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Shifting trends in global trade

Author: ICAEW Insights

Published: 01 Dec 2020

Nearshoring

COVID-19 is the latest force for change in global trade. Here, we examine trends fuelled by the pandemic – shorter supply chains, heightened customer and political demands, and, ultimately, a move towards deglobalising.

Trading and operating overseas has been getting more complicated. A decade ago, the benefits of outsourcing to distant overseas suppliers seemed clear to managers and politicians of all stripes. 

Factors including advances in technology, voters’ changing attitudes and rapidly shifting customer trends have encouraged businesses in some sectors to explore nearshoring – the process of switching to suppliers that are geographically closer to your business HQ or customer base. Globalisation is by no means in reverse, however. In other areas, technology is fuelling a new push to explore outsourcing operations overseas. 

We explore some of the trends in global trade that have been accelerated by COVID-19.

1. Building supply chain resilience

The pandemic has shone a light on the vulnerability of global supply chains and a lack of preparedness by the offshore outsourcing industry, warns analyst HFS. It adds that the consequences for the delivery of IT and offshore business process work are significant because homeworking has exacerbated any existing problems. For example, companies’ operations have been hit by a shortage of laptops, unsuitable homeworking setups and poor internet connectivity.

The experience is fuelling calls for a rethink of supply chains to support how organisations react to disruption. A McKinsey survey of 60 senior supply chain executives in 2020 found that 93% of them were planning to increase the level of resilience across their supply chains. A greater focus on nearshoring, dual-sourcing or regionalising of supply chains is an integral part of that strategy. 

Against a backdrop of rising labour costs in major offshoring centres such as China, the lower arbitrage rationale behind many offshoring decisions no longer offsets lower levels of satisfaction with non-domestic service provision. Research by HFS and the London School of Economics back in 2011 warned that although the transactional and cost-based elements of offshored work are significant, when it comes to cultural issues, business understanding and customer relationships, onshore service retains the upper hand. These issues have become even more acute since the research was carried out.

At the same time, lower real-estate costs and reduced competition for skills are driving moves to relocate production and support functions out of the major trading and financial hubs into second-tier cities and regions in domestic markets.

There is growing recognition that much of the environmental damage business causes is due to the increased scale of global economic activity. “International trade constitutes a growing portion of global economic activity, making it an increasingly important driver of environmental change,” warns the International Institute for Sustainable Development.

Greater frequency of severe climate events also risks disrupting the production and supply of goods and services, raising costs and prices. According to McKinsey, the probability of a hurricane of sufficient intensity to disrupt semiconductor supply chains in countries like Korea, Japan and Taiwan will be two to four times more likely by 2040. Companies can prepare by arranging dual-sourcing and increasing supplier resiliency through due diligence and collaboration with suppliers.

2. Customer demand and changing technological advances

The spread of internet-enabled devices, from smartphones to tablets, has given consumers instant access to information, products and choice of company. This gives customers access to new trends quicker than ever before and they want those demands satisfied just as quickly. For example, Kantar Worldpanel estimated that Apple’s delayed launch of its 2017 iPhone X cost it market share in all major markets, including 7.6 percentage points in the US and 8.5 percentage points in the UK.

A disadvantage of overseas supply chains is that they reduce manufacturers’ flexibility to react quickly to customers’ changing tastes and new styles, forcing some companies to bring production closer to the end consumer.

Meanwhile, sustainability has moved on from having mainly environmental connotations to being a much broader concept. Consumers are more likely to expect companies to behave in a socially responsible and sustainable way. They increasingly support businesses whose brand purpose aligns with their own beliefs, research by Deloitte has found.

In line with this, section 54 of the UK’s Modern Slavery Act 2015 requires certain businesses to produce and publish a statement setting out the steps they have taken to ensure there is no forced or unpaid labour in their own business or their supply chains, wherever they occur. This requires companies to look further than their tier one suppliers, to second and third tier suppliers and beyond. Arguably, managers feel they have better visibility into supply chains if they start closer to HQ.

A 2016 report by investment firm Schroders suggests the Modern Slavery Act has catalysed supply chain consolidation, citing “luxury goods companies such as Chanel, which is integrating silk suppliers into its operations, and Kering, which is acquiring tanneries to mitigate risk. Footwear company Adidas announced that it is moving some of its footwear manufacturing from suppliers in Vietnam back to Germany, to bring production in-house.”

Technological developments also bring the potential for production and manufacturing closer to the final destination of goods. Robotic automation and artificial intelligence is already being used to increase warehouse efficiency, streamline procurement and more accurately predict demand for products. Growing use of automation to fulfil simple requests by both internal and external customers is freeing up the more highly skilled retained function for more valuable work.

3. Political pressure

In recent years, companies have been faced with growing protectionist policies and an emphasis on policies that favour employing local labour, even if it is more expensive. Although the headlines focus on manufacturing sectors, politicians would be happy to see local services jobs created too.

Research carried out by KPMG and analyst HFS last year showed that the UK has now become “the world’s third-most attractive location to source business operations and IT support” due to “the steadily devaluing currency, availability of labour (especially in former manufacturing cities), and an adequate education system”. Whether and how Brexit disrupts that remains to be seen.

More broadly, Brexit will make it harder for UK-based companies to offshore as easily within the EU. It will also make business processes that involve trade or interaction with the EU (the UK’s largest export market) more complex as the implications of any trade deal are worked through. Again, this will be harder to manage with offshore operations and may make some managers opt to nearshore or even rehouse various operations.

However, this deglobalising trend is best epitomised in the trade war between the world’s two economic superpowers. President-elect Joe Biden is unlikely to change his predecessor’s stance much, and he is expected to use tax reform to encourage companies to employ American workers through his “Made in America” plan.

China made some concessions to US demands as part of phase one of a trade deal signed in January 2020. A Biden presidency will revisit that deal, but experts don’t think China and the US will cooperate much more closely. William Reinsch, a trade expert at the Center for Strategic and International Studies, said: “The reality is that the Chinese are not going to meet our demands. Not because they’re bad economics – they’re not – but because they’re bad politics.

“They would undermine the Chinese Communist Party’s control, which is the last thing the CCP will ever agree to.” This will likely mean more tit-for-tat actions, including pressure from the US for its companies to use domestic suppliers.

Similarly, French President Emmanuel Macron and German Chancellor Angela Merkel are putting pressure on the European Commission to make changes to its industrial strategy and competition rules to aid economic recovery from the COVID-19 pandemic. They are pushing for the creation of “European champions”, after expressing concern that EU competition rules have been applied in a way that is “very focused” on competition in Europe.

On the other side of the globe Australia and China have engaged in a long-running trade dispute. Recent reports found Australia’s famous wine producers temporarily suspended shipments at the request of Chinese importers in fear Beijing was about to ban a slew of Australian goods. Experts say this activity is in response to Australia’s public disagreement over some of China’s political decisions.

Political rhetoric and tariff wars that discourage offshoring may become more commonplace, so it is likely we will see greater numbers of companies opting to build capabilities and supply of finance services closer to home.

Managers will have to keep a closer eye on the political news than they might have through the past few decades, and be ready to react to changes to governments’ foreign policy as much as to economic policy.