‘Normal’ trade and supply chains

Due to the pandemic and the inability of businesses engaged in supply chains to quickly respond, international trade has been disrupted. The expectation is that trade flows will return to ‘normal’ by the end of 2021 (but it may take until mid-2022). However, will ‘normal’ continue to be the same?

Currently, about 70 percent of global trade is in intermediate goods, through internal trade by multi-national corporations (MNCs). For some developed countries, 50 percent of their international trade is between related parties.

For supply chain professionals building scenarios of their organisation’s supply network, 2030 is the year for meeting the UN 2030 Agenda for Sustainable Development, which includes the Paris Agreement to limit increases in global temperature. It is therefore of value to identify the changes that are most likely to occur in International Trade and identify the effects on supply chains.

International Trade research reports

Two reports are available that provide excellent inputs to your thinking about changes in International Trade over this decade. They are: Prospects for international trade by 2030 – BBVA Research (March 2021) and Global value chain transformation to 2030 (August 2020)

In summary, the reports note that:

• International trade has slowed since the 2008 financial crisis
• International trade is expected to continue exhibiting a downward trend over this decade, mainly in high-tech, global value chains (GVC) manufacturing. Note: a value chain incorporates the supply chain and demand chain for an item
• Developed economies are gradually reducing their participation in total global trade
• International trade is trending towards services, labour and cross border data flows
• Economic factors (such as cost differentials) will be less relevant drivers of trade
• Geopolitical, regulatory, etc. issues will play a bigger and in general a more negative role

The reports identify trends that are most likely to affect supply chains:

• International trade will rely more on intra-regional trade, which has an increasing share within international trade
• Technology:
  • digitalization of supply chains (‘the use of digital technologies to change a business model and provide new revenue and value-producing opportunities’ – Gartner);
  • initiatives expected to reduce processing, transaction and logistics costs:
    • artificial intelligence (AI), Industrial Internet of Things (IIOT), Blockchain etc. are expected to have broad acceptance in industry by about 2028 (Gartner).
    • robotics and additive manufacturing (i.e. 3D printing) allow more regional and local manufacturing at competitive costs. Information about the manufacturing process can be transmitted across borders and goods created near or at the place of consumption. This results in lower storage, handling and transport costs
    • some product based businesses are likely to become more services based. For example, from selling equipment to delivering data based services, including usage based leasing (i.e. ‘power by the hour’) and predictive equipment maintenance 
  • reliance on the digitalization of supply chains will result in GVCs for new entrants to be more loosely governed, platform-based and asset-light
• National government policy:
  • more interventionist;
    • more protectionist in trade and investment
    • increasing trade barriers on goods by World Trade Organisation (WTO) member countries – many based on a ‘national security’ justification
  • more regional, bi-lateral and ad-hoc economic co-operation
• Sustainability:
  • more policies and regulations;
  • sustainability driven disruptions will provide opportunities for market driven changes to products and processes;
  • impacts on physical supply chains
• Factors that could trigger more positive scenarios are: better global governance; more significant technological gains and openness and integration of new markets (Africa, India…)

Additional factors for supply chain professionals to consider are:

• Cost of international trade trend is increasing at a slower rate due to digitalization of supply chains (accepting the current spike in freight rates)
• Productivity growth in the tradable goods sector of developed countries is not increasing, even with the introduction of robotics and automation
• Developing countries as a group have almost doubled their volume of trade in goods since 2009
• Emerging markets will become future consumption hubs. The World Bank estimates that about 2 billion people are expected to join middle-income groups in Asia by 2030

The reports provide an overall direction for supply chains that points towards:

• Reduced ‘efficiency seeking’ foreign direct investment (FDI) in favour of regional ‘market seeking’ FDI 
  • A shift in some industries from large-scale investment to smaller-scale distributed manufacturing
  • A shift away from GVC investment to cross-border investment in infrastructure, domestic services and the ‘green economies’, driven by sustainability needs
  • Resilience and national security concerns as key drivers of GVC diversification
• A shift from global to regional and sub-regional value chains
  • Shorter and less fragmented value chains
  • More geographically concentrated value-added processes
• Reduced emphasis on global trade in intermediate goods; less so on trade in final products 
  • Continued growth and fragmentation in services value chains 
  • More platform-driven and therefore asset-light value chains

Platform-driven and asset-light value chains

Throughout history, societies have developed means by which individuals and groups can meet to trade goods. Local markets and bazaars and classified advertisements in newspapers are examples. Digital platforms provide the same connection, but between individuals and groups in any location. There is the added capability of data gathering and analytics to (hopefully) improve the experience for both parties.

The term ‘platform economy’ appears to currently be the most favoured for describing the total trade conducted using digital connections. For a digital platform, there are two levels:

Level 1: Technology platform, which provides a common ‘cloud’ technology framework. It hosts software firms that use the platform to build their on-line business. It can also provide a ‘cloud service’ for businesses

Level 2:

• Transaction platforms: software applications that assist end users with buying and booking items and services, such as holidays, reservations, assets and labour or
• Application platforms: software applications designed for business subscribers to develop models, plans and schedules based on their own data and inputs from customers and suppliers. These platforms may have third party software providers registered on the platform, which provide value-added services for the core product. For supply chain applications, this could include links to banks and finance firms, to provide financing against approved accounts receivables and payables. Also includes Collaboration applications that assist in managing projects.

A few platforms e.g. Apple and Alibaba combine the technology and transaction levels and are called Integrated platforms.

The consulting firm McKinsey consider that by 2026, about 30 percent of global trade will be via digital platforms. Even if this date is ambitious, as platforms gain a greater control over trade in some sectors, there could be a potential for the centres of trade to move from locations in political countries (e.g. Dubai, HK, London, New York, Singapore and Tokyo) to digital platforms.