As geopolitical tensions, tighter monetary policy, and the lingering effects of Covid-19 reshape the real economy, businesses must re-evaluate their trade relationships, balancing the quest for lower costs and greater efficiency against the need to mitigate evolving risks.
New patterns are emerging against that backdrop: the US now imports more goods from Europe than from China; China has replaced the EU as Russia’s most important trading partner; and ASEAN exports are on course to grow 90% by the end of the decade.
“No region or market is self-sufficient,” says Michael Spiegel, Global Head of Transaction Banking, Standard Chartered. “Trade will continue to drive the global economy even as supply chain dynamics evolve. Companies need strategies that empower them to remain resilient and to achieve sustainable growth.”
Multinational companies (MNCs) are adapting their trade networks to accommodate these new economic and geopolitical circumstances. As they diversify their supply chains, many are embracing two trends that will define the future of trade: the rise of digital services and the drive to sustainability.
The Rise of Digital Services
Governments around the world continue to impose trade barriers on physical goods, such as steel, raw materials, and semiconductors. World Trade Organization (WTO) research shows that member nations implemented restrictions at an accelerated rate last year in response to economic uncertainty.
As geopolitical shifts redefine the landscape of physical trade, digital services stand out as an area where businesses can engage in a comparatively open arena in the real economy. It could also prove a game changer for small businesses in emerging markets.
“Digitalisation reduces the barriers to entry that have historically challenged emerging markets SMEs and start-ups in international trade,” Spiegel says. “There is enormous potential for digital services trade to catalyse financial inclusion, sustainable growth and development.”
Cross-border digital services trade has increased four-fold since 2005, and now amounts to $3.8 trillion, according to the WTO. APAC is at the forefront of this trend. The region posted faster digital services trade growth than the rest of the world from 2005 to 2020. Exports and imports in digitally deliverable services grew at an average annual rate of 10.1% and 8.0%, outpacing a 6.9% global average for exports and 6.7% for imports.
Not everyone has benefitted equally. Digitally deliverable services still account for a significantly lower share of exports in the least developed countries in Africa and Latin America than in other parts of the world.
“Overcoming this challenge requires a holistic and coordinated policy approach to digital services trade that addresses gaps in ICT connectivity, upskilling, trade facilitation, and regulatory frameworks,” Spiegel says. “More inclusive outcomes start with greater collaboration between government and business stakeholders at home and abroad.”
The 2020 Digital Economy Partnership Agreement between New Zealand, Chile, and Singapore underscores the potential of collaboration. Recognised as the world’s first digital-only trade agreement, the pact accelerates seamless cross-border data flows and helps build a secure digital environment for businesses and consumers. It also promotes SME cooperation and digital inclusivity. Chile’s government views the pact as a pathway to turning the nation into a Digital Hub in Latin America.
As countries fortify their supply chains against trade disruptions from geopolitical, environmental, or other factors, it's reasonable to anticipate a growing demand for digital services in the years ahead. Here, financial institutions can play a vital role.
“To facilitate accessible, seamless, and transparent digital services trade flows, banks must develop innovative solutions that bolster digital transformation,” Spiegel adds. “They must also find new ways of getting liquidity to where it is needed most.”
Greening the Real Economy
While the future appears increasingly digital, the current cross-border flow of physical goods and services accounts for 20-30% of greenhouse gas emissions. To protect our planet, we must urgently decarbonise supply chains.
Balancing that ambition against prevailing trade disruptions makes the task difficult. Add to that the challenge of getting the data required to set clear targets and standards. Few companies disclose their Scope 3 emissions—those emissions a company is indirectly responsible for up and down its value chain. And many are unsure exactly where emissions exist in their fragmented supplier networks.
The Electric Vehicle (EV) paradox underscores the need for change. While the rapid electrification of transport is vital to global decarbonisation efforts, an EV currently has roughly double the production footprint of a typical internal-combustion-engine vehicle, with more than seven tons of carbon emissions traceable to battery production alone. Addressing the impact is crucial to achieving sustainability—a reality that extends to virtually every good and service in the real economy.
Despite the challenges, the world’s physical survival depends upon change, thus the ambition to decarbonise supply chains remains strong. Standard Chartered’s Carbon Dated report shows that 78% of MNCs plan to stop working with suppliers that endanger their carbon transition plan by 2025.
Emerging market suppliers are most at risk, yet many larger companies are either working closely with their suppliers on sustainability issues or plan to. That includes incentives to produce more sustainable products as well as financial and educational support. Their efforts reflect one of the greatest benefits of globalisation: those with the knowledge and resources to drive meaningful change can share them with those in need, yielding benefits that transcend borders.
“Embracing sustainability requires collaboration across the whole supply chain,” Spiegel says. “MNCs need to support suppliers if they expect them to align with their net-zero strategy. Whether it’s investments in technology, knowledge sharing, or other forms of support.”
Returning to the EV paradox, stakeholders from the automobility ecosystem including industry, policymakers, and fleet purchasers are tackling that issue through the Circular Cars Initiative, which developed a blueprint to forge partnerships and improve the business case for value-chain battery management. From government to industry, the partnership demonstrates the level of collaboration and strong commitment to sustainability that the world needs.
“While trade disruptions are front of mind today, digital services and sustainability will shape the future of the real economy,” Spiegel says. “By embracing innovative solutions and prioritising sustainability, businesses can seize opportunities for inclusive long-term growth and success in our increasingly interconnected world.”