study UK strand of the GREAT campaign as examples of how the Government could assist the university sector to increase digital trade.176 When questioned about what export promotion lessons have been learned due to the pandemic, Ms Truss said that “I think a lot more international commerce is going to take place online” and “we need to make sure we are helping our exporters use that technology to get their products around the world.”177 She confirmed the Government would be launching a new Export Strategy (the existing Strategy was published in 2018).178

Conclusions and recommendations

54.The pandemic has accelerated the shift to online based trade. This presents huge opportunities and businesses must be supported to avail themselves of these. In its forthcoming Export Strategy, we recommend DIT set out how it is adapting its support and advice for UK exporters in response to this; and what specific steps it will be taking to help exporters maximise the opportunities of digital trade.

Cross-government approach

55.In a letter to our Chair, the Secretary of State outlined the steps DIT was taking to coordinate its response to the pandemic across government, including devolved and local government. These included ministerial and official attendance at the International Ministerial Implementation Group and the Economic and Business Response Ministerial Implementation Group; calls with counterparts in the devolved governments; and DIT’s network of International Trade Advisers working with Local Enterprise Partnerships, Growth Hubs and Chambers of Commerce.179 In seeking to work with the rest of government, the National Farmers’ Union stressed the importance of good lines of communication between DIT and the devolved governments and a coordinated approach on matters of devolved competence.180 Kent County Council echoed the need for “clear and concise communications” to be shared with local government and other local partners to ensure businesses can access information in a timely way. Further, it said DIT should take account of the information being fed back by businesses through local authorities and Growth Hubs, and use this to inform its strategies.181 The Provision Trade Federation also said that the crisis had seen a “proliferation of contact groups” within government focussed on domestic issues initially but DIT would need “to play its full part in discussions relating to medium- and longer-term recovery plans.”182

HM Trade Commissioners

56.In 2018, DIT established a network of nine regional Her Britannic Majesty’s Trade Commissioners (HMTCs). The Government’s Export Strategy said HMTCs would “lead the Department for International Trade (DIT) overseas network at a regional level.”183 Further, it said HMTCs and their teams, alongside Ambassadors and High Commissioners, would play a role in export promotion by utilising “their government-to-government relationships and local insight to open new markets, reduce market access barriers, provide market insight, and support UK businesses to reach new customers.”184 On 16 June 2020, the Prime Minister announced that oversight of HMTCs was to be transferred from DIT to the new Foreign, Commonwealth and Development Office.185 In questioning seeking clarity about the movement of HMTCs and the future of DIT, the Secretary of State told us there was a need “to speak with one voice internationally” and that HMTCs were working closely with local ambassadors and high commissioners.186

Recommendations

57.We believe it is important that DIT seek a cross-UK government response to the pandemic and also engage with devolved, regional and local government to ensure businesses trading internationally are adequately supported as they seek to recover from the pandemic’s effects. In light of the recently announced changes to the Machinery of Government, we recommend that the Government clarify the role of HM Trade Commissioners in the new Foreign, Commonwealth and Development Office; and set out how their work will align with that of DIT staff in overseas posts, the administration of the GREAT campaign and the forthcoming revised Export Strategy. We would also welcome clarification of whether the work of HMTCs will now be examined and included as part of the Integrated Review of Security, Defence, Development and Foreign Policy.

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