Global trade: the disruptive forces
Global trade is a highly complex, valuable, and dynamic industry, with many factors influencing its evolution on a local to global scale. We review major disruptors, from geopolitical instability to emerging technology, impacting the industry in unprecedented ways.
Protectionism and geopolitical instability
Protectionist measures, such as tariffs and trade barriers, are causing trade tensions and disputes between countries. This friction leads to uncertainty and increasing costs for businesses, as well as disruption to global supply chains.
In addition, as has been the case throughout history, political instability, conflicts, and sanctions cause havoc on trade flows and economic uncertainty.
Examples: Steel imports to the US from multiple countries, palm oil from Malaysia to the UK, and Australian wine exports to China are just some of the products that have faced stiff tariffs over the last decade as governments seek to not only collect revenue but also protect domestic businesses.
The invasion of Ukraine by Russia in February last year triggered tough global economic sanctions against Russia and entities based in the country, significantly impacting supply chain flows, and causing trade bottlenecks and a spiralling energy crisis across Europe.
A digital order and e-commerce
The growth of the digital economy and e-commerce have enabled smaller businesses and entrepreneurs to reach a global audience like never before, disrupting traditional distribution channels and logistics. This has resulted in vast changes to consumer behavior, as B2B and B2C customers increasingly expect fast and reliable exchanges and services.
Example: There are many technology providers offering tools to business across logistics. The need for more digitalized processes in this sector became apparent at the peak of Covid-19 lockdowns in 2020 when couriers carrying important trade documents were ground to a halt, with goods at a standstill, and backlogs of container ships at ports worldwide amid labor shortages.
Environmental concerns and sustainability
Increasing awareness of environmental, social and governance, or ESG, issues as well as the impacts of climate change have led to pressure on companies to adopt more sustainable practices. This is resulting in changes in supply chain management and supplier onboarding, with businesses seeking to improve their sustainability, reduce impact, and ensure they are operating ethically and without greenwash.
Example: Europe is widely considered a leader in implementing ESG-linked policies as well as advancing more sustainable business practices, with the introduction of the EU Taxonomy in 2020, and more recently the Corporate Sustainability Reporting Directive. These regulations mean that businesses operating in the European Union must comply with these rules to trade with the bloc.
Regulation and risk
There is a growing need for better risk management and compliance in global trade. With increasing regulatory requirements and the potential for fraud and corruption, businesses need to be diligent in their risk management and compliance efforts to mitigate risks. This includes implementing effective compliance programs, conducting due diligence on business partners and suppliers, and monitoring transactions for potential red flags such as sanctions breaches or money laundering. Failure to comply with these rules can result in severe consequences, including fines, legal action, and reputational damage.
Example: Earlier this year, UK regulator the Financial Conduct Authority fined a UK-based bank specializing in trade finance and correspondent banking for clients in Africa more than £7.5mn for failures in its financial crime controls.
New technologies, such as artificial intelligence and blockchain, have the potential to transform the trade industry by improving efficiency, reducing costs, and increasing transparency. However, their widespread adoption is still in the early stages and will require time to gain wider recognition and integration into existing business systems and legal frameworks. The potential impact, however, is great with electronic bill of lading adoption set to enable $40bn in global trade, for instance, according to consultancy McKinsey.
Example: Global trade finance remains paper-based with an estimated four billion pieces of paper circulating at any given time in documentary trade. Artificial intelligence and advanced algorithms can extract and standardize data from these documents, which vary widely in quality, for a streamlined and more efficient process. In addition, policymakers are encouraging the shift to secure digitalized trade flows, with, as an example, the UK introducing the Electronic Trade Documents Bill into Parliament last year in a major step forward for the industry.
Global trade is facing numerous disruptive forces, and businesses will need to adapt to these changes to remain competitive and relevant in a fast-evolving world. Whether it’s navigating trade tensions, implementing more sustainable practices, investing in new technologies, or improving risk and compliance management, businesses that can stay ahead of these disruptors will be better positioned for success and better able to be flexible in the face of change.