By Stephen Ptohopoulos ACIB CDCSAdv CITF CSDG CSCF QTFS*
Disclaimer: Views and opinions expressed are those of the author and are not necessarily those of my employer.
This article draws on information and insights gained from various sources, principally reports published by the DMCC¹ and ICC².
When discussing and analysing the topic of international trade it is useful to make the distinction between trade in goods (or merchandise trade) and trade in services.
There are many things driving changes in international trade. What follows is a high-level overview of these factors.
The role of technology: Cloud computing; the internet of things (IoT); Digital Ledger Technology (DLT) (including Blockchains) and smart contracts; Big data analytics, machine learning (ML) / artificial intelligence (AI); application programming interfaces (APIs).
Environmental, Social and Governance (ESG) considerations: the environment, biodiversity, climate change and issues around sustainability; meeting the UN SDGs, etc.
The COVID-19 pandemic: The crisis resulted in the marshalling of vast resources by governments often on a scale comparable to wartime circumstances, for healthcare, economic/financial support and social safety nets. While restrictions, most notably lockdowns, have eased their impact on the economy and global supply chains are still being felt.
Geopolitics: growing tensions and ‘great power rivalry’ between the U.S. and China; the Ukraine conflict; trade wars, the re-emergence of state aid and industrial policies, protectionism; in some instances, a marked shift away from multilateralism to isolationism (e.g., ‘America First’ and Brexit).
Economics: Having experienced many years of low inflation and low interest rates, a jump in inflation prompted an abrupt fiscal tightening by monetary authorities – slowing down economic activity; elevated levels of indebtedness in both developed and emerging markets/developing countries; increase in borrowing costs (including the cost of trade finance).
What follows is a high-level overview of changes underway in the sphere of international trade, giving some examples.
The slowing down of the pace of globalization ‘Globalization to slowbalisation’ (to directly quote from the cited ICC report²) and the reconfiguring of supply chains with a shift from global value chains (GVCs) to shorter, regional supply chains. The relocation of manufacturing from another continent (sometimes on the other side of the world) closer to the home market, to a nearby/neighboring country (near-shoring, friend shoring, ally-shoring). An example would be a consumer brand selling in the US market that previously manufactured these products in China, moving production to Mexico or indeed somewhere within the USA. Another noteworthy development is the application of 3D printing (additive manufacturing).
The de-coupling of the US from China (and vice versa); the de-coupling of the EU from Russia, notably in the energy sector.
China’s changing role in world trade. China’s longstanding economic plan is to move up the value chain, whereby it shifts from a labour-intensive, export-orientated economy (“the world’s factory”) to an investment-intensive, high-tech manufacturing economy. It wants to re-balance, with domestic consumption making up a larger proportion of aggregate expenditure. Manufacturing wages in China have been rising and in many cases are now higher when compared to other countries in the SE Asia such as Myanmar, Laos, Cambodia, Vietnam, Thailand, Indonesia and Bangladesh. This, coupled with risks emanating from an escalation of a US-China trade war and geopolitical tensions has prompted businesses that manufacture in China to revisit their investment strategies. Having a ‘China Plus One’ strategy has proven to be prescient. Many foreign manufacturers (e.g., Apple) have decided for the time being to remain in China, while others might be contemplating or forced to exit.
Supply chains will have more in-built resilience. The large-scale disruption caused by the 2011 Tohoku (Japan) earthquake and tsunami, the COVID-19 pandemic, the blocking of the Suez Canal for several days in 2021 (by the container ship ‘Ever Given’) and the Ukraine conflict have prompted industries to redesign their supply chains to make them more robust. A ‘quick fix’ response is to increase stock inventory levels. Longer-term measures to mitigate against disruption caused by supply shocks are the diversification of supplies and the regionalization of supply chains.
The emergence of new trade corridors; growing role of regional hubs in low and low to middle income countries, regional actors and ‘middle powers’ (e.g., the UAE). An example is the booming UAE – India trade³; the development of regional trade (more about this below). Some of these trade corridors have emerged necessitated by geopolitical developments. An example of this are reports⁴ about strategic cooperation between Russia, Iran and India, with the establishment of the North-South Transport Corridor.
A growing number of Regional Trade Agreements (RTAs). Many are ‘new generation’ RTAs which go beyond goods (merchandise trade) and aim to bring about deeper integration, with coverage in any of several areas, including services, cross-border investments, competition policy, intellectual property (IP) and the environment. Many also focus on facilitating data exchanges and digital trade. Aside from countries within the same geographic region e.g., EU/Europe and USMCA/North America nowadays the term RTA (somewhat misleadingly) can also be applied to agreements between countries on different continents (e.g., EU – Mexico and arguably the CPTPP) and even agreements between RTAs (e.g., EU – Mercosur).
Proliferation of protectionist and industrial policies that result in trade fragmentation. Recently enacted US legislation, namely the Inflation Reduction Act aims at attracting investments to the US in green technologies with incentives in the form of grants, loans and tax breaks. Integrated circuits (ICs) / microchips (found in electronic devices) is an example of a technology/industry designated by the US as ‘strategic’. To this end, the US intends to use subsidies (contained in the CHIPS and Science Act) to incentivize the relocation to the US of microchip manufacturing. At the same time the US has imposed export controls to prevent China acquiring this technology. Other examples of export controls were export bans on vaccines (at height of the COVID-19 pandemic); the Ukraine conflict prompted producing countries to ban the export of agricultural commodities and fertilizers. Another policy that can result in trade fragmentation takes the form of investment restrictions, such as FDI screening, whereby direct investments from ‘hostile’ countries are blocked on national security grounds.
A greater share of trade comprising of services as opposed to the trading of goods (merchandise trade). In some cases, hardware has been replaced by software. There is also a correlation between higher levels of income and economic development with a more service orientated economy. All told, the result is a shift in final demand from goods to services.
Financial and payment fragmentation. China and Russia share the common desire of reducing the hegemony of the U.S. Dollar (USD) in the global financial system and dominant role played by SWIFT in cross-border payments. A growing number of trade transactions between entities in China with entities outside China are being settled in Chinese Yuan (CNY) (renminbi). While this is to be expected given the growing role of China in world trade the CNY is also making some inroads in terms of becoming a global currency. The CNY may emerge as a currency of choice for countries unable to access USD due to imposition of US sanctions. The CNY is used by many of China’s trading partners, such as Brazil, Saudi Arabia, Iran and Pakistan⁵. Transacting in CNY could be the means for entities in developing countries to access trade financing (and thus reduce the ‘trade financing gap’); documentary credits (L/Cs) issued in CNY are becoming more common⁵. As an alternative (future direct competitor?) to SWIFT, China’s Cross-border Interbank System (CIPS) is now used to settle a growing number of international trade transactions. It should also be noted that after Russia was effectively cut off from SWIFT, many international trade transactions and other payments to/from Russia are settled via the Financial Messaging of the Bank of Russia (better known by its Russian acronym SPFS). With respect to payments, innovation in financial services enabled by technology, such as mobile money, decentralized finance (DeFi) and Central Bank Digital Currencies (CBDCs) have emerged with the potential to challenge the dominance of interbank payment rails.
Different regulatory approaches to the digital economy are likely to lead to fragmentation: There are several aspects that need to be considered. Cross-border data flows versus data localization (whereby data stays within national borders); whether data processing is centralized or decentralized; whether data processing is state-driven or done in the private sector; in terms of data privacy / protection, who will own personal data: the data subject, (private sector) digital platforms or governments; approach to online content moderation; the regulation of AI. The cited ICC report² identifies three broad approaches: those of the EU, US and China/Russia. Such regulations will impact the future development of trade, particularly in data services.
Digitization of trade facilitates 24/7 connectivity, bi-directional data flows and opportunities to create value that result from the sharing of data. Digitization enables greater supply chain transparency and visibility; opens new possibilities in terms of financing techniques; enhances participants’ ability to make timely risk assessments and meet ESG requirements.
International trade is expected to play its role in the energy transition, to less carbon intensive or net zero carbon economies. To meet their ESG commitments the transportation industry will need to reduce the carbon emissions emanating from vessels and aircraft; efficiencies aided by technology should enable the transportation of goods on a more sustainable basis. Also, there should be a further reduction in carbon emissions with the digitisation of trade, since the use of paper will be significantly reduced if not eliminated entirely. It is also anticipated that ‘legacy’ goods – the production and consumption of which – require fossil fuels will over time be replaced with ‘green’ goods that are manufactured and consumed on a more sustainable basis and which generate low or zero carbon emissions over their product lifecycle.
Despite facing setbacks in recent years, globalization has not come to a grinding halt, but the pace has slowed down. If we think of globalization as a course of direction the force-field analysis provides a useful framework to analyse those forces that have been driving this change (the helping forces) and factors blocking this change (hindering forces). Some hindering forces emerged in more recent years and have been discussed in this article. Supply chains are being reconfigured and redesigned as they adapt to changes in the international trade environment.
¹ DMCC “The Future of Trade 2022: Global Trade in New Era of Multilateralism”
² ICC (2023), ICC 2023 Trade report: A fragmenting world
³ “Indian firms are flocking to the United Arab Emirates.” The Economist, April 27, 2023
⁴ “Russia and Iran join forces with India” YouTube, uploaded by CaspianReport https://www.youtube.com/watch?v=5ueMRsP1iXw
⁵ Mark Ford, “Sanctions and China challenging conventional US dollar denominated L/C transactions.” Coastline Solutions, February 24, 2023
*Associate member of the London Institute of Banking and Finance (LIBF). Holder of the following LIBF International Trade Finance qualifications: Certificate for Documentary Credit Specialists (CDCS®), Certificate in International Trade Finance (CITF®), Certificate for Specialists in Demand Guarantees (CSDG®), Certificate in Supply Chain Finance (CSCF) and awarded the Diploma for Qualified Trade Finance Specialists (QTFS). Also holder of the Incoterms® 2020 Certificate (INCO) and Certificate in Digital Trade Strategy (CDTS) awarded by the ICC Academy.
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