Global Trade’s Turbulent Path: From Slump to Digital Revolution
In the ever-fluctuating world of global trade, a rollercoaster ride continues to unfurl. While hopes for a revival emerged in the second quarter, Tradeshift’s data showed global trade activity declining at the fastest rate in eighteen months in Q3. James Stirk, CEO at Tradeshift, provides his perspective on the trends emerging from our latest Index of Global Trade Health, from slumping demand to a digital revolution, and how it’s impacting nations and businesses worldwide.
Global trade had shown small signs of an uptick in Q2. There were whispers of green shoots pushing through the cracks, hinting at a possible rebound after an extended period of declining demand.
The third quarter of the year dealt a dose of reality. Global trade transaction volumes on our network dropped six points below the baseline, marking the most substantial slowdown since the initial softening of demand eighteen months ago.
Temporary Factors and Long-Term Shifts
The trade slump reflects a slew of temporary factors, including rising interest rates, a cost-of-living crisis, and a snapback in business inventories as global goods shortages ease.
But it also results from longer-term changes, including rising geopolitical tension and more protectionist industrial policies in the West. As the world pivots from goods to services, traditional manufacturing giants are bearing the brunt of the transition.
The Looming Trade Finance Gap: A Growing Concern
As if slumping demand weren’t enough, a burgeoning trade finance gap is strangling access to critical working capital and making it more challenging for businesses to fulfill precious new orders.
A report by the Asian Development Bank reveals that the trade finance gap has grown to a staggering $2.5 trillion in 2022, up from $1.7 trillion in 2020. This is a concerning trend, particularly for smaller businesses deemed higher risk, as liquidity becomes scarcer.
Impact on Export-Driven Economies
Export-driven economies, notably Germany, find themselves in the eye of the storm. Trade activity within the Eurozone plummeted nine points below expectations during Q3, weighed down by sluggish order books among the region’s manufacturers. China is also proving highly susceptible to weakened global trade demand.
Shift to Resilience: Emerging Players in Global Trade
Amidst this turbulence, some nations are standing out. India, Vietnam, Malaysia, and Mexico are among the countries reaping the rewards of a shifting global trade axis that prioritizes resilience.
Our data reveals that trade activity levels in these nations have surged at multiples of the global growth rate over the past year. Vietnam, in particular, enjoys the benefits of an accelerating ‘China + 1’ policy, with local trade activity outpacing the global average by a factor of seven over the past twelve months.
The Dawn of a New Globalization Era
This evolving global trade landscape is giving rise to a more polarized form of globalization. Traditional hierarchies are being challenged, forcing businesses to adapt rapidly.
Tomorrow’s supply chains will be intricate, interconnected networks involving a blend of nearshore, onshore, and friendshore (countries that are geopolitical allies) stakeholders. This transition will require businesses to cultivate new relationships across a multitude of jurisdictions, each governed by its unique set of regulations and policies. Digitalization will play a crucial role in managing the complexity.
Adhering to a new set of rules: is compliance the new “sexy”?
Rarely do the words ‘compliance’ and ‘sexy’ find themselves in the same sentence. However, in the context of the profound supply chain reset now unfolding, we may need to make an exception. The success of this new ‘networked’ supply chain model will hinge heavily upon strict adherence to an intricate and evolving set of rules, spanning from tax compliance to carbon reporting.
Navigating this intricate web of regulations can be exceptionally time-consuming, underscoring the urgency for heightened digitalization. Beyond the inefficiencies stemming from a persistent reliance on manual and paper-based compliance processes, non-compliance poses tangible risks for businesses, including penalties, delays, strained supplier relationships, and reputational harm for companies found in breach.
Data, visibility, and control—byproducts of a digitized compliance environment—will play an increasingly pivotal role in enabling businesses to maintain agility in an increasingly complex macroeconomic landscape. Armed with the right automation and real-time decision support capabilities, digitalization presents a gateway to potentially substantial cost savings and efficiencies spanning the entire lifecycle, from sourcing through to payment.
Unlocking the Full Potential of Digital Networks
The benefits of a digitally networked model for supply chains stretch far beyond risk mitigation, providing a rich seam of data that can be used to fuel a revolution in access to working capital for every connected business.
McKinsey estimated that shifting to electronic bills of lading would unlock as much as $40 billion in additional global trade volume, particularly in emerging markets. This same principle can be applied to other traditionally paper-based trading documents, including invoices and purchase orders. The synergy between digital connectivity and core banking infrastructure serves as a primary driver behind our recent decision to establish a joint venture with HSBC, positioning us at the forefront of this transformative journey.
Global trade’s path is far from smooth, but it’s also evolving into a new era driven by digitalization and resilience. Adapting to these changes will be crucial for businesses and nations looking to thrive in the turbulent global trade landscape.
