The top ten trends shaping the future of international trade

International trade and global supply chains are undergoing a marked transformation. This is fuelled by the challenging economic and geo-political environment, evolving commerce models, the rise of digitisation, the pivot towards sustainable business practices, and innovative approaches to financing.

Vivek Ramachandran, Global Head of Global Trade Solutions (GTS) at HSBC, explains.

What businesses are buying and selling is changing.

Today, the value of global trade is estimated to be in the region of $32 trillion¹, of which a fifth is comprised of services². Over the next decade, services are expected to account for a substantial share of all new international trade, with the bulk of this being in digitally delivered services³.

Businesses that adapt to these changing dynamics – by developing ancillary services and embracing digital change – will potentially be among the winners moving forward.

We are already seeing this in practice. For example, leading apparel manufacturers are launching software businesses to help their smaller competitors obtain efficiencies and productivity gains.

How businesses buy and sell goods and services is also evolving.

The Business-to-Business (B2B) e-commerce market is already five times the size of the Business-to-Consumer (B2C) market⁴ and we expect this to grow at an exponential pace.

Trust has always been the foundation of strong commercial relationships. This has historically been forged through physical and repeated interactions. Going forward, data validation over platforms (i.e., which helps us with authenticating company identification, transaction legitimacy, etc.) will change how businesses develop relationships. We will see an increase in digital associations allowing trade with anonymous partners.

As these data validation tools and platforms become more ubiquitous, new markets will increasingly open up, both for supply and demand, potentially creating opportunities for most businesses.

Supply chains have evolved over decades with the almost singular objective of minimising costs. This objective occasionally came at the expense of transparency, optionality, and resilience. Many businesses discovered this when the pandemic struck.

We are living in a world with many uncertainties and, as a result, we are seeing global trade becoming increasingly local.

Corporates are rethinking their traditional supply chain models, with a rise in protectionist measures. Re-shoring, near-shoring, and friend-shoring are all likely to become more widespread as firms react to the vulnerabilities in their supply chains which the pandemic unearthed.

This is leading to more manufacturers diversifying their supply chains into different markets, including Bangladesh and Vietnam. Other industries, however, are choosing to nearshore their supply chain operations. For instance, a number of US businesses are reportedly considering moving some production lines to Mexico, in order to reduce their reliance on certain markets⁵.

Moving forward, it is essential businesses adopt agile supply chains, with options and safeguards in place to weather any potential disruption and geopolitical uncertainties.

Digitisation of trade has been a non-linear path – with many steps forward but equally many backwards! We are optimistic about this changing in the next decade.

There are four foundational steps required to digitise global trade.

Firstly, we need a set of common data standards for trade documents. Adoption of a universally recognised electronic Bill of Lading is a critical step forward.

Secondly, there needs to be a comprehensive legal framework underpinning those standards. Again, in-roads have been made here following the introduction of the UK’s Electronic Trade Documentation Act, and it is expected other markets, including France and Germany, will follow suit.

Thirdly, we must develop a system or a combination of systems where data can be shared digitally. This is more difficult. Over the past decade or so, several experts and consortiums have argued that Blockchain – due to its immutability and real-time transparency – would accelerate digitisation in trade finance, but the technology is yet to make a decisive impact, due in part to concerns about its scalability and lack of interoperability.

And finally, there must be an ecosystem of market participants who are willing to accept that data over the system(s), and act upon it accordingly (i.e., by providing financing/facilitating the physical movement of goods, etc.).

If we can achieve these objectives, then it will result in more trade and help companies navigate new business opportunities.

Sustainability is no longer a fringe issue.

Regulators, policymakers and industry bodies are demanding that companies take sustainability more seriously.

A failure to do so could result in companies being subject to even tougher rules on sustainability.

The message is, act now, or else you will be required to do so on somebody else’s terms!

Most businesses have limited – if any – visibility into the composition of their entire supply chains - a deficiency, which needs to change, and quickly.

For example, in the apparel sector, brands may have an intimate relationship with the manufacturers and often nominate the fabric mills. But, as you move further upstream, they have little idea as to where the cotton is farmed or which ginners are employed.

Regulation – together with the increased focus on sustainability – are forcing companies to obtain better and more granular insights into their supply chain networks.

At an EU-level, the Corporate Sustainability Due Diligence Directive (CSDDD) stipulates companies must conduct reasonable due diligence on their business lines and supply chains to prevent human rights abuses and environmental violations from happening⁶.

Similar rules have already been enacted in a handful of EU member states, namely France and Germany. Germany’s Supply Chain Due Diligence Act, which goes live in January 2024, obliges companies to take measures to stop human rights and environmental risks in their business activities and supply chains⁷.

If companies want to stay on the right side of regulation, they need to obtain better transparency into their supply chains.

Sparked by the global growth slowdown, the precipitous drop-off in consumer demand and other tough macro headwinds, corporates are looking to obtain efficiencies amid the surging cost pressures.

Working capital optimisation used to be a matter for treasury, but now CEOs and CFOs are taking an active interest in it.

This is because working capital optimisation can enable businesses to obtain much needed efficiencies, by helping them to mitigate funding and liquidity challenges.

As such, companies must try and squeeze as much value as possible out of their working capital, as too many businesses – both big and small - are currently leaving value on the table.

Market uncertainty is leading to heightened buyer risk, which could potentially result in companies suffering financial losses, should things go awry.

This is prompting companies to think more carefully about buyer risk.

So how can they do this?

While digitisation will prevail in our industry, there will still be a place for conventional solutions – such as documentary credit (DCs) or Bills of Exchange - as these are an incredibly effective buyer risk mitigation tool.

Although under-utilised, traditional trade instruments can help companies manage their pre-shipping financing and reduce risks without incurring high financing costs.

Post-pandemic, we are now starting to see shorter order cycles emerge once again.

The tighter order cycles will, however, cause challenges for companies, together with their suppliers, and these risks need to be managed.

This could result in some companies returning once again to the just-in-time supply chain model.

Times are changing, and businesses need to respond.

In addition to embracing Direct-to-Consumer (D2C) business models and digitisation, companies should start embedding financing into their operations, as this could provide them with lucrative new revenue sources.

Already, we are seeing several leading companies boost their revenues through the provision of financing services.

This is a strategy companies ought to consider moving forward.

HSBC is well-positioned as we often sit on both sides of the transaction, giving us unique insights into the needs of buyers and sellers, together with that of the wider industry.

Through our extensive investment into experienced people and processes, we are leading the way in driving automation and digitisation in trade finance.

Contact a HSBC representative to find out more.