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

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

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

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

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. 

 

trade war

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

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

supply chains

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

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.

trade finance

The Trade Finance Landscape in 2022: Automation and Digitalization

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.

global trade finance

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

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.

Trade credit

ITFA Takes A Harmonized Step Towards Trade Credit Insurance

The ITFA (International Trade and Forfaiting Association) recently released a new initiative in the form of a Basel III-compliant trade credit insurance policy form. Designed to assist insurers and financial institutions to negotiate new deals and help establish a standardized Basel III policy, the IFTA’s initiative also represents an effort to help trade credit insurers in an era where insurance companies are seriously re-evaluating how they operate.

Trade credit insurers, and the insurance industry as a whole, have been greatly challenged by the economic fallout created by the pandemic and the lockdowns. The frequency of insolvencies from commercial customers due to financial difficulty has risen greatly. Normally, credit insurers would cancel (or at least limit) coverage for buyers who display signs of being unable to pay. 

But due to the serious economic situation created by the pandemic, there is now the dramatically increased risk of trade credit being withdrawn across the board. In this article, we’ll cover why insurance plans including TCIs have become more relevant since the start of the pandemic, how the IFTA’s new policy should help trade insurers, and then what we can expect the near future to look like for the insurance industry overall.

What is trade credit insurance?

Trade credit insurance, or TCI, protects businesses against the inability of commercial customers to pay for services or products. The inability of customers to pay may result from financial woes, bankruptcy, societal upheaval, or other factors. The purpose of a TCI plan is therefore to help businesses ensure they still receive proper cash flow as a result of doing business with a customer who won’t or can’t pay. Banks, in particular, utilize trade credit insurance for capital relief and to reduce financial risk when conducting transactions. 

In many industries, it’s common for customers to take out a line of credit in order to make a large purchase. Of course, any business that lends money to customers is taking a risk that the total amount lent (in addition to any interest) will not be repaid. It’s even a greater risk when the debt is unsecured and there is no collateral to reinforce the loan. 

A comprehensive TCI plan will compensate a business for any unpaid debt, depending on what the coverage limits and other details of the plan are. Since most lines of credit that businesses give for large purchases are unsecured, having a TCI plan in place will mitigate much of the risk. In other words, businesses with a TCI plan at the very least should be more comfortable with extending lines of credit to customers, and they will have a backup plan in the event that the entire debt is not paid. 

Why the pandemic has demonstrated a need for insurance 

Due to greater financial uncertainty since the pandemic began, there has been a drastic increase in the number of businesses and individuals alike applying for insurance coverage. It’s not just TCI plans either. The number of business owners applying for life insurance coverage, for instance, has increased dramatically as a means to protect their financial assets in the event that the worse happens.

It’s not hard to see why. Covid has proven to be deadly for patients who are older and/or have existing health issues. That’s most likely why the number of adults who have purchased a life insurance plan has increased to 50% of adults in Canada and 52% of adults in the United States. 

If anything, the pandemic has demonstrated that there is a very real need for businesses and organizations to have an insurance plan (or plans) in place to help ensure financial stability in an increasingly volatile era. It’s also demonstrated a greatly increased demand for insurance coverage across a number of different policies and plans. Other insurance plans that are in greatly increased demand from business owners include general liability insurance, worker’s compensation insurance, and commercial property insurance. 

And now that insurance companies (in general) are experiencing much higher demand since the start of the pandemic, there is much more uncertainty in regards to the timing and extent of claims, as well as the fact that most insurance agencies are being forced to increase premiums and raise additional capital to help reverse the decrease in return on equity. Like the businesses they are insuring, insurance companies themselves are likewise at increased risk.

Even though the policy by the ITFA is in regards to trade credit specifically, it may provide us with a blueprint on how risks and costs may be reduced for insurance companies overall as well as the financial institutions they work with. 

What does the ITFA’s new policy form do?

Basel III is an international regulatory framework that was made as a response to the 2008 financial crisis. The new ‘harmonized’ Basel III-compliant policy form that was released is designed to help insurance companies and banks negotiate new deals as well as standardize a trade credit policy. 

The new form covers receivables policies and is intended to generate more insurable opportunities while keeping costs and time spent to a minimum. As noted previously, banks and financial institutions often rely on TCIs for capital relief and to keep risk to a minimum. The issue, however, is that banks and TCI agencies often each possess their own Basel III policy forms. 

When a bank and TCI agency attempt to work together, many hours or even days are spent on negotiating forms. This is difficult because all forms being negotiated are kept confidential and much work goes into settling on similar wording. Needless to say, negotiations can be extended and expensive. 

The goal of the ITFA’s form is to ‘harmonize’ wording during negotiations between banks and insurance companies so that two primary goals are accomplished: one, that insurance carriers can more clearly based on their services provided and the details of their policies versus policy wordings, and so that banks can focus more on their pricing. To put it into simpler terms, it aims to standardize how insurance policies are worded. 

As Sean Edwards, the CEO and Chairman of ITFA stated at the 2021 ITFA conference, “Consistency, predictability and a reliable form is paramount to regulatory bodies further recognizing trade credit insurance as a viable risk transfer mechanism for capital substitution. We need all banks, insurance companies, law firms, and brokers moving in the same direction if we are to grow the overall industry.”

Streamlining policy negotiations between banks and insurance companies with standardized wording is certainly one way to provide relief to insurance companies, and one that could be applied to other insurance companies outside of TCI carriers as well. 

Other actions include governments offering their support to insurance markets by guaranteeing transactions made by insurance companies through reinsurance agreements and, in the case of the European Union, having export credit agencies ensure short-term trading risks instead of private insurance companies. 

Conclusion

As the world starts to emerge out of the economic crisis generated by the pandemic, private businesses, banks, and insurance companies are all at greater risk than they were before. Insurance companies including TCIs are in a position where their services are in much greater demand than before, and they need to minimize financial losses. The move by the ITFA to standardize language and streamline negotiations between banks and insurers is one-way costs can be reduced. 

digital currencies

Central Banks to Adopt Their Own Digital Currencies to Eliminate Potential Risks

Digital currencies backed by central banks, or central bank digital currencies (CBDCs), are becoming a reality for residents in a few countries around the world. The evolution from checks, to debit cards, and now to digital payments give cause to wonder if we really need cash anymore. While economists agree that we still need cash for now, some governments are discussing the effects of implementing a CBDC nationally. 

However, not everyone is as interested in the prospect of implementing a nationwide digital currency. Commercial lending and banking would be affected, as the widespread use of CBDCs could take a bite out of commercial deposits and put the industry’s funding in jeopardy. But with China currently developing a digital Yuan, that leaves government and supply chain leaders wondering about the potential trade risks of not competing in the global economy with CBDCs. 

Luckily, lawmakers have come up with a slew of solutions that include strict regulations and controls, hard limits on transfers and holdings, and a long-term transition period before the new digital assets could be launched in full effect. In the meantime, central bankers in the US are contemplating adopting their own digital tokens for instant, low friction international transactions. 

What is Central Bank Digital Currency?

A CBDC is the virtual form of a certain fiat currency. You can think of it as an electronic record or a digital token of how currency is spent, held, and moved. CBDCs are issued and regulated by central banks and backed by the credit of their issuer. They aren’t really a new kind of money, it just changes the way we track transactions. 

While seemingly very similar at first glance, CBDCs are not cryptocurrencies. Cryptocurrencies are digital currencies that are secured by cryptography and exist on decentralized blockchain networks. Bitcoin and other cryptocurrencies are not backed by any government or banking entity and are purely digital currencies. CBDCs, in contrast, are backed by legal tender and are only a digital representation of fiat money.

Part of the draw to create CBDCs is inspired by their crypto-cousins’ distributed ledger technology. DLT, or blockchain technology, refers to the digital infrastructure and protocols that allow access, validation, and continuity across a vast network. This means that, in contrast to fiat currency that exists today, digital currencies can be tracked and verified in real-time, limiting the risk of theft and fraud. 

Blockchain technology is usually associated with cryptocurrency, but it has the potential for numerous applications that could help governments organizations and banking entities run more smoothly with accountability and transparency. Another reason why countries are drawn to CBDCs is they have the ability to help increase banking access for otherwise underbanked populations. 

Currently, there are 81 countries exploring CBDCs. China is racing ahead of the pack with their development of the digital Yuan, putting pressure on countries that will want to remain competitive. It raises the question of whether China will at some point accept only digital currency, meaning other countries would need their own CBDCs to remain competitive on a global scale. 

China’s digital Yuan

China has long been known to resist cryptocurrencies and crypto trading, so when the news broke that their central bank has been developing a CBDC there was some confusion. However, it has now become clear that the Chinese government is creating an environment where citizens who want to use digital currencies like crypto will have to use the digital Yuan, removing any competition from DeFi banking initiatives. 

Before their crackdown on Bitcoin and crypto, local investors made up 80% of the crypto trading market. This shows promise when it comes to the adoption of the digital Yuan, with so many Chinese citizens open to adopting and spending digital currency. 

They have already started real-world trials in a number of cities and are expecting the digital Yuan to increase competition in China’s mobile payments market. It is still not entirely clear how users will hold and spend the new digital Yuan whenever it is available nationwide. Right now the most popular form of mobile payment in the country relies on QR codes scanned by merchants. 

Alipay and WeChat Pay could eventually integrate CBDC functionality, and smartphones could also potentially be used as a digital wallet for CBDCs. There is still a lot to be discussed, tested, and fixed before the digital Yuan can be distributed nationwide, but China is currently the country closest to rolling out its own CBDC. 

Where does the United States stand?

Crypto thefts, hacks, and frauds amounted to about $1.9 billion in 2020, so many leaders have reservations when it comes to enforcing and regulating CBDCs in the US. But there is evidence that CBDCs would have no issues being adopted by the American people. Crypto aside, the digital payments sector is booming with about 75% of Americans already using digital payments apps and services. 

But there is not yet a single widely accepted infrastructure available that could handle CBDCs, and lawmakers are lagging behind when it comes to regulations for fintechs as it is. The US could take a page from China’s book and explore adding CBDC functionality to existing banking fintechs like Chime, Paypal, and ApplePay. According to online trader Gary Stevens from Hosting Canada, it would also be wise to look at banks that offer trading services as well. 

In the US, banks offering online trading services (such as Merrill Edge through Bank of America) tend to provide a seamless client experience,” says Stevens. “They strive to provide a consistent login interface between the bank and its brokerage arm, making switching between these platforms easier. This also makes other tasks like moving money between these accounts more flexible. Therefore, US residents have come to expect a more integrated, holistic experience with similar core functionality.”

The Future of CBDCs

The onset of the pandemic has created the perfect storm for CBDCs to come to fruition. Telework, online education, and streaming services have experienced growth while brick-and-mortar establishments have suffered. The same is true for the financial services industry. Banks have struggled to compete with fintech solutions, and more people are utilizing digital payments than ever before. 

Since CBDCs are such a new technology, there is still much to learn when it comes to implementing CBDCs nationwide and around the globe. Offline accessibility and resilience are only a couple of concerns regarding digital currency adoption worldwide. Other issues include user privacy, using private and public blockchain networks, and how digital currencies will be exchanged on a global scale. Only time will tell how central banks choose to seriously pursue this route to make it more mainstream. 

Conclusion

There are a lot of details still up in the air regarding CBDCs, as well as a considerable amount of research, testing, and development left to unfold. But one thing is clear: central bank digital currencies are already under development. Whether you are getting into online trading or just like the convenience of e-payments, they might be coming to a digital wallet near you sooner than you think. 

global trade

Asia Takes the Lead For Recovery and Regional Growth For Global Trade

As global trade rebounds, the economies from East Asian and Pacific countries are increasing at a faster pace than their Western counterparts. China is fully expected to be the leader of this rise.

While part of this is because China is the largest economy in the region, another perhaps lesser-known reason is the fact that China (as well as other East Asian nations such as Vietnam) has not suffered from lockdowns and economic restrictions due to Covid to the same degree that Western countries have. 

In this article, we’ll dive into the increase in trade during the first half of 2021 from Asia in comparison to their Western counterparts. We will also talk about whether China has a stronger grip on world trade than ever before due to the pandemic…or if the evidence alternatively suggests that China’s position as a trade leader may be nearing its peak instead.

A Return to Normal Trade Levels in Asia

Businesses based out of East Asian countries have good reason to be optimistic as global trade starts to return to pre-pandemic levels. It’s clear that Asian economies have not been hit to the same level as countries in the rest of the world have. 

According to research conducted by the East Asia Forum, the digital economy is projected to add over $1 trillion to the Asian economy over the next decade, the most of any region in the world. And it’s not just projections about the future that are favorable to Asia. The results already speak for themselves. 

For instance, total export volumes from East Asian countries for the first quarter of 2021 were actually up 15.4% more than what they were in the first quarter of 2019. Meanwhile, exports have collapsed amongst nations in other regions of the world. Europe has reported a 2.9% decline in exports when compared to two years ago, with an even sharper decline of 11.2% and 19.9% for Africa and the Middle East respectively. 

There are two significant reasons why East Asian economies have rebounded so quickly in comparison to the rest of the world. The first is because they have largely followed China’s lead. The World Bank has forecasted that China’s economy will expand by 8.1% by the end of this year, which has helped carry an increase of 4.4% for other closely-tied countries in the East Asian and Pacific region as a whole. 

Then there’s the fact that Asian nations, including China, did not have to endure lockdowns and economic restrictions to the same level that the United States or Europe did. In the summer of 2020, for instance, it was widely reported how a massive pool party was held in none other than Wuhan while Western countries remained under strict lockdowns that were tightly enforced. 

This year, Western countries like the United States continue to feel the negative effects of the imposed economic restrictions in the form of a lower participation rate in the labor force, severe non-labor shortages (such as in the form of lumber and semiconductors), higher inflation, and costlier prices for basic goods.

This naturally begs the question:

Has The West Truly Fallen Behind?

In Western countries like the United States, Canada, and the United Kingdom, small businesses are perhaps the worst affected of all. Small businesses are responsible for a majority of private-sector employment and have also been the most severely hit. 

According to the Business Resiliency During Covid-19 study conducted by Freshbooks, 77% of surveyed business owners stated that they were either not confident or only somewhat confident in the state of their businesses. Among the reasons cited included a loss of income, reduced cash flow, and not having enough staff or resources to keep operations up and running.   

Of course, only time will tell if Western economies have truly fallen behind their Western counterparts. The United States has long been a leader in the global economy and even now remains the world’s largest economy when measured by nominal GDP…though China is now in a close second.

It’s also concerning that many businesses do not appear to have the appropriate financial security measures in place in the event of further financial or personal disaster. For example, in the same Business Resiliency survey, nearly a quarter of surveyed business owners indicated that they did not have any kind of an insurance policy in place.

Business owners who have taken out large business loans or a line of credit, for instance, would benefit strongly from a comprehensive insurance plan that covers most or all of the financial damages in the event of defaulting on the debt from a lack of incoming cash flow, or worse, in their death that would essentially transfer the liabilities to their family members. 

When you combine the fact that most business owners do not have an insurance policy as a cushion in place with the realities that many of those same owners have burnt through their emergency funds during the lockdown and that Covid relief packages from the Federal government are set to expire (or have already), it’s easy to see how the situation is a bit dire.

In the short term at least, it’s clear that the economies of East Asian countries, spearheaded by China, have emerged out of the pandemic more favorably than the countries of the West. 

But is China’s rise set to last? And if not, what does this mean for the rest of East Asia?

Has China’s Grip Over World Trade Peaked?

China has been the largest exporter of goods worldwide since 2009, and it became the world’s largest trading nation in 2013. Both of these positions had previously been held by the United States.

In other words, China as a trading leader on the world stage is nothing new, and this is also why the faster recovery of Asian economies versus Western countries should not be surprising. More than half of all e-commerce transactions in the world are now coming out of China, which likewise has borne well for the Asian market.

But there are many who believe that China is nearing the peak of its current economic capacity, and with it, perhaps the rest of Asia as well. A report last spring by UNCTAD (the United Nations Conference on Trade and Development) argued that while China is almost certain to remain as the leading exporter in the world for the next few years, there are several inherent vulnerabilities that threaten to cut its rise a bit short.

Among the reasons cited for this include simmering geopolitical tensions that hinder social development, rising labor costs that could lead to production processes either being automated or transferred elsewhere, increased tariffs on Chinese exports from the U.S. and EU, and major companies pulling the production of their products out of China completely. 

As an example of the last mentioned reason, electronics conglomerate Samsung announced last year that they would cease manufacturing computers and phones in China in favor of other Asian countries like Vietnam and India. This decision was made in the face of both rising costs to manufacture in China and increasing international tensions. 

Each of the aforementioned factors means that China could become more dependent on domestic rather than international demand, and therefore stands to chip away at China’s competitiveness on the global scale if those factors don’t change. 

And the spread of the Delta variant has also spurred new lockdowns in China and other Asian countries, which means it’s almost certain that we will see new disruption to Asian supply chains, and particularly in regards to consumer goods and high tech equipment. 

In other words, even though East Asia may have taken the lead in economic recovery and trade growth for now, it’s still far from certain that this will last over the long term. 

Conclusion

Has the pandemic truly created a major economic realignment to global trade and the world order, or are the shifts we are seeing now temporary?

The evidence is clear that the economies of East Asian companies have recovered from the pandemic faster than the United States, Canada, or Europe. But those economies have also largely followed the lead set by China’s current dominance as a world trade leader, and vulnerabilities in China’s economy mean it’s easily possible the country’s grip over world trade could start to slip.

china

China Will Continue to Be a Major Contributor to Global Trade Growth in 2022

Despite the twin impacts of the pandemic and the US-China trade war, economic indicators suggest that China will continue to grow rapidly through the next year and will be one of the biggest contributors to global trade growth in 2022. 

Indeed, in some ways, the current trajectory of China’s economic growth and trade surplus – both highly positive – is a return to normal. Though many feared that the pandemic and the US trade war would cause long-term, structural damage to China’s trading and economic infrastructure, it appears that this was not the case. In fact, changes to the way supply chains work may mean that China is now in a stronger position than it was at the beginning of the pandemic – a luxury that other countries can only dream of.

In this article, we’ll look at the most recent economic indications from China, explain what they mean for global trade, and see how analysts and governments in the West are responding to these signs.

Positive indications

First, let’s look at the state of the Chinese economy. Here, the news is very positive. On almost any measure that is commonly used as a proxy for consumer demand – the Purchasing Managers’ Indexes (PMI), electricity consumption, bank lending, etc. – the Chinese economy is booming. 

Though many analysts expected that consumer demand would be significantly down in 2021, in actuality, China is experiencing strong demand in both domestic and foreign markets. The Chinese government continues to invest heavily in making China a tech superpower, and so far, they are mostly succeeding. 

There are some complexities hidden behind this headline, though. One is that China has seen heavy food price inflation over the past few months driven, in part, by the US-China trade war. For many households in the country, food makes up a sizable proportion of the household budget. 

On the other hand, it seems that the pandemic has not affected the Chinese economy to anywhere near the degree that some experts expected. The transition to remote working for office workers, for instance, went more smoothly than had been predicted and occurred without a net loss to the economy. This was the case in some other countries too – remote workers contributed $1.2 trillion to the US economy alone last year, a 22% increase from 2019 – but it was especially pronounced in China.

 

Increased foreign trade

Since both domestic and foreign demand for Chinese goods remains high, we are likely to see China’s share of global trade increase over the next year. This is also a continuation of the pre-pandemic trend, which saw gradually increasing volumes of high-value finished goods being exported from China.

When it comes to global trade volumes, the picture is not completely positive, however. Though demand for Chinese goods remains high, the pandemic has imposed new restrictions and complexities on exporters. This is likely to slightly reduce trading volumes over the next year. That said, China is already a titan when it comes to global trade, and a slight reduction in growth is not likely to affect that. 

Liang Ming of the Chinese Academy of International Trade and Economic Cooperation predicted that the country’s total foreign trade will be near five and a half trillion by the end of 2021. In fact, since that prediction was made, market conditions have only grown more positive for Chinese exporters. 

Many manufacturers in the country have used enforced lockdown periods to update and improve their logistics and supply chains for the post-Covid world, and many of their trading partners have come out of the pandemic more quickly than expected. 

Calls for decoupling

All this is great news for China, and specifically for Chinese exporters. It might not be such good news, however, for the countries that buy goods from China. This includes the US and the majority of European nations, all of whom are heavy consumers of Chinese-made goods. Many analysts are alarmed at the growing dominance of China in global trade, pointing out that this could be dangerous for the world’s privacy and safety.

The numbers are certainly impressive. Official data released from the Chinese government in July 2021 showed that for the first half of the year the country’s foreign trade surged to 18.07 trillion yuan, equal to roughly $2.79 trillion USD. This was despite many industries being affected by the US trade war and despite calls in the US for the country to transition away from its dependence on China.

There are other concerns about granting China a larger portion of the global economy. Specifically, concerns about the privacy of data collected by Chinese companies remain high, as do concerns that Chinese banks are being used to launder money on behalf of Mexican and Colombian drug cartels.

All of these concerns have led some think tanks to call for a “decoupling” from the Chinese economy. This would involve selected trade embargos in order to promote domestic production of consumer items in Western economies and to give these economies time to make back some of the gap that is opening in global trade.

Conclusion

Ultimately, the trajectory that China now finds itself on – with a growing economy and a rapidly increasing trade surplus – has been the norm for much of the last two decades. And if a global pandemic and a US-directed trade war has been unable to stop the growth of the Chinese share of global trade, it’s unlikely that anything will.