How blockchain can restore trust in trade

containerInternational trade is under pressure. Fears fuelled by the global refugee situation and terrorist threats have led to tighter border controls – and these come at a cost. Every inspection of goods, every stop along the supply chain, eats up time and drives up prices. It harms businesses and consumers alike. Those involved in international trade – whether manufacturers, trading houses, transportation companies or banks – are seeking ways to ease the situation and cut time and costs.

Blockchain technology can help. The cloud-based ledger ensures that records can’t be duplicated, manipulated or faked, and increased visibility in parts of the supply chain promotes an unprecedented level of trust. It means governments can better protect citizens, while business partners can be certain trading documents are real. Consumers can check the quality and provenance of products, and banks can reduce processing time. And it’s all paperless.

Thanks to blockchain, all kind of legal, financial and product-related information can be made available. This allows even the least trusting parties to comfortably conduct business. With further investment and experimentation, blockchain could potentially hide confidential information to protect the interests of trading parties – pricing information, for example.

Does it work in the real world? Barclays reported the first blockchain-based trade-finance deal in September 2016. The transaction guaranteed the trade of almost $100,000 worth of cheese and butter between Irish agricultural food co-operative Ornua and the Seychelles Trading Company. The process – from issuing to approval of the letter of credit, which usually takes between seven and 10 days – could be reduced to less than four hours. Other banks are also exploring ways blockchain technology can improve processes along the supply chain. In August 2016, banking consortium R3CEV reported that 15 of its members had joined a trade finance trial to test its distributed ledger protocol, named Corda. Also in August, Bank of America, HSBC and the Infocomm Development Authority of Singapore (IDA) revealed that they had built a blockchain application to improve the letter of credit (LC) transaction process between banks, exporters and importers.

It’s not only banks: Maersk, the world’s largest container-shipping line, has been participating in a proof-of-concept initiative, using blockchain expertise from the IT University of Copenhagen to digitize the ships’ cargo inventories. These so-called “bills of lading” require an enormous amount of paper. A shipment of roses from Kenya to Rotterdam, for example, can result a pile of paper 25cm high. And the cost of handling it can be higher than the cost of transporting the containers. Maersk’s aim is to optimize the flow of information while raising visibility along the supply chain.

Often when making a purchase, buyers don’t know where the goods they ordered are coming from, or even whether they have been shipped at all. With blockchain, consumers can be informed of every step in the process. Combined with the internet of things, this could also extend to the care with which a product is transported. Swiss start-up Modum, for example, uses blockchain as a way of assuring recipients that pharmaceuticals have remained within an acceptable temperature range while in transit.

Trust and transparency

Citizens are worried that reduced barriers at the borders, as well as trade agreements, increase the risk of terrorism and illicit trade. Blockchain technology can in fact provide the backbone of a system of authorized trusted participants, bringing everything into the light, whether it’s a product, the party selling it or the path it takes to reach the buyer. Consumers and watchdogs, public and private, can trace every item moved through the authorized blockchain-backed channel and validate or reject both product and party. Customs clearance, too, can be optimized using blockchain. Parties that are part of the group can act quickly and efficiently, while others face scrutiny.

Immutable records on every aspect of a transaction – from the source of the raw material to where and how the products were manufactured, to their distribution, maintenance, repair, recall and recycling histories – are the new basis of trust. Information about ownership, provenance, authenticity and price are all held in the blockchain. Digital product memories connected to smart devices along the supply chain will provide secure proof of everything from manufacturing processes to quality controls. This will reduce the cost of compliance, i.e. the adherence with laws and regulations. Furthermore, this will open doors for replacing current product labelling practices to protect consumers and accelerate customs-clearance processes. Customers and consumer-protection organizations, as well as customs authorities, will have all the information they need to decide to buy or not to buy, to let goods through the border or to block them.


Blockchain has the potential to become the new gold standard of business and trade. But first, all nations need to accept the new technology. There are technical hurdles to overcome too. First, blockchain protocol(s) used to secure the ledger of global trade and manufacturers must be trusted by all of its users and be effectively un-hackable. Technical capabilities to handle very large transaction volumes will also need to be enhanced and the cost of maintaining the protocol may need to be lowered. Ordinary companies and individuals will need to be onboarded into the machine-to-machine (M2M) economy. The liability model of trade conducted on the blockchain will need to be reviewed as the appropriate treatment of liability may differ from current models.

Blockchain can help to reinforce trust in today’s complex and globalized world – giving citizens and governments fresh confidence in the global exchange of goods.

Image: Erwan Hesry

This blog was originally posted on the World Economic Forum Agenda.

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Why border controls won’t protect Europe against terrorism

In mid-December, people and families all over Europe and in many parts of the world were gearing up to celebrate Christmas, one of the most important events in the Christian calendar. But on 19 December 2016 at 20:02 local time, a hijacked truck veered into a traditional Christmas market next to the Kaiser Wilhelm Memorial Church in Berlin. Twelve people were killed. Four days later, the suspected perpetrator was shot and killed by police on an Italian plaza in Sesto San Giovanni, a suburb north of central Milan.

bordercontrolsOn the same day, ISIS extremists released a video of the perpetrator, filmed recently in Berlin. His name was Anis Amri. Having pledged allegiance to the group, he suggested that the Berlin attack was vengeance for coalition airstrikes in Syria.

Amri was from Tunisia and had arrived illegally in Italy in 2011. The New York Times reported that after he had showed signs of radicalism, Amri was classified as a terrorism risk in 2014 – one of a group of a few hundred individuals only – before making his way to Germany in 2015. In Germany he had been under covert surveillance for more than six months. Italy and Germany had failed to deport him due to a lack of cooperation by his home country.

After the Berlin attack, Amri had travelled for three days and 1,000 miles across Europe. A train ticket found on his body showed he had come from Chambery in France via Turin. European right-wing politicians, including Marine Le Pen, the leader of French far-right National Front, and Nigel Farage, the former leader of the UK Independence Party, responded by demanding an end to the Schengen agreement, a historic deal signed by five European countries in 1985, which had led to the creation of Europe’s borderless Schengen Area.

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Are borders ever the answer?

Few national borders are absolutely impermeable, and controls may fail due to fake and stolen documents. The Chicago Tribune reported that in 2015 around 170,000 people escaped detection at the US border with Mexico and 200,000 eluded capture when adding those who entered by sea. This is barely half of people who entered the US illegally. The wall that made Berlin one of the most difficult places to cross the border could not stop illegal crossings. The wall only reduced the number of escapees to 868 per annum during the 1970s and to 334 per annum between 1980 and 1988.

Aviation security measures are considered most tight in the world of travel and transport – but two passengers were able to board Malaysia Airlines Flight 370 on stolen passports. The Berlin suspect had used at least six different aliases under three different nationalities, reported the Daily Mail.

The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote. All people named in connection with the Paris attack of 13 November 2015 were French or Belgian citizens who held European passports. The BBC reported that on 23 December 2016, Australian police detained six men and a woman – four Australia-born. Three are suspected to have planned a Melbourne Christmas Day terror attack which Australian Prime Minister Malcom Turnbull called one of the most substantial pots to have been disrupted in recent years.

According to Eurostat, it is estimated that the European Union’s citizens aged 15 or over made 1.2 billion tourism trips in 2014, for personal or business purposes – 25.1% were to destinations outside the country. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the required changes to the highly cost-optimized just-in-time concepts – largely applied in the automotive industry – and the efficient goods supply out of European distribution centres. Consumer prices would rise due to the forced slowdown, necessary adjustments and increased logistics costs. Many products would disappear from supermarkets – at least temporarily. The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

A united Europe

The current terrorist threat requires collaboration across all European countries, the use of advanced technology and a common European anti-terrorism strategy. Instead of investing time, money and energy in individual and isolated efforts to protect each country, Europe could be made much safer through consolidating budgets and other resources to better protect the outer borders of the EU and leverage advanced digital technology. The most effective way would be for all European countries to unite under one strategy – for example in a “homeland security alliance”. There is little chance that European countries with long and highly permeable coastal borders can manage the protection challenge alone. The effort cannot be shared but needs to be concentrated where needed.

The potential measures range from increasing EU security forces at the southern European borders to identifying and registering new arrivals; introducing waterproof authentication checks for example at train and bus ticket booths. The digital age brings solutions that allow smooth travel and fluid transport while also ensuring the highest level of security.

The exchange of security-relevant information should be mandatory. Country authorities need to be able to authenticate every individual and check for security risks. Facial-recognition software on surveillance cameras, which is available yet still rudimentary in many places, needs to be improved.

Blockchain technology – which can ensure the authenticity of goods – will possibly help in future to track the origin of freight. The transport of weapons and explosives would become significantly difficult. Manufacturers have already started to use blockchain technology to confirm the authenticity of luxury goods. The AMBER alert, a child-abduction alarm system that distributes alerts via TV and radio as well as emails and text messages, could be transformed into an effective measure to put the entire European population at the disposal of its own security system.

Even the most secured borders have proven to be permeable. And borders cannot stop local-born and locally operating terrorists. Political leaders need to explain why digital and coordinated European measures are better suited to protect the lives of European citizens and visitors than the reinstallation of intra-European borders.

The situation demands an act of solidarity across all governments in Europe. In its own interests, the private sector is required to support this effort. Leaders could leverage the current threat as a historic chance to unite Europe under an urgently needed common security vision and execution plan.

Image: REUTERS/Vincent Kessler

This blog was originally posted on the World Economic Forum Agenda.

Don’t Blame China For Taking U.S. Jobs

The problems are more complicated than that.

Where have all the manufacturing jobs gone? If you ask Republican presidential candidate Donald Trump, the answer is clear: China! But there is another, more plausible explanation. To paraphrase Democratic presidential candidate Hillary Clinton, “It’s the robots, stupid”.

The U.S. has lost 5 million factory jobs since 2000. And trade has indeed claimed production jobs – in particular when China joined the World Trade Organization in 2001. Nevertheless, there was no downturn in U.S. manufacturing output. As a matter of fact, U.S. production has been growing over the last decades. From 2006 to 2013, “manufacturing grew by 17.6%, or at roughly 2.2% per year,” according to a report from Ball State University. The study reports as well that trade accounted for 13% of the lost U.S. factory jobs, but 88% of the jobs were taken by robots and other factors at home.

If not China, what then explains these jobs losses? It’s simple: factories don’t need as many workers as they used to, because robots increasingly do the work.

manufacturing1Investment in automation and software has doubled the output per U.S. manufacturing worker over the past two decades. Robots are replacing workers, regardless of trade at an accelerating pace. “The real robotics revolution is ready to begin” writes BCG and predicts that “the share of tasks that are performed by robots will rise from a global average of around 10% across all manufacturing industries today to around 25% by 2025.”

With increasing automation, the manufacturing industry is becoming more productive. From 1998 to 2012, all sectors experienced a productivity growth of 32% when adjusted for inflation – the production of computer and electronic products rose 829%. The researchers at Ball State University calculated: If 2000-levels of productivity are applied to 2010-levels of production, the U.S. would have required 20.9 million manufacturing workers instead of the 12.1 million actually employed.

Many of today’s customers demand fast products, such as fast fashion with quickly changing models. Producing far away is only then still an option when margins are high and able to absorb high transport cost for air transportation. Moving closer to markets means more distributed manufacturing which reduces also the impact of disruptive events, such as the tsunami in Japan and the flooding in Thailand.

Focus on manufacturing pays off. One example is Greenville, South Carolina. Greenwille was for decades the state’s heart of the textile industry till its gradual decline when confronted with competition from Mexico and South East Asia. “In 1990, 48,000 people still worked in textile manufacturing in the Greenville area, according to the U.S. Bureau of Labor Statistics. Today fewer than 6,000 do” we can read in MIT Technology Review.

The U.S. needs to aim at leading the adoption in robotics. According to the BCG report, manufacturing labor costs in 2025 are expected to be 33% lower in South Korea for example and only 18% to 25% lower in the U.S. Therefore, South Korea is estimated to improve its manufacturing cost competitiveness by 6 percentage points relative to the U.S. by 2025. Focus need as well as skilled workers due to the fundamental shift in competences and because programming and automation talent will replace low-cost labor as key drivers of manufacturing competitiveness.

The focus on China is diverting energy from the real challenge. This is not only misleading but puts at risk the future of the U.S. economy.

Read my full article on Fortune.

The world is building fences. Here’s why we should worry

Long forgotten seem the walls, fences and barbed wires at all borders. Therefore, the understanding of the benefits of open borders might be fading. Of course, with terrorist attacks and waves of migrants concerns are rising. However, I wish that we are mindful and clear about the effectiveness, consequences and cost of the new global disintegration tendencies.

Fences

In December 2015, the BBC wrote: “EU border security becomes new mantra“. Not only Europe but larger parts of the world are going through a phase of increasing disintegration: the Brexit referendum, discussions about the exclusion of Greece from the Eurozone and the beginning of the construction of fences along the green borders of barrier-free Schengen.

Near Schengen, on 14 June 1985, the picturesque town in Luxembourg, five European countries signed the agreement which led to the creation of Europe’s borderless Schengen area. In light of mass flows of migrants seeking asylum in Europe, Hungary blocked migrants from onward travel to the rest of Europe and constructed a four-metre-tall fence along sections of the border with Serbia – a country not part of the Schengen area.

Also, Austria has begun building an anti-migrant barrier across the Brenner Pass at the Italian border. Putting an end to hope on one side and reducing fears on the other. However, it’s not only in Europe that countries are raising the bar. US presidential hopeful Donald Trump wants to build a wall at the Mexican border. Increasing fear of terrorists in the US has led to the reintroduction of a visa for “certain Europeans“.

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Image: The Economist

Click here to see other regions in the Economist’s interactive map

The hidden cost of disintegration

What would be the impact of reestablishing barriers? Citizens would face long-forgotten burdens: the northern Europeans, for example, would experience long traffic jams at the Brenner Pass on the way to the holiday destinations in the south. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Consumer prices would rise due to the forced slowdown and necessary adjustments along the supply chain. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the changes required to the highly cost-optimized just-in-time concepts – largely applied in global manufacturing in the automotive industry – and the efficient goods supply out of the distribution centres. Many of the products made available by bilateral and multilateral agreements would disappear from supermarket shelves.

Disintegration would affect the competitive position too. Europe, for example, might find itself in a very disadvantaged situation given that Asia is continuing to integrate. What if TTP arrives and Schengen leaves? There might also be explosive geopolitical risk involved, with Crimea, Ukraine and new Chinese islands in the South China Sea heating up the debate. As new fences go up across Europe, what tensions could result from countries such as Spain, Italy and Greece being left more or less alone with new waves of migrants?

How effective are visas and border controls?

Looking back: how safe has the world been with more barriers? Did borders protect Italy from the onslaught in the 1970s of the Red Brigades, Spain from the ETA, Germany from the Red Army, and France from GIA? Did borders protect the US from attack on 9/11? How effective have been the high metal fences and walls, barbed wire, alarms, anti-vehicle ditches, watchtowers, automatic booby traps and minefields along the inner German border from 1945 to 1990? The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote.

Tightening up security

The world has experienced decades of advancing global integration. Increasingly open borders and many trade and investment partnerships have strongly contributed to the prosperity and wealth of people and nations. International organizations and agencies have not only supported global growth but also established institutions in charge of dealing with the risks of reducing national barriers. Organizations have developed international ties and many platforms of collaboration to fight crime and terror have emerged.

Interpol – the International Criminal Police Organization – has strong links with Europol, the organization coordinating the local police forces across Europe. Within countries, ministries and agencies are increasingly working together. Germany, for example, has established the GTAZ – the Joint Counter-Terrorism Centre – an autonomous authority and co-operation platform used by 40 internal security agencies.

The private sector has launched initiatives to protect staff and assets against terrorism and other threats across the globe. Since the attacks of 9/11, security measures have been tightened. Today, individuals and companies are checked against the sanction lists of the US and Europe. Employees appearing on the lists are no longer allowed to be paid a salary, and companies are excluded from doing business. Though, as the Panama papers show, we have not yet closed all the back doors.

Battle on the internet

Social media helps terrorists organize itself and recruit new fighters. On the other hand, the FBI uses internet surveillance software like Carnivore to identify and stop attacks. Organizations such as the Search for International Terrorist Entities are scanning propaganda material and training manuals, and sharing the insights with other organizations. Technology trumps. The internet has the potential to flatten borders while reducing risks. The more people are active on the net, the better economic value can be extracted and (potential) terrorist activities monitored. Which also does not come without concerns and complexities – as the discussion between Apple and the FBI shows.

Governments have the obligation to protect citizens and the right to control borders. However, what are the effects of the potential disintegration on citizens, migrants and the economy? The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

We need to understand and be mindful of the impact of our decisions on the economy. All the same, should we apply economic reasoning to a decision on whether or not to offer a helping hand to people in severe need?

Image: REUTERS/Marko Djurica

This blog was originally posted on the World Economic Forum Agenda.

What does London’s new mayor mean for Brexit?

London has elected its first Muslim mayor. It’s a development that many see as reflective of the city’s tolerance and capacity to embrace differences. Will the election of the pro-trade and pro-Europe Sadiq Khan ultimately prove a crucial turning point in the Brexit debate?

LondonAndTheBrexit

The city’s citizens have good reason to vote for openness. London is built on trade. Trade has largely contributed to today’s wealth and the rise of many cities, regions and nations. Although trade growth has been moderate since the Global Financial Crises, reestablishing trade barriers might lead to significant negative effects.

The United Kingdom has its own currency and enjoys a high degree of economic sovereignty, which would hardly be enhanced by Brexit. Whether the wave of refugees seeking save harbour in the UK would slow down post-Brexit remains a question mark. What’s more certain is that trade barriers regularly increase the price of imported consumer goods, the prices of materials and parts to local production as well as industrial assets, and consequently the prices for goods produced in-country, for internal consumption or for export.

Four scenarios for Brexit

What would Brexit entail? Answering this means formulating the possible positions the UK could take after an exit from the European Union (EU). The scenarios include: (1) complete independence, (2) loose association with the EU, and (3) broad harmonization with the EU – the exit could also be structured in a gradual and staged way. Finally, (4) the UK could join another zone, such as the North American Free Trade Agreement (NAFTA).

The choice between these options would determine the extent and nature of future trade barriers and the level of impact on society and economy within the UK, in respect to the exchanges of goods with EU members, with countries and blocs the EU has agreements with and finally with other blocs and nations.

If the UK stayed largely harmonized or associated with the EU, little change would occur. Under all the other scenarios, procurement, manufacturing and distribution networks would possibly need to be adjusted – immediately or over time, partially or even drastically.

How would Brexit impact business?

Looking at the cross-border movement of goods, the costs of trade to the economy as well as the impact on cost structures and consumer prices depend on the conditions in four key areas of trade facilitation: (1) border administration, (2) market access, (3) telecom and transport infrastructure, and (4) the business environment. Brexit would affect three of the four areas, namely border administration, market access and business environment.

Tightened border administration extends the time goods travel, slowing down deliveries while increasing the cost of transport. In addition, border controls reduce the reliability of the supply chain as the time required for possible inspections is unpredictable. In time-critical industries, this would force companies to hold buffer stocks and re-design logistics systems.

State investments in hyper-efficient customs clearance facilities, combining technology with smart procedures, can smooth away some of the negative effects. These approaches include pre-clearance processes based on pre-submitted customs information, or ensuring goods carry digitally and instantly retrievable information which can be used to let them clear customs while passing the border – probably a longer shot.

A curb on innovation?

The second area affected by the potential Brexit would be market access. Controls and regulations to structure which companies can sell and operate on the national market is often linked to the protection of local industries. This protection eases the pressure on local companies to innovate and drive serious programs to improve competitiveness.

Third, the business environment would be affected too: changes could occur in the area of investment policy and the hiring of foreign workers. The UK government would potentially need to negotiate trade terms and agreements with many partners – a costly process which can take years. In the meantime, the local and foreign companies operating in the UK might be faced with significant uncertainty.

In order to compensate for the cost and price increase, the UK government could consider tax cuts and subsidies to ease the pressure on consumers and manufacturers. Otherwise, the rising cost of production could trigger the gradual migration of UK manufacturing towards lower cost locations and increasing dissatisfaction among consumers and citizens.

Uncertainty, reduced competitiveness and job cuts

Uncertainty, reduced cost competitiveness and potential measures to protect local industries can lead to the gradual retreat of foreign players. Job losses and increasing dependency on imports would be the consequences. Over time, protected UK industries might fall behind the foreign players due to reduced cost optimization and innovation pressure and hence competitiveness.

In the short run, some sectors would be able to reap some short-term benefits. Logistics for example would be under pressure to redesign logistics concepts and build new distribution centers. However, this short-term revenue booster is to be considered economic waste. Instead of making the supply to the local economy and society easier and more fluid, investments would flow into efforts to cope with additional administration, regulation and procedures.

Logistics – in common with many sectors – would suffer in the end. For example, as the customers of the logistics and supply chain service providers put pressure back on suppliers, the effect would be shrinking margins. This is particularly challenging at a time when cash and financing needs for newly required investments would be well on the rise.

Referendum

It remains unclear what position the UK would take in the event of a Brexit. What is clear is that the additional layers of work and cost caused by tightened border administration, regulated market access and a deteriorating business environment would result in additional burdens and disadvantages for companies, and especially for consumers and citizens.

While initially, some industries would reap benefits, soon the negative repercussions risk spreading across all stakeholder groups – government, business and society.

Let’s hope that the election of Sadiq Khan will be followed by more enlightened public sentiment towards globalization, the importance of stress-tested trade blocs and the accomplishment of new agreements like the TPP and TTIP.

This blog was originally posted on the World Economic Forum Agenda.

Can trade change the way we see globalization?

Many voices have been prophesying the end of globalization. Koert Debeuf, political analyst and visiting research fellow, CRIC, Oxford University, writes in the aftermath of the Paris attacks on 13 November 2015: “The world has left the path of globalization and is taking the trail of tribalization.” Are we facing a new trend?

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Globalization is a multidimensional phenomenon – the interconnectedness, interdependence and integration of cultures, markets and individuals. The emergence and growth of the global net of diverse national economies has brought new perspectives and prosperity to countries, companies and citizens. Although the trade flows are changing and the growth has slowed after the global financial crisis, connectivity is the key enabler of modern life.

Despite all connectedness and convergence, the world remains diverse. And that diversity is a major source of creativity; it drives innovation and progress, growth and prosperity. Connections and interactions within and among groups with a multitude of races, ethnicities, genders and sexual orientations are driving creativity and innovation in companies and across geographies. Competition makes us focus and keeps us contributing to economic growth.

However, diversity and competition are also leading to anxiety and conflict.

There is a need to strike the right balance between growth and prosperity on the one hand and preservation and protection on the other. What are the specific roles governments, businesses and resources play in this respect?

Borders aren’t always barriers

In the wake of the 9/11 attacks in New York, and more recently in Paris and Brussels, governments have attempted to protect citizens by raising the barriers at their borders. The intentions are good, but the practice risks burdening the economy or even excluding their own consumers, investors, brands and manufacturers from the many benefits and opportunities created by international trade and globalization.

However, today’s governments may not have the mandate to make this decision themselves. One of the deep-rooted desires of humanity is to exchange with other people and travel the world. As we see in the ongoing “hacktivist” challenges to the national firewalls, people will not give up on finding ways to access what is kept away from them – even if they simultaneously fear losing the security provided by national borders.

Borders do not need to be barriers. Modern technology has reached a stage where both security and fluidity is possible. Despite open borders, local cultures persist – as many examples show. Nations should continue to set the rules based on local codes, interests and needs, while regional and international bodies, such as the ASEAN and the World Trade Organization, help to prepare, negotiate and execute international frameworks and implement tested tools for secure borderless flow of goods and people, capital and data.

This often challenged but widely used model requires from the various actors – mainly governments and international organizations – empathy, creativity, diplomacy and pragmatism.

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Small businesses with global goals

Multinational companies have been developing the capacity to thrive in global commerce for some time. Thanks to internet, small and mid-sized companies have also gained access to the global markets. Although the physical supply chain still struggles to overcome the various hurdles to make international commerce easy and truly a reality, many online platforms and sites already exist to serve sellers and buyers, independent of location.

On the back of international agreements and with the help of supply-chain service providers, global brands have built global sourcing, manufacturing and distribution networks. The diverse range of companies competing in today’s worldwide markets do not only design, manufacture and provide us with the goods we enjoy – but also offer jobs in the many countries in which they operate.

Therefore, not only are global companies likely to object to regulation that significantly restricts their ability to manufacture and sell abroad, but smaller players, employees and consumers might well join the effort to maintain access to resources, products and customers in the digital global market.

Global solutions to global problems

On the one hand, the planet needs preservation and protection: if we do not act there will be more plastic than fish in terms of weight in the world’s oceans by 2050. On the other hand people need food, shelter, healthcare, education and jobs: in 2015, 836 million people around the world were living on less than $1.25 a day. While there are grave concerns about the effect of industrialization and consumption on resources and the environment, there is no doubt that poverty should be eradicated. And as the poor often live on the most affordable and hence vulnerable land, one obstacle to ending poverty is climate change.

We can observe that no barrier, no net, no firewall is large, long or strong enough to keep pollution, micro-plastics, terrorists and other threats away. Considering the magnitude of today’s environmental threats, there is a need to act fast and collectively. The world needs a cross-disciplinary and cross-industry effort, not only to effectively respond to the global environmental and resource challenge but also to other crises, such as pandemics, conflicts and the refugee challenge.

COP21, the Bali package and many other initiatives and agreements show that governments and enterprises are willing to stand together to develop more effective global frameworks and mechanisms. We need to strengthen the global platforms of collaboration and impact on which international organizations and governments, businesses and academia can co-create the most effective and balanced global solutions.

Ultimately, globalization is not an on/off exercise but the ongoing responsible management of global conventions and national codes, global markets and diverse economies, global commons and inclusive global growth. This requires confident and capable actors with strong identities not afraid to open up and willing and able to respect the different cultures while complying with international treaties and law. Even more so, globalization should be the golden path that connects and lifts the diverse global community to the next level of prosperity.

Image: REUTERS/Edgar Su

This blog was originally posted on the World Economic Forum Agenda.

4 things to know about the new era of global trade

As Otaviano Canuto, the executive director of the IMF, wrote in the Huffington Post, “world trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade during the first half and only low growth during the second half”. After the boom of previous years and since 2008, world trade has been rising slower than GDP. In light of the lingering effects of the global financial crises, China rebalancing towards domestic consumption and the lack of new BRIC-like global growth engines, companies and governments need to adjust their strategies.
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The main characteristics of the new era of global trade are relatively mature value and supply chains, increasing regionalization and localization of production, the rise of non-tariff barriers after a period of significant tariff reductions, and an e-commerce boom, which often struggles to overcome the hurdles in international business. Digitization appears to be the key enabler of modern times, and an important lever to capture value in the new era of global trade. It is digitization that opens up new horizons for product design and management, manufacturing, retail, and the repurposing of goods. However, we need open and courageous leaders in government and business to make the change happen and capture the opportunity in the following main areas of development.

1. The new customer experience: “fast products”

Today’s customers demand fast products, such as fast fashion with quickly changing models. In fact, this works well for brands wanting to avoid the high inventory and high risks they encounter when they have to make big bets on the right designs for an entire fashion season, for example. Fast products require short supply chains. Consequently, production needs to move closer to the markets and shops to meet the shorter lead times from sketch to shelf. Zara, for example, “adapts couture designs, manufactures, distributes and retails clothes within two weeks of the original design first appearing on catwalks”. In creating the new customer experience, the management of the supply chain becomes a critical source of competitive edge.

Companies that wish to play in the “fast economy” will require new factories close to the markets and new distribution platforms. Those countries that provide the most fluid import and export ecosystem will be high on investors’ lists. In particular, countries in regions close to large markets, such as Central America, South-East Asia and North Africa might wish to review their strategies to capture the value of this trend.

2. Multilayer global manufacturing and supply platforms

Digitization helps the fast economy. In the past, brands tended to centralize manufacturing for better manageability and quality control. The power of information technology, the internet of things, big data and the cloud provides a new level of collaboration and empowerment throughout the value and supply chain. One example is the Flex Pulse Centre. The enhanced visibility allows companies to move factories closer to the customer without risking sudden surprises. In the continuous process, the global supply chain is converting towards a more and more dense and integrated platform of short, medium and long distance cargo moves – with regional and local distribution centres along the way. With the fast economy some intercontinental flows of goods will become regional and local traffic. However, the new factories will continue to require global supply, as not all materials and resources will come from sources nearby.

These multilayer global manufacturing and supply platforms still have many black holes. Some blackouts of visibility are caused by governmental security concerns, for example in freezones, others by the lack of digital infrastructure. There are opportunities for business and government through public-private partnerships to establish not only the digital architecture but also the trust to fully leverage the available technology. It goes without saying that the smooth and seamless movements of goods in and out of countries through the reduction or elimination of tariff and non-tariff border barriers is essential for establishing denser platforms and making countries and locations more attractive.

3. Scaling up market participation: International e-commerce

The era of “platformization” allows for a more inclusive economy. Global e-commerce platforms such as eBay or Alibaba can connect millions of manufacturers and billions of consumers, making the global market accessible to even the smallest manufacturer and providing the broadest choice to all consumers. In addition to much broader and better match-making, middlemen are cut out which allows for higher margins on the sales and lower prices on the purchasing side. It also reduces the risk of corruption. However, the concept only works if the underlying logistics and transportation platforms support the digital transactions.

Unlocking the potential of international ecommerce requires efficient and cost-effective logistics and smooth customs processes through the paperless digital export and import processing. On the import side there is a need for effective tools to be able to process and analyse information about shippers and products moved. These tools reduce clearing times, even enable pre-clearance, and help to manage the risks that come along with lower value goods, which fall often below the threshold of more diligent customs clearance processes. In addition, governments need to ensure healthy competition and avoid the formation of digital monopolies. Platforms can also be used to foster the job-creating small and midsized business landscape.

4. Repurposing of goods

Although there is a need to analyse the entire value chain, as sometimes even long-distance transport might be less carbon intense than local production, tightening the supply chain in many cases saves energy and emissions. Hence, the trend towards localization and regionalization helps with resources and the environment. However, new technology and digitization can go well beyond the simple shortening of the supply chain.

The new visibility in the supply chain not only helps identify leakages and misuse but enables new operating and business models, ranging from optimizing delivery routes to tapping into unused capacity enabled by the many platforms of the sharing economy. Additional potential lies in the resources locked in the products which are thrown away every day: electronics, paper and plastics. Asset tracking could help unlock a potential value of about $52 billion annually for consumer electronics and household appliances alone. Repurposing products will be a major challenge and opportunity for governments and companies in the years ahead.

In the modern interconnected and interdependent world, we need seamless global visibility and fluidity of the flow of goods. Businesses seek and will find new sources of value in tracking products throughout the first lifecycle and the recovery for the repurposing. By creating a repurposing capability, the public and private sectors have a unique opportunity to position themselves as modern and responsible players.

In the past, developed and developing countries have benefitted from globalization, with China as the most recent role model of trade-driven growth. Some low-cost labour countries might still be able to repeat China’s success, others need to look for new models. While globalization has driven the rise of emerging markets and global players, it has also paved the way for today’s dense multilayer value and supply platforms, which are the basis of our modern life.

Companies and governments need to update knowledge and adjust strategies. We must keep in mind that despite all the technological possibilities, it is our skills, wisdom and courage that will help develop new business models and drive the necessary policy reforms. As Sachin Maini once said: “While technology makes it possible to do much more than we could without it, it can’t help us decide what to do.”

This blog was originally posted on the World Economic Forum Agenda.