Significant and sustained increases in the world trade index (an index measuring the number of times the word uncertainty or its variants are mentioned in Economist Intelligence Unit (EIU) reports at a country level) should be a worry for many as “the increase in trade uncertainty observed in the first quarter could be enough to reduce global growth by up to 0.75 percentage points in 2019."*
In August, the US Institute for supply management's latest report shows a contraction in production, purchasing and employment indices.
Uncertainty generated from Brexit, US – China trade war, Japan – South Korea trade wars, coupled with a general discontentment with a global trend towards widening income inequality is creating a toxic mix for politicians to deal with, the irony being that the convenient approach of blaming your trading partners for your problems is only likely to exacerbate a general lack of confidence and increase further uncertainty.
The current round of the G7 summit in Biarritz concluded with support “to overhaul the WTO to improve effectiveness with regard to intellectual property protection, to settle disputes more swiftly and to eliminate unfair trade practices” in essence signaling a need to strengthen the capabilities of the WTO to act faster and more decisively in resolving disputes that are even more political than structural in nature, requiring a more multi-faceted engagement approach, whilst this may help in the long-run in reality companies will have to contend with uncertainty in global trade for some time to come as well as the impacts on the real economy from these disputes.
And all of this is happening as IMO 2020 approaches, the January 1, 2020, date by which the International Maritime Organization mandates a switch to lower sulfur fuels in order to achieve an 80% reduction in sulfur emissions leading to significant cost increases in the shipping goods via ocean freight (initial estimates between 180USD – 420 USD per TEU dependent on routing, base fuel costs, carrier).
So given the significant uncertainty around global trade agreements, the increasing use of trade as a political football, the increasing costs to trade and the shortening of product lifecycles as customers want faster, newer more differentiated offerings. Is it still worth it?
Of course this is very much dependent on what industry you are in, whether you’re a global manufacturer or a wholesaler sourcing goods your perspectives may be different based on investments made, your sensitivity to current trade/tariff measures, your customer demands, your markets and the degree to which you are exposed to political debate and targeting.
However, I would offer that the benefits of specialization, economies of scale and unique factors of production that have underpinned global trade still exist as Adam Smith put it in 1776, “By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”**
Today this simple analogy still holds true in skills, competences, capabilities, and access to markets and insights so that over time the expectation is that trade will prevail.
While the recent outlook has been gloomy, opportunities for 2020 include a resolution to a number of ongoing disputes and a final settlement on Brexit (we hope), but also the further maturation in technologies such as blockchain, process automation, forecasting and demand management solutions which can more than offset costs associated with IMO and can support greater agility in the uncertain supply-chain world that we currently live in.
Indeed, if 2019 was the year of trade uncertainty, 2020 could be a restorative year in our ability to execute global trade.
Partnering with an experienced supply chain leader will be essential to minimizing cost increases while ensuring the efficient flow of your company’s goods and services.