Macro Trends

The Future of Trade

November, 2022
20 min read
20 min read

Global value chains are undergoing a transformation powered by new capabilities, decentralized demand, and next-generation technologies. While the mainstream debate about trade is all too often focused on recapturing the past, business leaders are looking to the future.

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The principal assumption which has underpinned conventional understanding of global commercial dynamics during the 21st century is that the perpetuation of international interdependence is inevitable. However, empirical evidence shows that global economic integration has been in sharp decline for quite some time. 

Since the 2008 global financial crisis, the world’s two largest economies, the United States and China, have been locked in an endeavor to obtain greater self-sufficiency and protect strategic sectors by erecting mutual trade barriers. Naturally, the tension ensuing from the escalation of the US-China decoupling has disrupted supply chains across the globe and fueled the retreat of hyperglobalization. 

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The stagnation of economic bonding has been exacerbated by the impact of the COVID-19 pandemic and the Russian invasion of Ukraine. Compounded headwinds caused by these developments have brought international economic cooperation to a perturbing inflection point. The upshot for businesses is that it is becoming practically unfeasible to maintain far-flung supply chains.

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Global value chains are undergoing a transformation powered by new capabilities, decentralized demand, and next-generation technologies. While the mainstream debate about trade is all too often focused on recapturing the past, business leaders are looking to the future.

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Future-oriented companies are aware that the pillars of the past, namely cheap capital, energy, and labor, are eroding. In the wake of soaring costs, crippling shortages, and suffocating bottlenecks, they are taking steps to recalibrate their supply chain organizations. Opportunity beckons for those who can learn to navigate the new reality successfully. 

1

Skilled Labor

Over the past four decades, decisions about where to base production have primarily hinged on labor costs, especially in labor-intensive industries. Today, the outlook is entirely different. Value chains are becoming more knowledge-intensive. As a result, cheap labor has effectively been rendered a factor of inferior importance. 

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Less than 20% of the global trade in goods is based on labor-cost arbitrage, and the downward trend is even steeper in labor-intensive manufacturing.

While this diminution is partly a consequence of labor-saving technologies and partly a reflection of rising wages in developing countries, it is apparent that other considerations are also informing decisions about the selection of production locations. Companies are increasingly factoring in the quality of infrastructure, access to natural resources, availability of skilled labor, and proximity to consumers.

The shift from labor-intensive to capital-intensive manufacturing will have significant implications for the position of low-income countries in global value chains. As value creation moves to upstream activities, knowledge and intangibles will become vital. Thus, countries with skilled labor, robust innovation, and strong intellectual property protections will become the new preferred production destinations.

2

Regionalization

Widespread narratives about global trade vastly overestimate the geographic limits of international commerce. The lion's share of global trade is, in fact, more regional than global. Companies seeking to harness the benefits of international markets, more often than not, tend to stay closer to home than one might think.

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The maturation of emerging economies is one of the driving forces that are reshaping the landscape of commercial activity. Increased demand in developing countries has led to a closer clustering of production and consumption. China is undoubtedly the biggest contributor to the decrease in trade distance and intensity. However, albeit at earlier stages, other developing countries are also showing signs of structural economic evolution. 

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This significant change in the geography of global demand presents lucrative opportunities for exporters across industries. Leading companies that are doubling down on diversification and resilience are best suited to make the most of the unfolding possibilities. Their decision-making is no longer determined solely by production costs. Instead, increased emphasis is being placed on re-shoring, diversifying vendors, localizing suppliers, creating redundancy, and overstocking.

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Recent geopolitical tensions have brought to light the advantages of closer alignment with allies, as well as the imperative to reduce dependency on uncooperative nations. In particular, heightened instability has created an impetus for the European Union to address the limitations of its unity as a bloc.

Pressure from the continent's periphery has been mounting on the EU. Whether it is the proliferation of hybrid warfare from Russia, or the intensifying pull from the Chinese orbit via One Belt - One Road, there is no shortage of malign influences in Eastern Europe. The response of the European Union to the trouble brewing in its neighborhood will determine the potential prospects of its common market.

A growing realization of the fragility associated with stretched-out supply chains has made businesses more cautious about the market volatility of unfriendly countries which are often prone to erratic behavior. Hence, companies are seeking more reliable engagements with partners from countries that share democratic values and mutual interests. 

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All Western Balkans countries aspire to join the European Union and have frameworks in place to align their policies with EU standards. The EU is the main trading partner of the WB, for exports and imports alike. As trade networks pivot to embracing friendshoring/allyshoring, the Western Balkans are poised to benefit from the favorable momentum by using it as a platform to enhance integration into western supply chains. 

3

New Technologies

The net effect of the role of new technologies on global value chains is, as of yet, uncertain. However, it is already abundantly clear that technological advancements are changing the nature of trade. Today, the flows of data and information generate significantly more economic value than the trade of goods.

Digital technologies and data flows are the new connective tissues of the global economy. The availability of instant and low-cost communication has exponentially increased the exchange of services worldwide. While it is true that the global goods trade has flattened and cross-border capital flows have stalled, the long-term impact of technological progress on the trade of goods remains to be seen.

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Change is happening at an accelerated pace across sectors and industries, now compressed even further by the COVID-19 pandemic. Perhaps more than ever, companies are feeling the compulsion to seize opportunities from major digital advancements. It is no surprise that many industry leaders have made digital transformation the centerpiece of operational efficiency and innovation.

Given that automation and AI may amplify the trend toward capital-intensive manufacturing, capitalized spending in the future will likely be focused on R&D and intangible assets such as software, brands, and intellectual property. The new reality demands a digital-first approach for those who want to earn the passionate loyalty of customers while inspiring the energy, enthusiasm, and creativity of employees to facilitate profitable, sustainable, and organic growth. 

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