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An Introduction to the 5 R’s of Reverse Logistics

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3pls, Archives, Global Logistics, Global Trade Daily

An Introduction to the 5 R’s of Reverse Logistics

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One of the most valuable and yet overlooked components of any company’s supply chain is the process of managing returns. This process is also referred to as reverse logistics.

Most companies overlook their reverse logistics strategy because they are primarily focused on forward logistics or the operation of selling and distributing new products to customers. The process of reverse logistics, or of receiving returned products and then distributing those products back out into the marketplace, is often costly and drains capital for businesses. 

There’s no shame in admitting your business’s reverse logistics strategy is inflicting a strain on your margins. After all, you’re reading this article. Fortunately, there are strategies you can use to reverse your reverse logistics strategy, and that’s what we’re going to cover in this guide today. 

But first, there’s another fundamental question that we need to answer:

What is Reverse Logistics, and Why Does It Matter?

Reverse logistics refers to each step and link involved in managing product returns from customers. As mentioned above, most companies are focused on the process of forward logistics, or ensuring the flow of their products from the factory to distributors and finally to customers. 

Applicable to both retail and eCommerce, reverse logistics is just as crucial to optimize as forward logistics. Too many companies view reverse logistics as a gaping hole where it’s inevitable that they’ll lose money. But in reality, reverse logistics can still be an opportunity to create value for your business. 

The process of reverse logistics encompasses five primary components, or ‘R’s,’ each of which we’ll outline and discuss in greater depth later on:

  • Returns
  • Recalls
  • Repairs/Refurbishment
  • Repackaging 
  • Recycling 

Each of the above steps is important because it involves regaining value by taking returned products and then either getting those products back out into the marketplace to be resold or adequately discarding them. This is crucial for regaining customer trust (especially if you need to repair a product and get it sent back to the original customer) and ensuring your business doesn’t lose money. 

Businesses in today’s world especially are facing a much higher strain on their finances than they were before. On average, it already costs about $40,000 to open a small business and operate it for one year. And the cost of goods and inflation, in particular, have further pressured a higher burden on most small businesses to open and function as well. 

That’s also not to mention the basic cost of living that has risen as well, further putting a strain on individual business owners to stay afloat. In Canada, for example, the average cost of living across all provinces is now over $4,000 a month. In the United States, meanwhile, the average cost of living across the country is approaching $5,000 monthly. 

If the returns process is currently one of the most expensive fronts of running your business, as it is for many companies, it’s long overdue for you to take action and optimize it, so it becomes less costly. 

The idea with reverse logistics is simple: returned products are not wasted and instead resold, reused, or recycled so they can continue to generate value for your business and make customers happy. 

It’s for these reasons that it will pay for your business to evolve your reverse logistics strategy if it’s currently costing you money. And that starts with understanding what each step of the reverse logistics process even is.

The 5 Rs for Reverse Logistics

Here are the 5 Rs of reverse logistics:

1 – Returns

Returns are always the first action taken in the process of reverse logistics. This is when customers return a purchased product to your business for any number of reasons. Reasons for returns usually include:

  • The product arrived to the customer defective 
  • The product came to the customer damaged
  • The product failed to meet the expectations of the customer or did not work as described

There are several strategies you can use to optimize and reduce the cost of the returns process. The most crucial step is to have a return material authorization (RMA) verification to allow a customer to return a product. The RMA number should be assigned by your customer service department to ensure the return can be processed. It should also describe your return policy and instructions on how to ship the product back to you.

Additionally, make sure that you have a concrete policy for returns. For example, will you only allow defective products to be returned, or will you allow products that did not meet customer expectations to be returned as well? 

Finally, make sure you have a process in place for testing the returned product as well to confirm whether or not it’s suitable to be returned back to the marketplace.

2 – Recalls

Recalls are another and more complicated way to return products to businesses. The reason recalls are usually more complex is that they are subjected to governmental regulations and involve basic construction issues that could be hazards to the health and well-being of customers. For example, devices are often recalled if they have construction issues or faulty components that could endanger other people. 

The best way to handle recalls is to have a process in place to receive and replace the recalled product. The number one goal when handling recalls should be to focus on your customer and to fix or replace their product with an alternative unit. 

3 – Repairs/Refurbishment

Repairs are when a damaged product is fixed (after the problem has been identified by the business) and then returned to the original customer at no cost to them. Refurbishment is when the product is returned to like-new condition, so it is ready to be sold again on the general marketplace.

Make sure that you have a streamlined process in place to repair or refurbish returned products. Have an efficient tracking system and a part of your inventory management team dedicated to the repairing and refurbishing of products. 

If the faults or hazards with your product are not too severe, hopefully, you can get the product repaired and returned to the customer or refurbished and then sent back into the marketplace to be sold. 

4 – Repackaging

What happens when products are returned because customers were dissatisfied with the product but not because there was anything wrong with the product? In this case, the product needs to be repackaged so it can be resold on the marketplace.

Your company’s return policy should indicate quite clearly whether you allow products to be returned because of customer dissatisfaction or if you only allow returns in the case of defects or recalls. If your company offers a product guarantee (meaning you promise to refund the customer and take the product back if they aren’t happy with it), then you’ll need to allow returns due to customer dissatisfaction. 

In this scenario, it’s absolutely crucial to repackage these returned products and get them returned to your inventory as quickly as possible. First, thoroughly and efficiently check the product to see if there are any flaws sustained. If there are, you’ll need to get the product reconditioned, so it’s suitable to be sold again as a repackaged product. 

5 – Recycling

Last but not least, put some thought into how you can make your products more sustainable so they can be properly recycled or environmentally disposed of when they reach the end of their service lives. 

For most businesses, this means working with recycling firms to ensure that any waste is correctly collected and disposed of. In the case of technological devices, for example, recycling firms can likely salvage rare earth metals that can then be returned to your business so they can be used again in future products. This will save your business money in the long run. 

Conclusion

Reverse logistics is all about keeping costs and disruptions to the returns process to a minimum. Keep the above points in mind, and continue to research and think about how you can turn costs into opportunities for returning, recalling, repairing, repackaging, or recycling your products. 

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Why Consumers Want More Action on Sustainability

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Earlier this year, CGS, a global business applications provider, unveiled its latest annual 2022 Retail and Sustainability Survey. The survey examined different aspects of sustainability from a consumer perspective to gauge sustainability adoption and consumer perspectives, among other things. Surprisingly, despite economic uncertainty in the past, present, and looming on the horizon, consumers seemed eager to embrace sustainability and demand it from legislators and companies alike. This article will look at the survey and how sustainability is impacting consumer goods.

What’s the sustainability movement?

Despite current world events and inflation, consumers are more interested than ever in shopping for sustainable products. The United States Environmental Protection Agency (“EPA”) defines sustainability as the pursuit of creating conditions where humans and nature can coexist and support present and future generations.

Sustainability is important because it enables us to fulfill our social and economic needs without jeopardizing our society. CGS’s latest 2022 Retail and Sustainability Survey explored how consumers view sustainability today.

Sustainability interest is surging after the Covid-19 pandemic

The interest in sustainability briefly dropped during the pandemic as countries turned towards trying to stop the spread of Covid-19 at any cost. Global supply chains came to a grinding stop, and consumer desire for goods evaporated overnight. In 2020, only 51% of respondents indicated that sustainability was at least “somewhat important.” Today, however, 79% of U.S. consumers report believing that sustainability is “somewhat important” when looking for fashion, apparel, and footwear. For younger generations, 33% of Millennials believe that purchasing sustainable products is “very important,” and 27% of Gen Z believe the same, which is key when it comes to eco-friendly initiatives.

Importantly, past surveys demonstrate that consumer concern for sustainability has only risen. In 2019, 68% had responded that sustainability was “somewhat important.” 

Sustainability at any cost?

Sustainability often comes at a price, but despite inflation and other global disruptions, many Americans are open to shopping sustainability. Among those surveyed, 68% indicated they would pay more for sustainable products. This increased from 56% in 2020 to 47% in 2019. Gen Z stood out again when it came to spending and reported that they were the most likely to pay up to 100% more for a sustainable product.

Related to cost is also where consumers are shopping. Sustainability is driving consumers to change the brands they shop from based on whether they make sustainable offerings. 50% of U.S. consumers have changed where they purchased goods in the past year, and 14% are purchasing from businesses with sustainable practices.

Can fast fashion clean up its act?

These trends can also be seen when it comes to some of the world’s biggest startups, like Shein. Shein is best known for turbocharging the fast fashion business model and producing clothes at unbelievable prices. In the U.S., environmental and social good can hugely impact a company’s ability to attract capital in today’s market.

Shein and other fast fashion startups mostly ship their products via the mail. However, Millennials and Gen Zers both reported making more purchases in-store over the past year, with 45% and 43%, respectively. In the end, cheap clothing may be convenient, but it is not necessarily driving consumer demand.

Consumers expect transparency

Sustainable production practices aren’t the only concern for consumers – expectations for transparency have also continued to rise. Demand for increased transparency rose from 2020 when only 23% reported that brands gave enough transparency into their sustainability practices. Today, in 2022, 34% felt that brands were transparent enough. Many global manufacturers are putting planet preservation into their business plans.

At the forefront of sustainability is the practice of ethical labor standards. The survey found that 32% believed that brands should commit themselves to ethical labor practices and that it should be their priority.

Should sustainability be legislated?

However, what should we do when brands refuse to change? The CGS survey also attempted to glean answers on whether consumers thought businesses or the government should be in charge of driving sustainable initiatives. Earlier this year, in anticipation of New York Fashion Week, New York legislators unveiled the Fashion Sustainability and Social Accountability Act (“Fashion Act”). The Fashion Act would have forced brands in fashion to adopt sustainability-related obligations.

Following this announcement, 49% of respondents indicated they would like to see more sustainability from different brands. Interestingly, 23% were opposed because they feared it might lead to more expensive goods. 

The survey also broke down people by age to determine which age groups were more inclined to support sustainable legislation. 59% of Millennials and 60% of Generation Z were in favor of national/global sustainability laws. In contrast, the older generation of Baby Boomers found only 37% in support of sustainability legislation.

California leads the charge in sustainability legislation

In June, California passed a similar bill addressing everything from fast fashion and e-commerce packaging to clothing displays and beauty packaging. Among other requirements, the bill will demand producers that sell, distribute, or import into California (basically any company operating in the U.S.) to reduce single-use packaging by 25% by 2032. Of course, the California law is still too new to predict how it will actually impact consumers.

The beauty industry, in particular, faces tremendous hurdles when it comes to reducing packaging. Single-use sachets, which are commonplace to deliver product samples, are almost impossible to produce in recyclable versions. In contrast, some experts view this as an opportunity to establish reuse and refill infrastructure and technology. 

In any case, supply chains, retailers, and distributors will all be forced to adapt to these industry disruptions. CGS’ survey indicates that consumers are hungry for these changes and willing to encourage legislators to act when companies fail to.

What’s driving the “going green” phenomenon?

Besides legislation, though, what precisely is driving consumers’ motivations for “going green?” Among all age groups, Gen Z was the most influenced by celebrities and other influencers for going green at 15%. However, receiving information about sustainability initiatives and lower pricing ended up being the most influential. 38% of respondents said they would be more motivated to purchase sustainable products if they received more information, and 56% were motivated by lower pricing. 

Lower pricing isn’t the only thing consumers appreciate, though. Many buyers also appreciate business updates via texting and SMS, which allows them to quickly and conveniently communicate with the brands they love.

How do consumers embrace sustainability?

Finally, when companies aren’t doing enough and legislators are coming up short, many consumers in the U.S. are taking things into their own hands. 42% of respondents indicated they are waiting longer or choosing longer shipping options for products that are better for the environment. When broken down by generation, 31% of Generation X and Millennials are waiting longer, and only 27% of Gen Z are. In the end, these types of motivations are also shifting business behavior.

The bottom line

Sustainability isn’t just a throw-away trend, and “going green” will only become more popular. The CGS 2022 Retail and Sustainability Survey reveals just how much consumers are demanding that companies and legislators embrace sustainability. Today, sustainability isn’t just about “green statements” but about real, lasting change.

 

bullwhip 2017 saw more shipments of export cargo and import cargo in international trade.
Archives, Education, Global Trade Daily

The Perfect Storm: How a Potential Economic Recession and the Supply Chain Bullwhip Are Colliding

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The impacts of the supply chain bullwhip and brewing economic recession have recently come to a head. As the economy has stretched its legs from the Covid-19 pandemic, supply chain issues continue and are exacerbated by ongoing economic challenges. A combination of inflationary pressures, interest rate hikes, and supply chain problems could spell disaster for shipping markets and companies involved in logistics. This article will look at the so-called “bullwhip effect,” its origins, and how it’s creating a perfect storm with the potential economic recession.

What is the ‘bullwhip effect?’

The bullwhip effect is a type of economic scenario where minimal changes in supply chain demand cause increasingly large demand changes as they move up the supply chain. The term references the effect generated when a whip is cracked, and the subsequent wave generated down the whip becomes larger as it moves towards its end.

Bullwhips are generated at the retail level first, then move from retailers to wholesalers and then up to manufacturers. Typically, consumer demand for goods (real or predicted) changes; then, in conjunction with a lack of information on demand, wholesalers will increase their orders, and manufacturers will change their production by an even larger amount.

Unfortunately, supply chains are not perfect, and as a result, they suffer from inefficiencies. The bullwhip effect amplifies these inefficiencies and can result in several different problems. Ultimately, it can mean inflated inventories, lost revenue, poor customer service, schedule delays, and even larger economic problems like layoffs and bankruptcies.

Why are we experiencing a supply chain bullwhip?

Supply chain bullwhips don’t just happen overnight; they take time to build up as different sections in the supply chain adjust to changing demand pressures. That being said, the most recent bullwhip originated from the Covid-19 pandemic. 

Measuring container shipments over time can give us an idea of how the issue has evolved. Before Covid-19, the ratio of containers per shipment was relatively static; however, in the summer of 2020, the container-to-shipment ratio bubbled. So-called Big Box retailers (like Walmart and Target) used their leverage to increase the number of containers in their already scheduled shipments. Comparatively, smaller importers kept a more static ratio due to difficulty securing additional container capacity. 

Continuing economic trends worsen the supply chain

As you probably recall, the economic shutdown in April 2020 essentially brought global supply chains to a halt. The subsequent uptick in the container-to-shipment ratio was an effort by retailers to resupply dwindling inventories. One way to track these inventories is using tools like Visualping, which monitor websites for changes (like product availability) and can email you when a web page is changed or updated.

These trends continued until the end of 2021 when Big Box retailers returned to pre-Covid ratios. One theory is that they believed they had generated sufficient inventory to handle consumer demand. Through the end of 2021, consumer demand remained stable, and, normally, the bullwhip effect would have slowly resolved itself as retailers worked their way through their excess inventories over time. However, the Russian invasion of Ukraine in February of 2022 upended everything.

The real effects of oversupply and dwindling demand

In response, food prices began to surge, and out-of-control inflation set in, resulting in price surges that hadn’t been since the 80s. With inflation rising, consumers reacted by clamping down on their spending. Retailers, with their excess inventories, were faced with a dilemma and had to reduce subsequent container orders.

Big Box retailers, like Target and Walmart, have since reported having too much inventory. And these two companies are the two largest importers of container freight in the United States. Together, they account for close to 7% of all container imports to the United States. Another large importer, Samsung, also faced similar problems and requested suppliers to reduce production by up to half in July. (Last year, in 2021, Samsung was the 7th-largest importer into the United States.)

Finally, other events, like the transport worker strike in Chennai last month, further compound the bullwhip effect because it further constrains demand up and down the supply chain.

How does the bullwhip effect impact a potential recession?

One issue with the bullwhip is that consumer demand is being destroyed by the Federal Reserve through interest rate hikes. These hikes, designed to slow demand and limit the impact of inflation, have concerned economists and financial experts because of their potential to cause a recession. Normally, demand would stabilize, and excess product inventories could be sold. Instead, fears of the recession and other economic pressures are reducing demand further when inventories are already at extreme highs.

What are the economic dangers?

Unfortunately, there is no clear answer to whether the U.S. has entered a recession. Economists define a recession as “an economic contraction starting at the peak of the expansion that preceded it and ending at the low point of the ensuing downturn.” 

The National Bureau of Economic Research (NBER), a nonprofit, nonpartisan organization, is one of the most frequently cited organizations when determining whether or not the economy is in a recession. As of early August, NBER has not yet claimed that the U.S. has entered one, despite the U.S. experiencing two straight quarters of GDP decline; a so-called “technical recession.”

Moody’s analyst Scott Hoyt argues the “technical recession” many are referring to most likely comes from other countries without an organization like NBER to declare an official recession. Other experts have argued that demand fluctuations are not a demand problem but really just a coordination problem and not a sign of a recession.

Despite suggestions that there is no looming recession, over 30,000 tech employees have lost their jobs as of July, and housing markets are beginning to slow. Cryptocurrency markets have been decimated since their highs earlier this year, giving investors the chance to buy any crypto at a discount. 

The combination of inflationary pressures, interest rate hikes, and GDP regression all have a significant impact on supply chains and thus worsen the effects of the bullwhip.

 

central Russian economic contraction was caused by drop in oil prices, resulting in lower values of export cargo and import cargo begin shipped in international trade.
Archives, Banking, Global Trade Daily

Why Central Banks Aren’t Worried About The Global Economy Despite All The Warfare

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Whether you’re filling up your tank or grocery cart, you’ve probably felt the sting of inflation in your wallet. The war between Russia and Ukraine has exacerbated food prices, but that’s not the full story. Inflation, driven primarily by the post-economic boom after the Covid pandemic, has seen prices rising out of control. Governments and central banks are enacting anti-inflationary policies to help combat these issues.

In this article, we’ll take a look at the impact of the war on the global economy, what leaders are worried about with regard to the economy, and how governments are reacting to help curb inflation.

The Global Economic Impact of the War in Ukraine

When Russia invaded Ukraine in February of 2022, no one was quite sure how it would play out. Months later, Russia continues to advance in Ukraine, and the effects of the war are being felt across the globe. One of these impacts has been driving more and more people into poverty around the globe. In reality, post-Covid recession inflation is actually the primary concern. The war between Russia and Ukraine is just merely exacerbating an already struggling global economy.

The United Nations Development Program (UNDP) found that more than 51.6 million people fell into poverty in the first three months after the war. These people were living off of $1.90 or less every day. Western sanctions on Russia and disrupted supply chains throughout Ukraine have led to port blockages driving up the cost of wheat, sugar, and cooking oil. Despite these acute problems directly related to the war, the cost of goods and commodities has already been rising since Covid restrictions began to ease.

The Real Global Economic Threat

The real global economic threat faced today is rapidly increasing inflation. Underlying inflation trends from the Eurozone, UK, and the US, reveal the composition of this inflation. The US, for example, is still experiencing a red-hot labor market. Ultimately, this labor market is one of the key drivers of inflationary problems in the US. Worse still, inflation of this type doesn’t usually disappear without some kind of intervention.

Comparatively, the Eurozone and UK are experiencing inflationary problems as a result of energy prices being driven higher. Some of this can be attributed to European reliance on Russian natural gas, but also newly enacted green energy policies are also driving up the cost of energy.

Developing economies and the global south, however, are among the countries worst hit by inflation and supply chain disruptions in Ukraine. Countries such as Haiti, which depend on foreign imports, like wheat, are already experiencing some of the worst inflation and price hikes around the globe.

Can Central Banks Save the Global Economy?

The Bank for International Settlements recently urged prioritizing inflation above any other goal. In an annual report, the BIS observed that the Covid recession and following expansion have created a situation where there are high inflationary pressures in addition to other elevated financial vulnerabilities.

When the pandemic occurred, economies ground to a halt due to lockdowns and policies that put the clamp on consumer spending, crippled supply chains, and minimized demand causing factories to close down. Once all of these restrictions were lifted, economies saw huge upshots in housing prices, stock markets, and wages. Pandemic policies of low-interest rates, high government spending, and stifled demand caused an explosion in economic activity.

Consumers have been feeling these problems since 2021. Small businesses especially have been faced with cash flow problems. Even without hard data, everyone can see how prices increase week by week.

In May, the US saw inflation climb to 8.6%, the highest in four decades. In Europe, inflation reached 8.1%. In order to combat this inflation, central banks across the globe have begun raising interest rates in order to bring them back towards a 2% benchmark. Combating inflation by hiking interest rates can have negative consequences, though. The duty of the Fed, and other central banks, is to combat inflation without triggering a full-blown recession.

What Policies are Central Banks Implementing to Stop Inflation?

The primary tool for combating inflation, from an institutional standpoint, is raising interest rates. In June, the Federal Reserve raised its benchmark interest rate by 75 basis points to 1.5%-1.75% in June, with another expected to come this July. The Fed anticipates a range of 3.25%-3.5% by the end of the year.

Similar measures are being taken by other central banks that are also raising their rates. Interest rate increases work like an economic tax and can help bring balance to the supply and demand of goods in the market.

These rising rates can have a wide range of impacts across the economy, though. Banks and other lenders often use the Fed as a benchmark for establishing their own interest rates. If you have a small business loan or a business checking account, this can impact you. When interest rates on things like mortgages, credit cards, and other types of debt rise, it means less money consumers can spend in other areas, thus reducing demand.

The Threat of a Recession Still Exists

One issue with hiking rates, whether it’s slow or quick, is that they can trigger a recession. Currently, unemployment is at around 3.6%, but too much change could send that higher to 6%. Experts argue that it’s unlikely that a recession will occur. 80% of US small businesses believe they could withstand a US recession.

The key here is that central banks are trying to navigate a soft landing versus a hard landing. A hard landing occurs when an economic slowdown or downturn occurs after a period of rapid growth (i.e., a recession). In a soft landing, the government is able to reduce inflation without harming jobs or causing too much economic pain for consumers.

Despite assurances that no recession will occur, tech stocks have been rocked in recent months, with huge layoffs and even rescinding offers in the case of Twitter, Redfin, and Coinbase. In any case, central banks are working their hardest to ensure that inflation is brought under control without making things worse. Global foreign direct investment has recovered to pre-pandemic levels, but as the economy slows, this too could change.

Conclusion

Even with the continuing war between Russia and Ukraine, economic pressures persist because of inflation. Central Banks across the globe are enacting policies to help combat inflation and prevent damage to consumers from getting worse. Experts believe interest rate hikes can help combat out-of-control inflation that is sending millions into poverty.

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Archives, Global Logistics, Global Trade Daily

Key Insights and Trends Shaping the Global Logistics Services Market by 2027

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Recent upheavals socially and economically have dramatically changed global trade. By 2027, these current trends will have further reshaped how we do business across the globe. In this article, we’ll examine some important market segments, regional changes, and then the processes and technologies driving the changes in the global logistics services market.

Important Market Segments

One of the key transformations that will occur in the future will be based on different market segments of global logistics services. Depending on the logistics model (1PL, 2PL, 3PL, or 4PL), different changes can occur. 4PL providers manage entire activities involved in supply chains, like storage, processes, procurement, and distribution. Because of that, their role will only grow as smaller firms rely on 4PL to ensure products can be delivered in a timely fashion and overcome logistical difficulties of scale. Deployment models such as roadways, airways, waterways, and railways will all also transform as new technologies, and consumer demands revolutionize these industries.

End-use verticals, another important market segment, will also see differing trends depending on the area involved. This means that industrial & manufacturing verticals may see different changes from retail, healthcare, oil and gas, and others.

Regional Changes

Another important change that will occur in the future is the transformation of different regions. Presently, the fastest-growing market is the Asia Pacific. This trend is only expected to accelerate as more consumers in the region acquire higher levels of wealth. This means emerging countries like China, India, Japan, Malaysia, and Indonesia will see huge growth in the coming years.

In Europe, supply chain stability is currently under question due to increased tensions between western nations and Russia as the Russian-Ukraine war drags on. In the long run, the war’s outcome could determine whether Russia further alienates itself from Europe and continues to orient itself towards Asia and the East.

North America remains the largest market and continues to flourish. For example, the Port of Corpus Christi, Texas, set new tonnage and revenue records in the first four months of 2022. Despite growth opportunities in North America, other opportunities will continue to grow in LAMEA, with a particular emphasis on growth in Latin America and select African countries like Nigeria and South Africa. The growing tech industry in Argentina and Brazil also shows great signs of potential for the logistics services market.

Processes for Achieving Global Logistics Changes

Just how will these changes in regions and markets play out? New processes and technologies will continue to be adopted and invented to facilitate greater logistics growth. Next, we’ll look at some of the ways these changes will occur.

Omnichannel Shipping

One major disruption you can expect to see soon is the continued growth of omnichannel shipping. Omnichannel shipping differs from traditional shipping because it facilitates the transfer of goods across channels. This means that rather than just sending goods for cross-country transfer, a single warehouse may service returns, outbound packages, and global logistics.

The growth and expansion of omnichannel shipping can be attributed to the so-called “Amazon Effect,” whereby traditional retailers have begun offering more omnichannel touchpoints to improve customer loyalty. In the end, omnichannel is all about providing seamless shopping experiences, whether digitally or in-store.

Globalized Compliance

Globalization is not expected to disappear. In fact, more regulations and laws will be expanded to facilitate global trade. However, as a part of this expansion, process logistics suppliers must be aware of changes that impact their various markets. This includes newer compliance requirements whereby companies will need to audit data and supply trails for their data and customer data throughout the logistics process. In the end, compliance and shipping are inextricably linked, and companies will need to stay up to date to stay competitive.

Logistics Threats

Another key area that will disrupt global logistics marks is threats to the global logistics and supply chains. Many of these threats can be due to bad actors, but also environmental threats and social upheaval. Supply chain disruptions due to these factors are key.

The Great Resignation

The Great Resignation, so-called because unprecedented numbers of workers uprooted their work lives and left for other jobs, has dramatically reshaped the social fabric of the global economy. Demands for higher wages, better working conditions, and more remote working opportunities have been drivers of this social phenomenon. As a result, logistics companies have had to respond and adapt as worker shortages have appeared.

Hackers / Ransomware

In the past year, ransomware attacks have increased by one-third. These attacks have often focused on supply chain style attacks, which are particularly important for logistics servicing companies. In a supply chain attack, secondary targets that supply primary targets are often the first step. Then, once the secondary target has been breached, hackers laterally move through their network until they can acquire credentials for the primary target.

Logistics companies at the 3PL and 4PL levels are particularly at risk because they may serve a wide range of potential primary targets like healthcare providers, manufacturers, and government entities. To protect against these risks, logistics firms need to continue investing and reinvesting in cybersecurity.

Covid-19 and Public Health Issues

Although the Covid-19 pandemic began in 2020, the global economy is still reeling from its impacts, which will continue for years. Even today, markets are disrupted because of public health concerns in China. Businesses will need to find ways to adjust and eliminate costs to adapt. For example, medical businesses can save $200 monthly by automating invoices and eliminating paper. These types of public health-related logistics disruptions will thus enable new opportunities to appear for emerging markets and other areas. 

Key Technologies Driving Global Logistics

Several key technologies that have emerged will continue to play a critical role in how global supply chains operate and continue to evolve in the coming years.

RFID

RFID is expected to continue to grow in importance. Although the technology has failed to yield significant changes since it first appeared years ago, recent advances have the potential to assist in route optimization and produce real-time tracking of goods. Effective implementation of RFID technologies will be key to supporting tagging trucks, pallets, and inventory to provide insights down and across the supply chain.

Cloud

Cloud technologies are also significant because they enable logistics companies to operate remotely across their broad logistics networks. Continuing to adopt cloud-based technologies and integrating them into existing business models will assist in the further evolution of logistics markets.

Sustainability

Finally, sustainability will be a key issue for supply chains and global logistics in the near future. Many global manufacturers are including sustainability in their business plans. In many areas, such as the EU, sustainability also significantly overlaps with compliance and regulatory requirements. This means stricter regulations on emissions from logistics vehicles, monitoring of cargo ship pollution, and other issues. Sustainability touches all levels of organizations and can be as discreet as an office policy to go paperless or as broad as setting green investment requirements for larger multi-national companies.

 

ban Commerce Restricts the Export of Luxury Goods to Russia and Belarus and to Russian and Belarusian Oligarchs and Malign Actors in Latest Response to Aggression Against Ukraine
Archives, Commentary, Global Trade Daily, International Trade, War

The Fallout of Putin’s Sanctions: What You Need To Know

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The Russia-Ukraine war has caused sanctions to be leveled from both sides of the conflict. Sanctions began when Russia increasingly mobilized its military along its border with Ukraine. Since the invasion, Western states have responded with additional sanctions, and Russia has retaliated. The exact outcomes of the conflict and the sanctions are likely to continue to materialize over the remainder of the year. This article will look at the sanctions, their fallout, and just what you need to know.

Ukraine Invasion Triggers a Global Response

On February 24, 2022, Russia attacked Ukraine, undertaking a total invasion of the country. The invasion was set off after years of escalating military conflicts in Ukraine and a military buildup by Russia. As Ukraine announced its intention to join NATO, and after talks broke down, Russian President Vladimir Putin announced the recognition of two pro-Russian breakaway regions in eastern Ukraine on February 21, 2022. The next day, the first round of economic sanctions by the U.S, the U.K., and the European Union was announced.

What Sanctions Are in Place?

Before diving into how Russia has replied to western sanctions, let’s look at what sanctions have been put in place so far. Currently, Russia is experiencing economic, energy, and individual sanctions. Additionally, many private companies are also making their own business decisions to impact Russia.

  1. Financial Sanctions: Russia’s central bank assets are frozen, bringing a halt to $630bn of foreign currency. As a result, Russia has seen a 17.8% rise in inflation, and the rouble has lost 22% of value. Additionally, most Russian banks have been removed from the international financial messaging system Swift, which is used for many types of payment processing. Finally, the U.S. and the U.K. have both taken actions to prevent Russia from utilizing funds in their banks.
  2. Energy Sanctions: The U.S. has banned all Russian oil and gas imports. Similarly, the U.K. has begun phasing out Russian oil imports and expects to be done by the end of 2022. Germany, which depends on Russian natural gas, has put a stop to the opening of the Nord Stream 2 gas pipeline from Russia. Finally, the E.U. has pledged to stop Russian coal imports by this August.
  3. Individual Sanctions: The U.S., E.U., U.K., and other countries have also begun sanctioning many Russian individuals and businesses. The most well-known of these include Russian oligarchs. Russian oligarchs wield tremendous power and wealth in Russia and are often closely associated with the Kremlin. Oligarchs aren’t the only ones being sanctioned, as many government officials and their families have also been sanctioned.
  4. Other Actions: Over 1,000 international companies have suspended operations in Russia, including McDonalds, Coca-Cola, and Starbucks. Russian flights have been banned from Western airspace. Dual-use goods (that is, items that can be used both for civilian and military purposes) have also been banned from export to Russia. Even Bitcoin wallets aren’t safe right now, with Russian bitcoin miners being put under sanctions.

The Russian Reply to Sanctions

With so many sanctions being imposed on Russia, it would be hard to believe if they never replied. Next, we’ll look at how Russia has reacted to the sanctions imposed by Ukraine and its allies.

Russian Export Bans

The most recent wave of Russian bans included more than 200 products after the West enacted its own sanctions.

A non-exhaustive list of products banned for export includes:

  • telecommunication, technological, and medical equipment;
  • vehicles;
  • agricultural machinery;
  • electrical equipment;
  • railway cars and locomotives;
  • containers;
  • turbines;
  • stone and metal cutting machines;
  • video displays;
  • projectors; and
  • switchboards and consoles.

The ban was put into effect until the end of 2022. Russia suspended the export of the goods to all countries except for members of the Eurasian Economic Union (EAEU) and the Russian-recognized separatist states of Abkhazia and South Ossetia. The Eurasian Economic Union includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. Cuba, Moldova, and Uzbekistan are member-observers.

No Indication of Energy Sanctions

Interestingly, Russia did not go as far as to cease energy and raw materials sales. Russia’s raw materials and energy sales are the country’s largest contribution to the global trade by far, and Russia remains key to the continuous flow of energy to European nations. In March, Russia threatened to cut off natural gas supplies via the Nord Stream 1 pipeline.

In 2019, Russian raw materials included $123bn in crude petroleum, $66.2bn in refined petroleum, $26.3bn in gas, $26.3bn in iron/steel/aluminum, $17.8bn in precious metals and gems, $17.6bn in coal briquettes, and $9.7bn in cereal products. Despite reluctance to reduce raw materials exports, Russia has suspended the export of some types of timber and timber products.

What Will Happen Because of Russian Sanctions?

The key to the Russian economy is the export of its raw materials. Not only do Western countries depend on these goods, but they are also the backbone of the Russian economy. This means that goods like oil and gas and metals such as steel and nickel are of key importance. 

As stated before, none of these materials appear on the materials banned for export. If any of these goods end up being blocked from export, many consequences could follow, including the cost of cars and other vehicles going up.

However, items like railway cars and locomotives will likely not suffer much harm. Additionally, agricultural machinery primarily exported to former-Soviet bloc countries like Belarus and Kazakhstan will not be impacted. 

Vehicles may be an issue for the company Stellantis, which owns Vauxhall, Peugeot, and Citroen. Related is that Russia recently announced the nationalization of Renault’s Russian assets. How all of this will play out in the long run is hard to say, but regardless, Russian vehicle exports do not make up as large of a slice of the global economy as their raw materials.

In the end, Russian bans on export appear to be symbolic in nature and designed to send a signal to countries that Russia views as a threat.

One area of possible concern, however, is how the Russia-Ukraine war will impact global food costs. Both Russia and Ukraine supply large amounts of grain to the world. In addition, Russia exports large amounts of agricultural fertilizers, including potash and phosphates, which are used as ingredients in fertilizers. The disruption of Ukrainian crop production during the summer growing season could lead to potential food shortages. Additionally, President Vladimir Putin warned there would be “negative consequences” for the world’s food markets.

Conclusion

Russian sanctions and sanctions on Russia are both bound to have an impact on the global economy. At this stage, Russia has not cut off its supply of raw materials, but that could change. For now, Putin’s sanctions may just be posturing on Russia’s part, but real threats like food shortages could be lurking in the shadows. 

 

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Update: Who Is Winning The U.S.-China Trade War?

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In 2018, U.S. President Donald J. Trump initiated a trade war with China. The trade war, which has never officially ended, continues to this day. Neither side appears to be winning and many bystander countries are benefiting as a result of this international dispute. 

In some cases, these countries are seeing a number of positive impacts, including an increase in trade exports. This article will take a look at where the U.S.-China trade war currently stands and what outcomes have occurred as a result.


 

An end to globalization?

One of the main concerns springing from the U.S.-China trade war was that it would damage the international economy and bring an end to globalization. Specifically, because the United States and China are the two largest global economies. However, even a global pandemic could not totally destroy the integrated economies of the world. 

Recent research demonstrates that U.S. tariffs on Chinese goods resulted in higher import prices in the U.S. and the Chinese retaliatory measures ended up harming Chinese importers. In the end, two-way trade between the U.S. and China dried up. However, contrary to speculators’ fears, globalization has not disappeared and many bystander countries benefited from the trade war through increased exports.

Explaining Bystander Country Growth

It seems unsurprising that global participants would fill the void after China was axed from the U.S. trade pipeline. Countries like Mexico, Malaysia, and Vietnam benefited the most. However, more surprisingly is that global trade, in products affected by the trade war, increased 3% relative to products not impacted by tariffs. So, not only did imports from other countries increase, but overall global trade increased.

One possible theory is that countries saw the trade war as a chance to expand their global market presence. China, which utilized a zero-COVID policy over the past few years, saw lags in its trade activity as a result. These gaps in global trade gave countries the opportunity to invest in additional trade opportunities or the chance to mobilize larger portions of their workforce. These changes enabled countries to increase exports without increasing prices.

Another theory explaining the growth is how third countries were able to export more to the U.S. and China. This change shrank their per-unit costs of production and economies of scale thus allowing them to offer more products for lower prices. Countries, where global export prices are declining, are also those where the largest increases in global exports are occurring.

Country Trade Growth Factors

One might wonder, what more could be done to take advantage of these types of trade wars in the future? Some countries increased exports overall. Others reallocated their trade by shifting their exports from other countries to the U.S. Finally, in some cases countries saw an overall decrease because they sold less overall. Two primary factors emerged to explain these patterns.

Deep Trade Agreements

Deep trade agreements (agreements that go beyond just tariff regulation, but include other behind-the-border protections) were significant. In a “deep” trade agreement fundamental economic integration provisions, like tariff preferences, export taxes, investments, and intellectual property rights are combined with other provisions. The first layer of these provisions usually supports economic integration like rules of origin and anti-dumping and countervailing duties. Then, other provisions that promote social welfare, like environmental laws or labor market regulations are added in, on top. 

Trade agreements beyond just tariff preferences and other fundamental provisions help minimize fixed costs of expanding into foreign markets. Countries with these types of agreements had the necessary security to expand trade as the U.S. and China vie for economic supremacy.

Accumulated Foreign Direct Investment

Deep trade agreements weren’t the only important factor though. Accumulated foreign direct investment was also significant. Foreign direct investment is different from other types of investment because FDI occurs when an investor based in a home country acquires an asset in a foreign nation with the intent to manage that asset. Many areas that are undergoing increased social, political, and economic connections to global markets also see increased direct foreign investment.

Foreign direct investment is significant because it helps manage the utilization of scarce global resources. Poor countries often lack the necessary capital to build the necessary economic infrastructure. By receiving these foreign funds, which are managed from abroad, countries can better develop their economies.

Supply chains interacted like dominoes

Analysts at the Peterson Institute for International Economics predicted as far back as 2016 that U.S. tariffs would cause widespread production shifts in a “daisy chain.” In essence, when U.S. tariffs hit China, companies moved production to a third country. This move then caused other activities in third countries to be shuffled. 

Analysts have noted that the complexity of modern supply chains makes predicting these outcomes difficult to predict. However, countries that were more integrated into the global economy seemed more likely to land firm relocations.

No Reshoring of U.S. Jobs

Unfortunately, relocations did not occur in the United States. Supporters of the trade war often hoped that it would result in the reshoring of U.S. jobs. Others were supportive because it demonstrated a way to hold China accountable for its deleterious authoritarianism. 

In any case, the trade war did not result in massive amounts of jobs returning to the United States as many had hoped – although admittedly this is something that’s difficult to measure. Overall, third countries were the main winners as they replaced Chinese imports with their own.

Bystander countries benefited the most, especially those with a high degree of trade integration. A good business plan can help a business navigate trying times. In the same sense, countries that adopted a strategy for global trade shakeups came out on top. Despite worries of an end to globalization, the trade war seems to have actually diversified trade and spread opportunities to other countries. In reality, the trade war has helped push us towards a world where trade is not monopolized by the U.S. and China.

Conclusion

Initially, we asked who was winning the U.S.-China trade war? The answer is clear: third countries with deep connections to international partners. This means countries that were able to take advantage of supply-chain shakeups and countries that already had existing trade agreements and large amounts of foreign investment. 

For the United States, and China, it appears that the trade war did not result in any major gains. Some analysts believe that it does more harm than good. The U.S. did not see any increased reshoring of jobs and economic activities. Really, the U.S. replaced Chinese imports with imports from alternative countries

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China’s Supply Chain Slows Down as Global Trade Shows Resilience

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One of the biggest economic hits of the COVID-19 pandemic was the complete disruption of the global supply chain. With entire economies shut down as lockdowns spread worldwide, global trade activity screeched to a halt, and the supply chain has yet to recover fully. 

Lockdowns in China, which affected many major industrial and manufacturing regions, caused trade activity to fall by 50% in the first months of the pandemic. With factories closed, massive shortages of crucial components like computer chips rippled throughout industries across the globe. Problems with staffing at major ports, along with a spate of severe weather issues, further compounded the supply chain crisis.

Because China enforced a very stringent zero-Covid lockdown policy early on in the pandemic, it was one of the first to recover. However, a new report suggests that the Omicron variant is once again straining the supply chain in China. New lockdowns are in place, and no matter how brief they may be, they will certainly cause further disruptions for companies still struggling to refill their depleted warehouses. Unfortunately, this is happening just as the rest of the world sees restricted supply chains recover. 

Zero-COVID policies create negative trade activity

Much focus on China in recent months has been on trade bans arising from China’s treatment of the Uyghur ethnic minority population and the country’s shifting approaches to dealing with public blockchains and cryptocurrency. But another very significant issue has been building in the background. Namely, a new round of infections is making China’s zero-COVID policy kick in, confining millions to their homes and shutting down large manufacturing facilities.

It is worth briefly reviewing China’s policy and how it affected the global supply chain in 2020. Early on in the pandemic, China initiated its zero-COVID policy. Within two weeks of the first death in China, the government began shutting down large cities across Hubei province, including Wuhan, the epicenter of the pandemic. The scale of the action was so large that the World Health Organization called it “unprecedented in public health history.”

The first services affected were public transportation – bus and train stations, airports, and major highways leading into and out of Hubei province all closed. Soon residents were confined into their homes, with only a single household member allowed to leave the house every two days to get essentials, such as groceries or medicine.

According to numbers the Chinese government reported, the zero-COVID policy was remarkably effective. Despite having a population of over 1.4 billion, China recorded fewer than 100,000 cases and 5,000 deaths in the first year of the pandemic (compared to 27 million cases and 370,000 deaths in the United States over the same period). Indeed, China’s policies were so effective that it ranks 120th in total cases out of 225 countries and regions reporting data and 84th in total deaths.

However, the zero-COVID policy also had a significant negative effect, both for China and the rest of the world. Indeed, what came next started a chain reaction that battered industries worldwide. 

Three weeks after the lockdown began, China shut down all non-essential industries in Hubei, including non-essential manufacturing. Chinese trade activity soon plummeted, losing almost 50% in a single month. 

Unfortunately, Hubei was and is a major manufacturing center in China, supplying steel, display screens, and automobiles. But perhaps Hubei’s most significant product is computer chips which are a critical component in many other products. So as Chinese supply dried up, other companies soon found themselves unable to fill orders creating a spiral of declining supply despite growing demand from consumers who were filling their time at home by shopping online.

The supply chain stabilizes throughout 2021

After falling drastically in 2020, trade activity rebounded quickly. China, in particular, regained its footing swiftly, seeing significant activity gains by the end of 2020, although it still had issues with transport. Everyone else fared less well, with growth just beginning to reassert itself around the fall of 2020, right before a new wave of COVID hit, causing further lockdowns.

The past year saw the supply chain stabilize for many countries as businesses had proper strategies in place and trade activity began to recover. According to Tradeshift’s recent Index of Global Trade Health, many regions were edging towards pre-pandemic activity levels, with the United States experiencing a surge that put it well in front of its earlier numbers. The Euro Zone remained below pre-pandemic levels but was clawing its way back.

Figure 1: Global trade activity 2020-2021

(courtesy of Tradeshift Index of Global Trade Health Q4 2021)

However, at the end of 2021, more bad news arrived in the form of the Omicron variant. Its effects would be felt quickly. But would the lessons learned throughout the early stages of the pandemic help prevent another meltdown?

New lockdowns in China create new disruptions

In 2021, China nearly met its zero-COVID goals, with only around 10,000 infections and two deaths through to the end of November. However, in December, things began to change. The far more transmissible Omicron variant began to take hold, and within two months, China had more new cases than it had seen in the previous year. Not surprisingly, they responded by once again initiating strict lockdowns in the Zhejiang, Henan, and Shaanxi (Xi’an) provinces, again major Chinese industrial centers.

The effects are already visible and pronounced. According to Tradeshift’s report, Chinese trade activity declined 10% in Q4 2021, marking the lowest activity level since the onset of the pandemic. Given how badly Chinese supply chain issues affected the rest of the world in 2021, there is naturally concern that the current Chinese downturn will spread rapidly. Fortunately, there are some signs that the rest of the world may be better able to handle the downstream issues this time.

What does the rest of 2022 hold?

There seems to be good reason to believe that the supply chain issues that arose following China’s initial lockdowns are finally easing in a meaningful way. But the rise of the Omicron variant, the uncertainty surrounding potential new variants, and the new spate of lockdowns in China are leaving many uneasy. 

Tradeshift’s founder and CEO, Christian Lanng, is one of those who is holding his breath about the next few quarters. Indeed, he believes everyone should be working now to build more robustness into the supply chain, reinforcing its ability to withstand large-scale disturbances. He predicts:

“At some point in the next 12 months, an event will unleash disruption that will once again test the resilience of global supply chains. Experts now expect a major shock to hit supply chains once every 3.7 years. Heading into the third year of a global pandemic, our index suggests businesses have learned a number of lessons which are enabling them to become better problem solvers in the face of fresh challenges.”

So the bad news is that we are not out of the woods quite yet. But the good news is that we have become much better at finding our way out quickly and with as few scratches as possible.

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Archives, Global Trade Daily, International Trade, Special Reports

The Trade Finance Landscape in 2022: Automation and Digitalization

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Given the rapid pace of digital transformation, it is often surprising to learn how many critical industries and services remain behind the curve, relying on manual processes and large-scale paper documentation. Global supply chain disruption resulting from the COVID-19 pandemic has highlighted that international trade finance is one such industry.

International trade finance remains mired in an avalanche of paper, a plethora of conflicting national regulations and processes, and systems that do not communicate well with each other. These burdens, coupled with the industry’s failure to adapt quickly to more modern methods of analyzing credit eligibility, hit medium, small, and microenterprises (MSMEs) particularly hard. As MSMEs account for a large part of total global trade and are the largest employers worldwide, it is far past time for the industry to make changes that provide greater and simpler access.

This article reviews digital transformation efforts in global trade finance and considers the prospects for digitization and automation in the coming years.

The state of digitalization in global trade finance

After a drastic dip in 2020 as COVID-19 shut down countries worldwide, the international flow of goods rebounded strongly in 2021, and significant growth is expected to continue in 2022. And, according to the World Trade Organization, 80 to 90% of this flow is dependent on trade finance.

Unfortunately, trade finance is heavily document-dependent at every stage, and the burden of document preparation is only exacerbated by the need to verify and process documents along the way. In addition to being environmentally questionable in an era of extreme sensitivity to climate change, the paper-intensive processes underlying traditional trade finance are inefficient and create unnecessary access barriers.

It is somewhat surprising how far behind trade finance remains, given the advances in automation of many other financial processes and the benefits of digitalization. For example, automating invoicing and payment processing can lead to 15.4% more invoices getting paid on time, which is crucial for business success.

Despite the availability of tools and systems that can easily facilitate the automation of current manual processes, trade finance participants, especially banks and financial institutions, remain behind the curve. 

The ICC’s annual report on global trade finance presents discouraging data about automation efforts. It reports that 45% of banks still have completely manual document verification processes, more than 30% have fully manual settlement and financing processes, and around 25% rely on manual processes for credit issuance and advising.

The net effect of reliance on traditional methods is that many organizations cannot effectively participate in trade finance systems. Outdated modes of assessing creditworthiness, coupled with overly burdensome documentation demands, combine to deny equal access to many businesses. And this result hinders global trade.

Roadblocks to digitalization

Not surprisingly, many objections to digitalization and standardization are familiar mantras. The cost and inconvenience of implementing new systems have long been favorite protests against digital transformations, and they have raised their heads again for trade finance automation.

However, time and again, it has been shown that companies taking this “moving forward is too difficult” approach don’t maintain their position in the industry; instead, they quickly fall behind their competitors. Indeed, the more forward-thinking companies can expect to reap the most important benefit from their investment – increased revenue growth and profits.

A more compelling concern about digitalization is data privacy and security. These concerns are more than relevant in an era where data privacy regulations are becoming more prevalent and more stringent, and the number of cybercriminals is increasing rapidly. But frankly, there is far more opportunity for data loss and misappropriation in paper-based manual systems.

Organizations can apply today’s advanced cybersecurity standards and tools to build robust and secure automated replacements for their existing manual processes. And the application of increasingly improved, artificial intelligence-based analytical tools can help financial institutions eventually make better decisions about extending finance to market participants, opening access to more organizations, and expanding both global trade and the finance market.

The International Commerce Commission digitalization plan

Recognizing the lack of progress on digitalization of international trade finance systems and the damaging effects on MSMEs, the ICC established a working group to build a new trade finance architecture. Working with McKinsey and Fung Business Intelligence, the ICC Advisory Group on Trade Finance put together a three-phase, ten-year trade finance modernization plan, which it published in late 2021.

The ICC plan attempts to address several well-recognized issues in global trade finance, including the complexity of transactions, the lack of transparency in trade finance decision-making, and the credit constraints preventing MSMEs from equal access to finance. The plan is highly ambitious and will require cooperation from governments, financial institutions, and trade organizations worldwide. But it can make trade finance simpler, more effective, and more inclusive.

While the details of the plan go far beyond the scope of this article, the plan generally proposes the development of a so-called interoperability layer. This layer is a virtual construct built by harmonizing disparate existing finance standards (specifically concerning data models and APIs), establishing new standards to address gaps in finance regulation, and creating uniform playbooks for global trade participants. Standardized automation playbooks have already achieved success in many other areas, such as closing business sales and increasing data consistency.

Phase 1 lasts 12-18 months and focuses on building buy-in for existing standards, bringing more organizations into a common framework. This phase will also identify areas where standards are lacking and propose options to fill these gaps in coverage.

Phase 2 takes place in 2-3 years. The goal of Phase 2 is to finalize the first round of standards that serve as the basis for the interoperability layer and develop standards and structures for APIs that market participants can use to access trade finance systems. In this phase, the governing body of the plan will push for greater participation, specifically from supply-side participants (i.e., financial institutions).

Phase three, which covers the next seven years, is primarily scale-up and refinement. Based on the previous years’ experience, market participants will work to improve on standards and drive usage of trade finance playbooks. Importantly, however, phase three is where architecture truly gets involved, with the launch of common systems that participants can access directly or via API.

Harmonization of laws and regulations has had varying levels of effectiveness in fields ranging from international trade to intellectual property to employment and human rights. It remains to be seen if the ICC proposal can effectively overcome the inertia that has so far gripped the trade finance industry. But if not the ICC proposal, then other digitization efforts must take place to facilitate supply chain 4.0.

Conclusion

The COVID-19 pandemic has put the global supply chain in the spotlight, unfortunately in a less than positive way. But as the world looks at how to resolve supply problems, global trade finance players have the perfect opportunity to revisit their processes and how they can facilitate international trade. As with so many other industries, the obvious answer is automation and digitalization. Hopefully, the market will heed this call and start the change sooner rather than later.

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Archives, Global Trade Daily, International Banking, International Trade

How the ICC Plans to Restructure Global Trade Finance for a More Sustainable Global Economy

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One of the most enduring effects of the COVID pandemic has been the disruption of the global supply chain. Micro, small, and medium enterprises (MSMEs) constitute the majority of companies and employers worldwide and are major contributors to the total global gross domestic product. They frequently encounter more difficulties than other companies because they have less access to global trade finance systems.

The International Chamber of Commerce (ICC) viewed the pandemic as an opportunity for positive disruption in favor of all global financial market participants. Accordingly, in August 2020, it created an Advisory Group on Trade Finance (ATF) and charged it with addressing trade finance challenges that hinder full participation by MSMEs. 

The ATF, in a joint effort with McKinsey and Fung Business Intelligence, recently released a proposal for restructuring global trade finance to better promote financial inclusion and sustainable finance. The report proposes a ten-year, three-phase process for modernizing and standardizing global trade finance systems through the introduction of an “interoperability layer.” 

In this article, we’ll summarize the report’s primary recommendations, provide an overview of the structure of the proposed interoperability layer, and discuss the anticipated effects on MSMEs worldwide. 

The current global trade finance market

In 2020, the finance market covered transactions totaling $5.2 trillion, or approximately 6% of the global gross domestic product. For financial institutions, this translated into 2% of their total revenue or roughly $40 billion. However, despite the size of the market, a finance availability gap of $1.7 trillion still exists, largely affecting MSMEs.

Fintech companies are relatively new participants in the market. However, they are actively working to develop new products at every stage in the supply chain, and the ICC report looks to leverage the capabilities of fintechs.

The vast majority (85%) of global trade finance addresses documentation issues associated with cross-border transactions, such as letters of credit, international guarantees, and international bills of lading, among other services. Documentation products and services also deal with regulatory and compliance issues, for example, anti-money laundering rules. The remainder is split between buyer-led financing (10%) and supplier-side finance (5%). 

What trade finance challenges does the proposal address?

Despite the sizable, robust trade finance market, there is substantial room for improvement, especially as it relates to MSMEs. According to the World Bank, as of 2017, approximately 65 million MSMEs were credit constrained. There are several reasons that MSMEs are less than full participants in the global trade finance arena, all of which the ICC seeks to rectify with its current proposal. Some of the most significant issues facing MSMEs are:

Lack of access to liquidity

Traditionally, MSMEs have had more difficulty accessing trade credit than larger corporations because they have less available collateral or are unable to meet established strict credit requirements. Credit requirements have not evolved to reflect changes in the global economy and there is a dearth of alternative financing options for international transactions. Because of this, MSMEs frequently find themselves without available credit for purchases or sales. 

Transaction complexity

The disparate requirements for international transactions and financing worldwide impose additional challenges on smaller firms with more limited resources. Just keeping track of the different requirements for each jurisdiction can be an overwhelming task. And when it comes time to meet the documentation requirements for each transaction, the burden only increases.

Limited access to B2B markets

B2B marketplaces create tremendous efficiencies in the market by pairing suppliers and purchasers quickly and simply. MSMEs, however, often lack either the knowledge base or the resources to gain access to these marketplaces. And for MSME suppliers, financing, capital, and cash flow issues can prevent them from establishing themselves as effective participants in B2B markets. 

What is the ICC’s reconception of global finance?

The ICC proposes a three-phase, ten-year plan for developing globally accepted standards that serve as a framework for common systems, all of which come together in an interoperability layer. The interoperability layer will not be hardware or software, but instead a virtual construct that sets the baseline standards and best practices supporting trade finance digitization. Digitization is increasingly important to MSMEs, after all. According to recent studies, 43% of small businesses now fully rely on online banks. 

Ultimately, the ICC envisions new standardized and shared architectures equally accessible to all market participants. The interoperability layer would replace the patchwork of standards and protocols that currently exist and fill regulatory gaps by developing a unified and consistent set of standards and practices. The proposed interoperability layer accomplishes three main missions. 

First, it encourages widespread adoption of existing trade finance standards to bring market participants into a common network. Second, it creates new standards and processes to fill existing gaps, including standards for sustainable finance. 

There are two main areas where the ICC identifies specific needs for additional standards, both of which focus on easing and increasing digital transformation of trade finance: uniform data models and API standards. API standards constitute an immediate need because many banks currently suggest that the lack of such standards inhibits their ability to develop strategies for API usage in their operations.

Finally, it creates operational playbooks for market participants that embody the full set of standards. The consolidation of standards and protocols into the interoperability layer will occur with full knowledge of the challenges that prevent or hinder participation by entities with fewer resources or credit histories. With simplified access to the trade finance system, more players at every level will be able to join. 

As for governance, the ICC envisions an industry organization or consortium overseeing the development, implementation, and ongoing management of the interoperability layer. The governing body should include participants from all functions, regions, and company sizes.

How does the interoperability layer benefit MSMEs?

The interoperability layer has benefits for all market participants, but the impact for MSMEs is particularly notable. With new standards and processes for assessing transaction risks, MSMEs will gain greater access to alternatives for credit and liquidity. 

Recent research suggests that traditional bank credit assessment models underperform newer tech-based models for determining creditworthiness. Applying real-time data and highly advanced analytical tools like AI, newer models provide a more timely and accurate assessment of a firm’s payment capabilities. In turn, better credit scoring results in more efficient allocation of resources, particularly for smaller firms like MSMEs.

In addition, new documentary standards and digitization of documentation requirements will reduce costs for all market participants. Because these costs disproportionately impact MSMEs, they will see the greatest benefit. But as finance processes become more streamlined and more participants enter the market, the large financial institutions will see corresponding revenue increases which, coupled with lower expenses, lead to higher profit.

Will the interoperability layer promote sustainable finance?

The ICC report recognizes that sustainability is an increasingly important issue for corporations and governments. However, there is currently a lack of standards for sustainable finance, including the lack of a commonly accepted vocabulary. One of the major tasks the ICC envisions is the creation of a standard taxonomy for sustainable finance that all market players can apply in future transactions. Once the market has a common language, it can better develop standards for applying the principles of sustainability in the global trade finance industry. 

Time will tell if the ICC proposal gains any traction. Further digitization is inevitable with or without the report. But building a common framework for the digitization that makes it easier for firms of all sizes to effectively participate in international trade is a valuable goal.