The shadow of protectionism looms ever larger over global trade. This is as policymakers continue to introduce measures that restrict or penalize the flow of goods and services across their borders. These are tricky times for businesses whose complex supply chains span across the world. And at Davos, we put global trade under the spotlight to better understand the source of trade instability, assess the impact on businesses, and debate what comes next.
Is protectionism effective?
The forces that drive global trade are always in flux. Over recent decades the trend has been towards globalization—the creation of an open and connected world. However, since the global financial crisis those forces have shifted and leading to a push back against globalization and a rise in protectionist sentiment.
To put this into perspective, research from the law firm Gowling WLG found that between 2008 and 2017 the world’s top 60 economies adopted over 7,000 protectionist trade measures to safeguard their national self interest. Protectionism has intensified since then as the US and China engage in a trade war that’s seeing both countries slap tariffs on goods like steel and soy beans. And there are plenty of other, smaller scale, trade conflicts occurring across the world.
So is the fabric of global trade unraveling? “No”, says Christian Lanng, Co-Founder, CEO and Chairman at Tradeshift. He doesn’t believe the impact of protectionism on global trade is as seismic as the headlines make it appear. In fact, he goes so far to say that protectionist measures are ineffective at delivering the desired outcomes of policy makers.
“This is supposedly the most brutal trade war for 30 years, but there’s been minimal impact on consumers,” he says. “We’re still able to buy an iPhone and pick up groceries imported from all over the world. Because of this there isn’t the political up swell that policy makers were hoping to see.” For Lanng this also shows that the government’s ability to impact trade is minimal. “Businesses and consumers are globalized,” he says. “So it’s very difficult for any government to conduct an effective trade war. Trade will always find a way.”
Despite this view, Lanng isn’t downplaying the business impact of some of these measures. “The trade war and protectionism is causing businesses pain,” he says. For example, the China tariffs increased the cost of doing business for over a third of US businesses. With 46% losing customers as a result.
Because of this impact, Lanng is seeing companies accelerate plans to diversify their supply chains and move towards a multi-sourcing model. It’s a shift that has been happening for some time as the Chinese economy evolves seeing labor costs rise and the focus move towards more sophisticated industries. “The trade war is accelerating these supply chain shifts, it’s not forcing them,” he says. “And no business is turning its back on China. It’ll soon be the world’s biggest consumer market so most companies want to keep a large part of their supply chains in the country to capture the opportunity.”
Counting the cost
Nando Cesarone, President at UPS International, agrees that protectionist measures are causing pain for businesses. “We’ve seen the impact of protectionism on business,” he says. “It’s disruptive, but trade is still flowing and businesses are finding ways to navigate the environment .”
He points to the businesses he’s worked with to shift parts of their supply chain out of China as an example. “We’ve seen a shift in supply chains from China to other markets in Southeast Asia because of uncertainty about the future,” he says. “Companies are hedging their bets to ensure that they can continue serving their clients no matter what comes next.”
And what’s interesting is that these moves are creating opportunities for other economies to benefit more from global trade. Take Vietnam, for example, the country is thriving with signs pointing to economic growth upwards of 6% in 2019 as companies shift parts of their supply chain to the country. “There are always winners and losers in these situations, and Vietnam is a winner at the moment,” says Cesarone.
He issues caution, however, especially given the criticality of China’s role in global supply chains. “China’s infrastructure and the size of its workforce means it’s hard to move supply chains out of the country and into developing markets at scale,” he says. So while Vietnam is a viable alternative, its size and developing infrastructure means there is limited room for businesses at present. “So the longer the trade war continues, the more supply chain disruption we’ll see,” he says.
Preparing for uncertainty
Businesses can’t rest on their laurels. Instability and unpredictability are the words that best describe global trade right now. So it makes sense for businesses to position themselves for the unexpected.
A few ways to do this are to:
Most supply chains are deeply entrenched and built to operate in a static, open world. Making small changes is often a painstaking and often multi-year process. Yet in this new era of uncertainty that’s unacceptable. Supply chains must be flexible. And businesses can’t keep all their eggs in one basket. So the advice is for supply chain leaders to build flexible, multi-sourced supply chains so the business has options no matter what happens.
Building flexible, multi-sourced supply chains is complex. At least more complex than the liner, static chains that most businesses operate. So businesses would be advised to revisit their supply chain technology stack. Look for solutions that create frictionless digital connections with all suppliers and provide deep insights and analysis to what’s happening across the end-to-end supply chain.
Focus on financing
Diversifying supply chains doesn’t come without risk. And one of the largest buyers must consider is the financial health of suppliers. That’s because micro, small, and medium-sized enterprises (MSMEs) face significant working capital challenges. So there’s a real risk that cash strapped suppliers might be unable to fulfil orders, leading to supply chain disruption. Buyers can help solve this issue by leveraging tools that finance these sellers through early payment of invoices. So make sure financing is part of the conversation when working with any new seller.
What comes next?
All businesses want stability and certainty, but that’s not on the horizon just yet. As Glen Weyl, Founder and Chair, RadicalxChange Foundation, says: “Nationalism and the narrowing of trade is an outgrowth of weaknesses in global frameworks.” In his view, the best way to solve this is for all governments and businesses to come together to build democratic institutions that focus on the “public good”. As this’ll help governments and companies look beyond their own self interest and work together to solve the challenges we face.
While he doesn’t dismiss building a new system to govern global trade, UPS’ Cesarone believes this is a “utopia”. So instead, a more practical answer may be to look at ways to make trade more inclusive. He wants to ensure the benefits extend further and deeper around the world. And to unlock trapped value that exists—like realizing the $26 trillion GDP boost that would come from giving women more chances to export.
“Technology is the answer,” says Lanng. “Ten years ago, small exporters couldn’t join the supply chains of large companies,” he says. “It was too complex. The barriers to entry were too high. But today we’re all connected through technology and all companies can take part in trade. So going forward it’s about empowering trade, connecting companies, connecting consumers, and removing all the barriers that limit trade being a force for good.”
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