4 things to know about the new era of global trade
As Otaviano Canuto, the executive director of the IMF, wrote in the Huffington Post, “world trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade during the first half and only low growth during the second half”. After the boom of previous years and since 2008, world trade has been rising slower than GDP. In light of the lingering effects of the global financial crises, China rebalancing towards domestic consumption and the lack of new BRIC-like global growth engines, companies and governments need to adjust their strategies.
The main characteristics of the new era of global trade are relatively mature value and supply chains, increasing regionalization and localization of production, the rise of non-tariff barriers after a period of significant tariff reductions, and an e-commerce boom, which often struggles to overcome the hurdles in international business. Digitization appears to be the key enabler of modern times, and an important lever to capture value in the new era of global trade. It is digitization that opens up new horizons for product design and management, manufacturing, retail, and the repurposing of goods. However, we need open and courageous leaders in government and business to make the change happen and capture the opportunity in the following main areas of development.
1. The new customer experience: “fast products”
Today’s customers demand fast products, such as fast fashion with quickly changing models. In fact, this works well for brands wanting to avoid the high inventory and high risks they encounter when they have to make big bets on the right designs for an entire fashion season, for example. Fast products require short supply chains. Consequently, production needs to move closer to the markets and shops to meet the shorter lead times from sketch to shelf. Zara, for example, “adapts couture designs, manufactures, distributes and retails clothes within two weeks of the original design first appearing on catwalks”. In creating the new customer experience, the management of the supply chain becomes a critical source of competitive edge.
Companies that wish to play in the “fast economy” will require new factories close to the markets and new distribution platforms. Those countries that provide the most fluid import and export ecosystem will be high on investors’ lists. In particular, countries in regions close to large markets, such as Central America, South-East Asia and North Africa might wish to review their strategies to capture the value of this trend.
2. Multilayer global manufacturing and supply platforms
Digitization helps the fast economy. In the past, brands tended to centralize manufacturing for better manageability and quality control. The power of information technology, the internet of things, big data and the cloud provides a new level of collaboration and empowerment throughout the value and supply chain. One example is the Flex Pulse Centre. The enhanced visibility allows companies to move factories closer to the customer without risking sudden surprises. In the continuous process, the global supply chain is converting towards a more and more dense and integrated platform of short, medium and long distance cargo moves – with regional and local distribution centres along the way. With the fast economy some intercontinental flows of goods will become regional and local traffic. However, the new factories will continue to require global supply, as not all materials and resources will come from sources nearby.
These multilayer global manufacturing and supply platforms still have many back holes. Some blackouts of visibility are caused by governmental security concerns, for example in freezones, others by the lack of digital infrastructure. There are opportunities for business and government through public-private partnerships to establish not only the digital architecture but also the trust to fully leverage the available technology. It goes without saying that the smooth and seamless movements of goods in and out of countries through the reduction or elimination of tariff and non-tariff border barriers is essential for establishing denser platforms and making countries and locations more attractive.
3. Scaling up market participation: International e-commerce
The era of “platformization” allows for a more inclusive economy. Global e-commerce platforms such as eBay or Alibaba can connect millions of manufacturers and billions of consumers, making the global market accessible to even the smallest manufacturer and providing the broadest choice to all consumers. In addition to much broader and better match-making, middlemen are cut out which allows for higher margins on the sales and lower prices on the purchasing side. It also reduces the risk of corruption. However, the concept only works if the underlying logistics and transportation platforms support the digital transactions.
Unlocking the potential of international ecommerce requires efficient and cost-effective logistics and smooth customs processes through the paperless digital export and import processing. On the import side there is a need for effective tools to be able to process and analyse information about shippers and products moved. These tools reduce clearing times, even enable pre-clearance, and help to manage the risks that come along with lower value goods, which fall often below the threshold of more diligent customs clearance processes. In addition, governments need to ensure healthy competition and avoid the formation of digital monopolies. Platforms can also be used to foster the job-creating small and midsized business landscape.
4. Repurposing of goods
Although there is a need to analyse the entire value chain, as sometimes even long-distance transport might be less carbon intense than local production, tightening the supply chain in many cases saves energy and emissions. Hence, the trend towards localization and regionalization helps with resources and the environment. However, new technology and digitization can go well beyond the simple shortening of the supply chain.
The new visibility in the supply chain not only helps identify leakages and misuse but enables new operating and business models, ranging from optimizing delivery routes to tapping into unused capacity enabled by the many platforms of the sharing economy. Additional potential lies in the resources locked in the products which are thrown away every day: electronics, paper and plastics. Asset tracking could help unlock a potential value of about $52 billion annually for consumer electronics and household appliances alone. Repurposing products will be a major challenge and opportunity for governments and companies in the years ahead.
In the modern interconnected and interdependent world, we need seamless global visibility and fluidity of the flow of goods. Businesses seek and will find new sources of value in tracking products throughout the first lifecycle and the recovery for the repurposing. By creating a repurposing capability, the public and private sectors have a unique opportunity to position themselves as modern and responsible players.
In the past, developed and developing countries have benefitted from globalization, with China as the most recent role model of trade-driven growth. Some low-cost labour countries might still be able to repeat China’s success, others need to look for new models. While globalization has driven the rise of emerging markets and global players, it has also paved the way for today’s dense multilayer value and supply platforms, which are the basis of our modern life.
Companies and governments need to update knowledge and adjust strategies. We must keep in mind that despite all the technological possibilities, it is our skills, wisdom and courage that will help develop new business models and drive the necessary policy reforms. As Sachin Maini once said: “While technology makes it possible to do much more than we could without it, it can’t help us decide what to do.”
This blog was originally posted on the World Economic Forum Agenda.