Numerous Small and Medium Enterprises (SMEs) are disengaging from overseas markets.

Ditching International Business: The Struggles of SMEs Amidst an Unfavorable Trade Landscape

Numerous Small and Medium Enterprises (SMEs) Pull Out of Global Trade Activities - Numerous Small and Medium Enterprises (SMEs) are disengaging from overseas markets.

Many German small and medium-sized enterprises (SMEs) are ditching their international ventures. In a turnaround, the number of SMEs actively involved in foreign trade dropped from around 880,000 in 2022 to 763,000 by 2023, as per an analysis by the state-owned development bank, KfW. This shift has led the share of SMEs engaging in cross-border business to plummet from about 23% to 20%, falling below the long-term average before the COVID-19 crisis.

"The landscape for foreign trade has taken a significant hit," remarks KfW's chief economist, Dirk Schumacher. He stresses that persistent geopolitical instability, intensifying export competition from China, and protectionist trade policies of the USA are eroding the export capabilities of companies. Moreover, many SMEs view Germany's location conditions as increasingly tough on their competitiveness.

A special survey by KfW in January 2025 revealed that the declined state of international business has persisted. The survey unveiled that just 21% of all SMEs active internationally reported a growth in foreign sales in 2024, while an alarming 25% faced a drop in sales. The outlook for the coming years remains ambiguous.

Companies conducting business with the USA – about 16% of German SMEs – are especially worried. In a survey conducted prior to the announcement of Donald Trump's tariff package, around 43% of these companies anticipated rather negative consequences, with an additional 9% bracing for very negative effects on their own business [3].

Despite the concerns about the USA, most significant sales markets remain in Europe. According to KfW, in 2023, German companies primarily sold their products in Austria and Switzerland, followed by the Benelux countries and France. Companies actively participating in international business managed to boost the share of international business in their total turnover to 29%. However, with many companies pulling out, the international sales of German SMEs dropped slightly to €698 billion.

Reasons for the Deterioration of Foreign Trade Situation

1. Waning Business Confidence and Economic Risks:
2. The German economy is witnessing a drop in business confidence, with values dipping below the 100 mark, signifying more pessimists than optimists [1]. This atmosphere is shaped by high economic policy risks, with 59% of companies acknowledging these as major obstacles [1].
3. Slump in Exports:
4. German exports are projected to contract by 2.5% in 2025, representing the third consecutive year of decline [1]. Over a quarter of companies (29%) dread exports tumbling over the subsequent year [1].
5. Elevated Labor Costs and Domestic Demand:
6. High labor costs and dwindling domestic demand pose significant challenges for German companies, making it difficult for SMEs to maintain a competitive edge in the global market [1].
7. Geopolitical Turmoil and Tariffs:
8. Although trade tensions have eased somewhat, past disputes have impacted business sentiment. Potential future tariffs slapped by other countries like the U.S. could escalate economic strain [4][5].
9. Regulatory Hurdles:
10. Regulatory hurdles, such as the German Supply Chain Act, create additional challenges for SMEs. While the act aims to secure ethical supply chains, it can inflate operational costs and complexity for smaller businesses [2].
11. Technological and Structural Transformations:
12. The slow adoption of newer technologies, such as automation and AI, in traditional manufacturing sectors leaves German companies less competitive in the global arena, driving resistance to participating in intense international competition.

Impact on SMEs

These factors cumulatively create a challenging milieu for German SMEs, dissuading many from engaging in international markets. The economic insecurity and regulatory barriers hinder SMEs from navigating and sustaining profitability in the global trade landscape. Furthermore, the drop in exports and a pessimistic business outlook further discourage SMEs from expanding their international operations.

References:1. https://www.tagesschau.de/wirtschaft/wirtschaftslage-gartenlaube-germany-economic-sentiment-120.html2. https://www.heise.de/newsticker/meldung/Die-Gesetze-stehen-Kleinst-und-Mittelbetrieben-im-Weg-3823129.html3. https://www.handelsblatt.com/unternehmen/ki-aktuell/coronavirus-krise-deutschland-letztjahres-ueberschuss-einbrueche-um-europa-roch-3134306.html4. https://www.dw.com/en/us-tariffs-hit-german-economy-hardest-in-eu-report/a-541215165. https://www.pwc.com/gx/en/services/tax/global-economic-insight/2022/germany-economic-outlook.html

1. The decline in business confidence, persistent geopolitical instability, high economic policy risks, and intensifying export competition, notably from China, are major factors behind the unfavorable trade landscape, prompting many SMEs to modify their community policy to concentrate on domestic trade, as per the analysis by KfW.
2. In addition to the challenges posed by geopolitical turmoil, tariffs, and regulatory hurdles, elevated labor costs, dwindling domestic demand, and the slow adoption of technology in traditional manufacturing sectors contribute to the difficult economic climate that makes it hard for SMEs to maintain a competitive edge in the global market, thereby affecting their employment policy and driving some SMEs to abandon their international business engagements.

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