Decoding Trade Knowledge and Execution Gap

“We think of globalization as a uniquely modern phenomenon; yet 2,000 years ago too, it was a fact of life, one that presented opportunities, created problems and prompted technological advancement.” – Peter Frankopan, The Silk Roads

Trade is an integral part of globalization; the exchange of goods and ideas has marked humanity’s evolution since times immemorial. The first formal effort to create international rules for trade can be traced back to the Word Economic Conference in 1927, organized by the League of Nations. This conference led to the drawing up of the Multilateral Trade Agreement, followed by the General Agreement on Tariffs and Trade in 1947. Eventually a formal body, that was responsible for negotiating international rules and resolving disputes, the World Trade organization, was set up in 1995. Alongside these global developments, the world has also seen major trade liberalization (world trade has grown 4100% between 1950 and 2020) as a result of technological developments, digitization and a concerted effort to remove trade barriers. The formation of trade blocs like NAFTA and EU and growth in bilateral and regional trade agreements has characterized international trade. Countries like India and China have emerged as important players in the global supply chain.

A new reality for International Trade?

However, we are now at a new inflection point. Global trade has been witnessing a gradual slowing down since 2011, with growth rates hovering at 3% per year as compared to 7.7% in 2007. Moreover, trade relations between China and US have not recovered since punitive measures were imposed in 2018; in fact, tensions between the two countries seem to be growing. Over the years multilateral agencies have consistently estimated that missed opportunities in international trade have cost the world nearly $1.5trillion. More recent estimates indicate that this number has ballooned to $3.5trillion. Moreover, cross-broader trade has become more complex. Trade disputes and changes in duties and rules are the new norm. Coupled with the recent historic hikes in freight charges and supply change disruptions, these factors are creating one of the most challenging times for international trade.

On ground impact of COVID-related supply chain disruption

The very real impact of these changes is being felt largely by SMEs and has far-reaching implications for trade’s potential to further the world’s sustainable development goals, through its contribution to GDP, ability to generate employment and alleviate poverty.

We spoke to several SME’s to better understand their challenges during the current crisis. Many SMEs reported having to cut down profit margins by 7% to 10% in order to absorb the increases in freight costs across the last year and a half. Others are operating at nearly zero profit, simply to stay in business. For instance, a textile importer indicated that since they operated on thin margins the firm had the capacity to absorb just 1%-2% changes in freight rates, however the company has had to contend with increases of over 25% in the last year. Another company involved in paper exports revealed that for some of their shipments freight rates were equal to the cost of the goods being transported. They added, “our margins are negative now, and in many cases our customers are not willing to buy from us at increased rates. If we increase our prices, the orders will go to someone else with deeper pockets.” For an automotive parts manufacturer, the freight hike has led to write offs, supply chain debts and zero margins. Delays have also affected profitability. Citing an instance, the proprietor of a textile firm said, “Last year, some of our goods were stuck at the Shanghai port for a month. While that shipment was originally booked at $6300, we ultimately had to pay $8100 to bring the goods to India.” Others have had to pay penalties as a result of delays caused by container shortages. Along with the immediate impact on profitability, this drastic increase in freight rates has also strained customer – buyer relationships as many buyers have opted to cancel orders over absorbing the increased freight charges. A sustained reduction in profitability has also affected SME’s abilities to pay reasonable wages to its staff members, which in turn affects employees’ purchasing power and well-being, as well as their ability to contribute to the economy.

One might argue that the pandemic-related global supply chain crisis is an unprecedented historical event; however, the effects of this disruption are here to stay as experts predict that even though freight rates will course correct in the future, they will not revert to pre-pandemic levels. Moreover, the supply chain disruption has thrown into sharp relief issues such as information asymmetry and lack of access to finance, that were gradually beginning to slow down global trade.

What will ease the pain?

Freight rate trends and price predictability: Several SMEs indicated that visibility of freight rates across a period would make a significant difference to their ease of operations. Another indicated that stable and predictable prices would help control inflationary tendencies and make it much easier for them to plan production schedules and dispatches. The firms said, “Price prediction is necessary for firms like us to continue in business and to take critical trade decisions - if there is a way in which freight forwarders, shipping lines and the government can work together to bring some stability to prices, it would be a boon.” A third, a solar company stated that a benchmarking of freight rates by industry and port pairs would address some of their largest pain points. Another suggested that tools which could aid forecasting freight rate trends would provide much needed visibility for production cycles.

ETA and real-time container tracking: Another key element SMEs looked for was the availability of real-time information. Several SMEs indicated that they were unable to access clear dates for the estimated time of arrival for their goods.  Moreover, they expressed frustration at often being unable to track each and every container as it made its way to the destination. Having to follow up on the status of the shipment cost them precious man hours and affected their ability to plan follow on operations.  

Customs Related Challenges: While governments have eased customs regulations, several firms mentioned that they needed to keep track of notifications and regulatory changes. Moreover, they reported that there did not exist a centralized system under which SMEs could access previous documents submitted to customs, which meant that for every new shipment, they had to re-initiate the entire documentation process.

Need for the right trade partner: Many SMEs also mentioned that they preferred partners who had a deep knowledge of the shipping industry. For instance, the logistics manager for a clean energy company stated that if they were shipping goods to Dubai, the freight forwarding partner must know that Fridays are a holiday in Dubai and schedule the shipment such that it reaches well before to prevent any delays. In fact, most SMEs indicated that they preferred to build long-term relationships with their freight forwarding partners, since they could trust such partners to find them the best rates and optimize routes to meet their requirements. One SME proprietor characterized this as, “The reliability of a service provider is the most important thing. They need to be able to understand my needs, provide the right inputs – delivering end to end service almost as if they were a part of my company.”

Access to trade information: Another explained how access to information played an important role in creating better trade, “even after being in business for over a decade, we don’t have the resources necessary to understand all the rules and regulations – in the past we have made mistakes on how best to classify our goods and ended up paying a higher duty than was required. If a partner can advise us on how to correctly classify our goods, help us find suppliers in countries where we get better prices or can access more favorable duties because of bilateral arrangements or treaties, this expertise will add a lot of value to our business.”

Coupled with the lack of access to finance, complex cross-border rules and regulations, the aforementioned elements contribute to a knowledge gap that has resulted in a stratospheric $3.4trillion worth of missed opportunities for trade. If we can create conditions to boost competitiveness and growth in small companies, this will result in positive outcomes for international trade and reduce the trade gap. Moreover, these gains in productivity could result in an estimated value addition of $15 trillion or almost 7% of global GDP. Thus, there is a huge imperative to develop ecosystem-based solutions that allow businesses, especially SMEs to take advantages of the opportunities offered by global trade.

Click here to read how access to finance influences inclusivity in global trade.