A PERSPECTIVE ON THE DECADE AHEAD

CONTENTS

Executive Summary04

Chapter Summaries

05

CHAPTER 1

THE CHANGING NATURE
OF GLOBAL TRADE
CHAPTER 2

THE IMPACT OF
DIGITALISATIONCHAPTER 3

BRIDGING THE GAP
IN TRADE FINANCE
CHAPTER 4

SHAPING THE FUTURE
OF SUSTAINABILITY
Conclusion

07
49
75
91
120

Executive Summary

EXECUTIVE
SUMMARY
Sweeping advances in tech and finance will
fuel global trade over next decade.
According to our global Future of Trade research, technology
could bridge the current $1.5 trillion. trade finance gap, unlocking
new opportunities for trade across borders. Meanwhile, Blockchain
is ripe for adoption – not just providing faster, more secure andeffective ways to handle workflows in order to move goods acrossinternational borders - but also potentially helping reduce up to
20% of the actual physical paper costs associated with global
trade, currently estimated at $1.8 trillion.
The report highlights the emerging impact of digitaltransformation for importers and exporters, along with theongoing shifts in global economic power.
For the last 12 months, DMCC, the world’s flagship Free Zone and
the Government of Dubai Authority on commodities trade andenterprise, embarked on a journey to discover what is in store forthe future of trade.
We gathered 250 global industry leaders, academics, and experts
in six commodity trade hubs to discuss how trade will change in
the next decade and how it will drive the global economy into thenext phase of growth.
This report is a synthesis of the insights gained from these
discussions and lays out the conclusions.

4

The Future of Trade

Chapter Summaries

CHAPTERSUMMARIESCHAPTER 1

THE CHANGING NATURE
OF GLOBAL TRADE
Changes can steer or veer the Future of Trade
Technological advancements and politicaldevelopments are affecting the nature of
how goods and services are exchanged
worldwide at pace.
Global trade and trade finance are at thecusp of a digital revolution driven by Fintech
and Blockchain. Meanwhile the world’s
economic centre of gravity is shifting
towards Asia with new manufacturing hubs
emerging.

Geopolitical factors continue to challenge
traditional tradeflows and associated tariffs; fromthe US election, to the UK’s Brexit through to
China’s Belt and Road mega project. How will this
impact global trade, our established commodities
trade hubs – and how will the industry connect
and interact in the future? This research sets
out to identify exactly that, and the Commodity
Trade Index (CTI) evaluates 10 key commodities
trading hubs based on three factors: commodity
endowment, institutions, and location.

CHAPTER 2

THE IMPACT OF
DIGITALISATIONThe Future of Trade is digital
While cross-border trade is still synonymouswith paperwork, the development ofBlockchain, advanced robotics, and theInternet of Things presents a profound shift
for the future. Technological advances are
rapidly streamlining business efficiency for
global importers and exporters; reducing cost,
increasing productivity and driving economies.
Cost of trade globally is estimated at $1.8
trillion, 20% of which is related to paperwork.
Blockchain is seen as a game changer forthe tracking of goods and shipment as wellas improving trade finance. By providing asecure, decentralised record of transactions, alarge degree of paper-based documentation

would be eliminated resulting in simpler,
automated workflows, smart contracts andcost reductions. According to estimates by theWorld Economic Forum, reducing supply chain
barriers to trade could increase global GDP bynearly 5%, and trade volumes by 15%.
The spread of technology and data is having
a significant impact on GDP. The Industry
Digitalisation Index (IDI) measures four
separate functions of digitalisation: ‘Upstream
supply chain’, ‘Production’, ‘Downstream
supply chain’ and ‘Digital infrastructure’. The
IDI tracks businesses’ digitalisation progress
across sectors. The results of which arerevealed in this report.

The Future of Trade

5Chapter Summaries

CHAPTER 3

BRIDGING THE GAP
IN TRADE FINANCE
Digital trade finance could revolutionise the Future of Trade
Due to strict collateral needs and credit history
checks, 50% of SME funding applications
are rejected by banks. This has resulted ina $1.5 trillion gap in trade finance. A survey
conducted in 2016 also found that banks had tospend more than $60 million on due diligencemeasures in relation to SMEs.

In fact, our research shows that start-ups
and SMEs are no longer as reliant on banks
as before, and that new alternatives to seek
finance is rapidly gaining ground. The potential
to significantly reduce cost and bureaucracywith Blockchain, in addition to new alternative
financing solutions becoming available is agame-changer for the future of trade.

Digitalisation, primarily in the context ofFintech and Blockchain, has finally brought
trade finance to the centre stage. There is a
general consensus that Blockchain will bridge
the trade finance gap. In a rapidly evolving
playbook, powered by digital, alternative tradefinance solutions are becoming accessible to amuch larger extent than previously. In this newenvironment, the role of banks is up for debate.

CHAPTER 4

SHAPING THE FUTURE OFSUSTAINABILITY IN TRADE
Reduce, reuse, recycle and return, will transformthe Future of Trade
With the decline of natural resources and therise of social responsibility, consumers are
increasingly demanding ethically sourced andenvironmentally friendly goods. Government
bodies are enforcing regulation. Sustainablesupply chains can reduce the impact on theenvironment as well as unlock opportunities toimprove operational efficiencies.

6

The Future of Trade

To sustain a strong business in the coming
decade, having a sustainable supply chain
is key. Industries are implementing various
sustainable initiatives throughout their businessmodel to ensure environmental consciousness,
ethical compliance and sustainability. This
research explores sustainable business models
and how they will impact global trade.

CHAPTER 1:

THE CHANGING
NATUREOF GLOBALTRADE
The Future of Trade

7

Chapter 1: The Changing Nature of Global Trade

The Future of Trade is anything but certain.
The political and technological developments
in recent years have put trading relationships
between countries and companies around theglobe in the spotlight once more.
On the political side, our research highlights profound changes
underway with a new US administration that has promoted
protectionist trade policies challenged established institutions,and disavowed multilateral trade arrangements. Meanwhile, thetrading relationship between the EU and the UK is one of the central
negotiating points during ongoing Brexit talks.
Emerging market economies, especially those in Asia are expected
to play a greater role in the global trade of commodities. Thesemajor producing and consuming countries are bolstered by young
workforces and rising, middle-class populations with both major
producing and consuming countries located there. China’s role asa global manufacturing hub may see a decline in the next decade,as many manufacturing centres could relocated to other low cost
regional countries.
Furthermore, China’s Belt and Road initiative aims to connect
millions of people in dozens of countries through large-scale
infrastructure investments, with hopes of stimulating trade in theregion. Although Africa and South America are yet to make asignificant impact on global economy and trade, these regions havea wealth of natural resources at their disposal. This wealth makes
them likely to play major roles in global trade in the next decade. In
addition, a trend towards nearshoring, fuelled by automation andanalytics, could result in some Latin American countries serving
as manufacturing bases for the US. These views were reiterated
by many industry experts who participated in the focus group
discussions on the Future of Trade, held in major commodity tradehubs around the world.

8

The Future of Trade

Chapter 1: The Changing Nature of Global Trade

GEOPOLITICS
OF TRADE
In addition to the impact of emerging technologies,
the world of trade is changing rapidly in the face ofgeopolitics. With the election of US President Donald
Trump and the UK’s Brexit vote, 2016 was a memorable
year in global politics. A clearer picture of what thesepolitical changes mean for business and trade is
beginning to emerge.
FIGURE 1

Trade (average of imports and exports) and share of GDP in
selected regions
90%
80%
70%
60%
50%
40%
30%
20%
10%

Europe & Central Asia
South Asia

East Asia & Pacific

2016

2014

4
2012

2010

2008

3
2006

2002

2000

1998

1996

1994

1992

1990

1988

1986

1982

2
1984

1980

1978

1976

1972

1974

1970

1968

1966

1964

1962

1960

1

2004

0%

North America

OECD members

Source: World Bank, Cebr analysis

Figure 1 shows a time series of the value of trade expressed as ashare of GDP by region. There are four separate time periods ofsignificant change:
The first period, starting in the 1960s up until the early 2000s, saw
slow but steady gains in trade as a percentage of GDP. This pattern
implies that as economies grew throughout the second half of the20th century, trade increased at an even faster pace, and therefore
secured an increasing share of GDP.

The Future of Trade

9Chapter 1: The Changing Nature of Global Trade

The following period is characterised by a rapid increase in the tradeshare of GDP between the early 2000s and the Great Recessionof 2008. Increased trade liberalisation in goods and services andreadily available lines of credit, supported the rapid growth in tradeshares over this period, further spurred by a global economic boom.
This boom proved not to be sustainable as is visible in the third
period, which includes the sharp downturn in trade share acrossall regions as well as the subsequent recovery. Here, some regional
differences become apparent with the recoveries in the trade sharein South Asia and the East Asia & Pacific regions falling behind thatof Europe & Central Asia and OECD member states.
Finally, there is a trend from 2012 onwards that is cause for concern,as the share of trade falls in most of the listed regions. This is clearlyvisible in South Asia and East Asia & Pacific, and to a lesser degreein North America and the OECD member states. Only the tradeshare of GDP in Europe & Central Asia have held steady for the
past four years. The data show that the recovery in output growthfollowing the Great Recession outpaced trade growth consistently
between 2012 and 2016 in a stark contrast to the pre-crisis period
when trade grew at a faster rate than output.

One reason for the slowdown in trade growth could be the stalling infurther rounds of global trade talks. The Development Agenda waslaunched in 2001 as the ninth round of trade talks since the creation of
the General Agreement on Tariffs and Trade (GATT) in 1947. The GATT
evolved into the World Trade Organization (WTO), but the mission has
remained the same. As such, much work remains unfinished to achieve
the reduction of market distorting measures, tariffs and non-tariffbarriers in world trade relationships.

Work remains to reduce
market distorting
measures, tariff barriers
and non-tariff barriers
10 The Future of Trade

Chapter 1: The Changing Nature of Global Trade

FIGURE 2

Weighted Mean Applied Import Tariffs
35%

30%

25%

20%

15%

10%

5%

China

World

Japan

EU

2015

2016

2014

2012

2013

2011

2010

2009

2008

2007

2006

2005

2003

2004

2002

2001

2000

1999

1997

1998

1996

1995

1994

1993

1992

1991

1990

1989

1998

0%

United States

Source: World Bank, Cebr analysis

Figure 2 shows average import applied
tariffs weighted by product import sharesfor selected countries. We clearly see theprogress China has made in eliminating tariffbarriers over the past decades. In the early
1990s, average tariffs of 32% were levied on
many Chinese imports, effectively shutting
off large parts of the Chinese markets for
global exporters. Subsequent reductionsin the tariff burden have led to a strong
decrease in trade barriers, though at a 3.6%
average, Chinese tariffs are still more thandouble the rates seen in the US and EU (both1.6%). Japan currently has the lowest averageapplied tariff at 1.4%. Generally, trade barriers
in major global trading hubs have decreased
over the past decade. How can this finding besquared with the sluggish world trade growth1seen in recent years? One explanation is thatmost of the factors holding back trade growth
are non-tariff barriers. These include a wide
range of measures, regulations, standards, andother obstacles that a country might employ
to protect domestic industries from foreigncompetition. Examples include: import bans,complex or discriminatory Rules of Origin,
import licenses or export subsidies, quota
shares, as well as sanitary measures and othertechnical barriers to trade1.

http://www.tradebarriers.org/ntb/non_tariff_barriers

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11

Chapter 1: The Changing Nature of Global Trade

THE SHIFTINGROLES OF THE
US AND CHINA
The global trade outlook improved in 2017, characterisedby an upswing with strong global demand supporting
exporters in the US, the EU and Asian countries. Air freight
demand grew by 9% during 2017, the strongest rate since
20102. While air freight makes up only a small fraction (1%)
of global trade volumes, it is estimated that it represents
more than one-third of trade by value and therefore
provides a useful gauge of the health of world trade3.
The US administration has taken an active andprotectionist stance on trade policy matters.
President Trump is an outspoken critic ofmultilateral institutions and agreements, andhas criticised what he perceives to be unfair
trade deals such as the North American Free
Trade Agreement (NAFTA) with Canada and
Mexico and the Trans-Pacific Partnership(TPP). As one of his first acts in office,President Trump withdrew the US from the
TPP negotiations. The remaining parties,
including Japan, Canada and nine other
Pacific Rim economies, have since taken up
negotiations to progress a TPP successor
agreement without the US. More recently, theintroduction of tariffs on steel and aluminium
imports have raised fears about escalating
tensions between the US and other countries.

While most key US allies secured a temporary
exemption from the tariffs, the US targeted
China with an announcement of additional
punitive tariffs due to Chinese practices
regarding the transfer of intellectual property.
China has threatened to retaliate should thetariffs come into force. All this points towards
a new era of how trade policy is conductedunder the current US administration. Tariffs
and other protectionist measures are seen
as valid tools to pursue national interests via
trade policy. Governing multilateral institutions,which long served as the champion of tradeliberalisation, are being discredited as the USsees itself disadvantaged and treated unfairly
by others.

Tariffs and other protectionist
measures are seen as valid tools
to pursue national interests via
trade policy
2312

http://www.iata.org/pressroom/pr/Pages/2018-01-31-01.aspx
Iata (2016) - Value of Air Cargo: Air Transport and Global Value Chains

The Future of Trade

Chapter 1: The Changing Nature of Global Trade

Our London focus group weighed in: “While
recent trade barriers have implications in the
short term, for example in steel, the US has nothistorically been successful in introducing tradebarriers. In 2002, the US voluntarily withdrew
from trade barriers on steel under the threat of
a WTO sanction. While trade wars will always
be a fact of life, largely, the protectionist
agenda is seen as a short term trend to savejobs, based against a national security rationale,and for short-term political gain.”Indeed, many of those interviewed feel that
the US uses the threat of tariffs to bringcountries to the negotiating table in order toaddress perceived disadvantages in bilateraltalks. In an optimistic scenario, our researchgroups highlighted that this strategy could
work to reduce trade barriers, including
non-tariff barriers between countries, as wellas market distorting behaviour by certain
factors. This could have a beneficial net
effect on trade and – given the size of the US
economy – make up partially for the stalling
multilateral trade talks. However, it was also
noted that there is considerable risk in thisnew trade environment. Rhetoric can quickly
escalate into a trade war between some of thebiggest global economies – both China andthe EU have announced they would respondto the unilateral imposition of tariffs by the
US. This would have consequences not only
for the directly involved states but also forregional trading partners. Estimates put thecost of such a trade war at up to $470 billion4.
Moreover, the unpredictable nature of thecurrent trade disputes creates substantial
uncertainty for exporters and importers.

Rules and tariffs could change within a matterof days, making reliable business planningvery difficult.
“There is going to be a shift over the next
couple of decades, but neither the US nor
the EU acting alone can address many of
the global challenges that we are facing,”
said one of the members of our Dubai focus
group.
A second major geopolitical driver of future
trade patterns is China’s Belt and Road
initiative. This initiative aims at expanding
maritime routes as well as rail and road
networks connecting China with Asia, Africa,
and Europe. The scope of the initiative isvast, encompassing 4.8 billion people innearly 70 countries with economies worth
around $21 trillion, about 62% of the world’s
GDP5. According to a Fitch report, projects
worth more than $900 billion are alreadycommitted or underway6.

470bn

$

Estimated cost of trade war in
the current geopolitical climate
https://www.bloomberg.com/news/articles/2018-03-12/trump-trade-war-could-cost-470-billion-by-2020-chart
http://www.ebrd.com/what-we-do/belt-and-road/overview.html
6Retrieved from https://www.ft.com/content/0714074a-0334-11e7-aa5b-6bb07f5c8e1245The Future of Trade

13

Chapter 1: The Changing Nature of Global Trade

The Belt and Road initiative is arguably China’s
most important geopolitical projects as it
seeks to create and connect markets as wellas assert its regional influence. The initiative is
not limited to infrastructure but also includes
energy corridors and telecommunications. Our
research revealed that the initiative could, infact be a driving force behind more energy
integration, more integrated trade routes,
gas pipelines, electricity transmission, and on
the whole theme of strategic energy security
policies not only the Asian, but also in the
Middle Eastern markets.

In terms of trade volumes, the investments
in ports and maritime routes is expected
to decrease costs for maritime shipping,enabling more viable trading routes.

In 2018, China announced that 2017 imports
from Belt and Road connected countries
increased faster than its exports for the firsttime.

Within five to ten years, the rules of world
trade previously written by the US, EU andothers may disappear, rewritten by others in
the international trading system.

The value of China’s imports from Belt andRoad countries stood at $666 billion in2017, an increase of 20% year-on-year. Thisaccounted for 39% of China’s total imports
value, according to a report by the State
Information Center, a State Council think tank.
In the same year, China’s exports to thosecountries came in at $774 billion, a rise of 8.5%
year-on-year. The growth of imports outpaced
exports for the first time since the Belt andRoad initiative was proposed five years ago.

Geopolitics are still relevant to trade, butwith the Belt and Road initiative becoming areality, new rules for international trade areon their way. These new standards will be
put forth by Free Trade Agreements (FTAs),
Bilateral Investment Treaties (BITs) and byregional institutions. These regulations will
be quite different than those introduced andmaintained by Western powers under the
WTO, according to the focus groups.

The Belt and Road initiative is a cornerstoneof China’s open foreign policy. The corridor
going through Pakistan, supporting thatcountry’s economy, will create opportunities
throughout the Middle East. The EU will
export its industrial and regulatory standards
to the rest of the world, while the US lost theopportunity to do so.

What is clear, the focus groups agreed, is that
Asia is taking its place on the world stage andthat the world’s economic centre of gravity isshifting towards it. For example, both Saudi
Arabia and Iran’s most important export
market for oil and gas is China.

Asia is taking its place on theworld stage and the world’s
economic centre of gravity isshifting towards Asia
14

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Chapter 1: The Changing Nature of Global Trade

GLOBAL ECONOMY:
EMERGING FROM
THE DOLDRUMS
The global economy saw modest growth in 2017 after
two consecutive years of deceleration of investments,
manufacturing, and trade activities. Improved businesssentiments in both emerging and advanced economies led toa rebound in investment growth. As for trade, the increase incommodity prices, after collapsing in the three preceding years,
had a positive impact on countries which export commodities.

FIGURE 3

Commodity Price Index
200

160

120

80

40

EnergyFertilizers

Precious Metals

Metals & Minerals

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0

Agriculture

Source: World BankThe Future of Trade

15

Chapter 1: The Changing Nature of Global Trade

Historically, international trade has shareda strong correlation with economic growth,and policies such as trade liberalisation andglobalisation were practised in both thedeveloping and the developed world. Prior
to the global financial crisis7, international
trade grew 1.5 times the global GDP for four
decades. This indicated a steady global tradeto-GDP growth which slightly declined after
the recession as the drop in economic growth
also stifled international trade.
Prices of oil and other major commodities
increased in the second half of 2017 owing
to a favourable supply and demand scenario.
This increase is likely to have a positive
impact on global trade as imports of primarycommodities account for more than onequarter of the total goods trade8. Globally,
more than $4 trillion of primary commodities
are traded annually. With commodity prices
forecast to improve in the short term, global
trade value is likely to increase.

the sector. Weather conditions could impact
supply of agri commodities, while oil may bereplaced by renewable or other cleaner formsof energy. Some countries may transformfrom being net importers to net exportersof certain commodities. Hence, the change
in trading patterns of these commodities
should be monitored carefully. As new tradeand manufacturing hubs emerge and oldcentres become less relevant, the future ofcommodities trade is anything but certain.
However, recognising the importance ofbalance in the current world of trade, thischapter discusses the key commodities andtrading hubs, while exploring the upcoming
manufacturing hubs.

4tn$

The value of primarycommodities tradedannually

However, the global commodity sector faces
significant risk. Escalating trade restrictions,rising geopolitical tensions, and a possible
slowdown in China could negatively impact

FIGURE 4

Trade as a % of GDP vs Real GDP Growth
65

5

60

4
3

55

2

50

1
45

0

40

-1

Real GDP growth (%)

2016

2014

2012

2010

2008

2006

2004

-3
2002

-2

30
2000

35

Trade as % of GDP

Source: World Bank

7
8

16

Refers to the financial crisis which started in 2008–09 in the subprime mortgage in the US and led to debt crisis in many advanced economies
Include all foods, metals and minerals, and fuel

The Future of Trade

Chapter 1: The Changing Nature of Global Trade

CRUDE OIL
Crude oil is the most commonly traded commodity. Oil,considered an engine for global growth, accounted for morethan 30% of global energy consumption in 2015. Hence, any
imbalance in the supply-demand scenario of crude impacts
global trade and the economies of major oil-exporting andimporting countries.
For decades, the US and other advanced
economies, such as those in Western Europe,
were the major importers of crude oil.
However, with China’s economic growth in
the past two decades, imports have shifted
towards the Chinese. This became moreevident after the financial crisis in 2009,
when growth in advanced economies slowed
while in emerging economies such as China
and India, the pace accelerated.

2010-2015. However, production declined in2016 as high inventories caused a supply glut,
resulting in a price drop to $50 in 2016 from
more than $100 in 2013.

Advanced technologies and techniques
have made it possible for the US to extract
shale oil. As a result, US crude oil production
increased by approximately 72% between

The Future of Trade

17

Chapter 1: The Changing Nature of Global Trade

The International Energy Agency (IEA)
estimates that the US will become a net
exporter of crude oil by 2027, potentiallyreshuffling international trade flows andchallenging the existing suppliers, particularly
OPEC, which has controlled the oil market for
the last half century.
The Middle East, accounting for approximately
35% of global crude oil production, is expected
to remain the largest exporting block in thenext decade9. However, its crude oil export
volume could decrease due to rising domestic
consumption and investments in new refining
capacities that require crude oil as the primary
raw material. Governments across the Middle
East are looking to develop the downstream
oil sector to diversify their economies fromcrude exports towards more specialised
refining products. The refining sector currently
consumes about one quarter of the domestic
crude oil production and this is set to increase
with the addition of new refining capacities.
For instance, the Gulf Cooperation Council is
forecast to add around 1.5 million barrels per
day refining capacity between 2017-202110.

IEA estimates that
the US will becomea net exporter of
crude oil by 2027

IEA estimates that
there will be 50 million
electric vehicles onroads by 2025, up from
2 million in 2016
9
10

18

The global energy transition towards
renewable energy will also impact crude
oil flow. Although the transition towards
renewable energy production is slow, it isgaining momentum as the cost of renewableenergy falls to a level on a par with the energy
generated from fossil fuels. The signing of theParis Agreement could hasten this transition.
British Petroleum (BP) estimates that theshare of renewables in the primary energy mix
could increase to 10% by 2030 and 14% by
2040 from 4% in 2016. However, most of thisgrowth will be at the expense of coal, which
is forecast to decline to 23% in 2030 from
28% in 2016, mainly driven by China’s movetowards green energy. The global oil share is
expected to drop to 30% from 33% over thesame period.
Any change in the energy mix will take along time and developing economies suchas China and India will continue to remain
dependent on oil. The transportation sector
accounts for 63% of global oil demand.
Adoption of electric cars is still not highenough to make a significant impact on
global oil demand. The IEA estimates that
there will be 50 million electric vehicles onroad by 2025, up from 2 million in 2016. Thisis expected to reduce only 2.5 million barrels
per day or about 2% of global oil demand bythat time.
Although oil substitution is not imminent in
the next decade, the trade flow of crude oil
is expected to change. The US could becomea net exporter of oil. A slowdown in China’s
economic growth could lead to lower oil
demand whilst demand for oil could increase
from developing and emerging economies in
Asia and Africa. In emerging markets, demandfor oil could be high in countries along China’s
Belt and Road initiative as development oftransport infrastructure and industrialisation
pick up pace in these countries. Africa, a
net exporter of crude oil, will also witness
an increase in domestic demand driven byrising urbanisation, economic recovery, and a
growing need for electricity.

OPEC, OPEC Annual Statistical Bulletin 2017
APICORP Energy Research, An uncertain outlook for the refining sector in the GCC

The Future of Trade

Chapter 1: The Changing Nature of Global Trade

FIGURE 5

Crude Oil – Imports by Region
50%

40%

30%

20%

10%

0%

Asia Pacific (excluding China)

2016

2012

2008

North America

2004

2000

1996

1992

1988

1984

1980

Western Europe

China

Source: OPEC Annual Statistics

FIGURE 6

Share of Primary Energy by Fuel Type
100%

80%

60%

40%

20%

0%
1970

1980

Oil

1990

Gas

2000

Coal

Nuclear

2010

Hydro

2016

2030

Renewables

Source: BP World Energy Outlook

The Future of Trade

19

Chapter 1: The Changing Nature of Global Trade

IRON ORE
Demand for iron ore is closely linked with the global steel
industry, which accounts for about 98% of the world’s iron ore
consumption11. Growth in steel consumption is observed toclosely resonate with economic growth.
Australia, Brazil, and China are the threelargest producers of iron ore, accounting for
close to 70% of the global usable product.
However, Australia and Brazil are the major
exporters and together they comprise 80% of
global total. The majority of these exports are
directed towards steel producing countries
with high domestic demand. China, despite
being the third largest producer, imports ironore as local production is unable to meet thedemand of its steel companies.

The trade flow of iron ore also depends ontransportation costs. Steel manufacturers
prefer to buy iron ore from relatively
close producers to benefit from lower
transportation costs. Australia supplies moreiron ore to countries in Southeast Asia andChina, while Brazil mainly exports to Western
European markets. However, with the growing
demand from Southeast Asian countries,
Brazil also exports iron ore to countries suchas China and Japan.

FIGURE 7

Iron Ore Imports by Country

18%
Austria37%

4%

Brazil
China

8%
India
Russia14%

Others19%

Source: USGS11

CIRRELT, Dynamic Determinants in Global Iron Ore Supply Chain

20 The Future of Trade

Chapter 1: The Changing Nature of Global Trade

China alone accounted for approximately
70% of total global iron ore imports in
2016, rising from around 20% in 2001,
owing to the country’s growing steel
production. Crude steel production in
China soared to 808 million tonnes in2016 from 101 million in 2001.
The steep rise in steel production
resulted in an overcapacity in theindustry. China’s shift towards a
consumer centric economy, and its slow
economic growth, have reduced demand
for steel in the construction sector
which accounts for majority of the steel
consumption. Growing environmental
concerns have also led China to suspend
steel production. Estimates suggest thatbetween January 2016 and October
2017, China cut nearly 100 million tonnesof legal steel capacity and 120 million
tonnes of illegal low-grade capacity12.

Experts agree that Chinese steel production
has peaked and will plateau over the next
decade. However, the drop in China’s
steel production will be offset by higher
production in other Asian and Middle
Eastern countries. For instance, India plansto double its capacity to 300 million tonnes
a year by 2030, while Iran aims to export
20 – 25 million tonnes of steel by 2025.
Demand for steel in Vietnam, the largest
producer and consumer of steel in the
ASEAN bloc, is expected to grow by 15 18% over the next decade. This will increase
the import demand of iron ore as local
producers are planning to raise capacity tomeet demand.

FIGURE 8Iron Ore Imports
1600

80%

1400

70%

1200

60%

1000

50%

800

40%

600

30%

400

20%

200

10%

0

0%
2001

2005

2009

2013

Global Iron Ore Imports (million tonnes)

2014

2015

2016

China’s Share (%)

Source: Trade Map

12

REUTERS, Global steel recovery at risk from capacity ramp-ups outside China

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21

Chapter 1: The Changing Nature of Global Trade

FIGURE 9Iron Ore Trade Flows from Major Exporting Countries

Major hubs both current
and future

Current
major export
destinations
Possible export
destinations by
next decade

Source: Trade Map

If China’s Belt and Road initiative progresses
according to schedule, it could require an
estimated 150 million tonnes of steel, creating
new consumer markets for iron and steel.
This could provide an opportunity for China

to export its additional steel capacity andnew production to these countries. It could
also encourage domestic companies toexpand into these markets - thus driving
iron ore demand.

FIGURE 10

China Steel Production as % of Global Production
60%

1800
1600

50%
1400
1200

40%

1000
30%
800
600

20%

400
10%
200
0

0%
1996

2000

2004

2008

Global Steel Production (million tonnes)

Source: World Steel Association

22 The Future of Trade

2012

2014

China’s Share (%)

2016

Chapter 1: The Changing Nature of Global Trade

GOLD
Four countries – China, Australia, Russia and the US – accountfor around 40% of global gold production. China is the leading
producer and consumer. Gold demand in Greater China (China,
Hong Kong and Taiwan) increased by nearly 50% between
2010 - 2017. In 2017, China accounted for about one third of the
global gold demand.
Growing urbanisation and a rising middle
class population in China will further drive thedemand for gold in the next decade. Demand
for gold jewellery in the country is shifting from
affluent coastal areas to less affluent regions
in western and central China with economic
development picking up pace in these regions.
India is the second largest consumer of gold,
accounting for about one quarter of global
demand in 2017. Demand has slowed down
in recent years, mainly due to government
initiatives to increase transparency in the sector.
In the long run, these initiatives and policies are

expected to strengthen the economy and leadto a more transparent gold industry. In addition,
India plans to establish a spot gold exchange
which will enhance transparency in price setting
and drive demand. India’s burgeoning middle
class is also expected to drive the demand forgold in the next decade.
Gold demand and consumption are also
expected to significantly rise in other Southeast
Asian countries such as Indonesia, Vietnam,
Thailand, and Malaysia in the next decade, driven
by rising incomes and economic development.

FIGURE 11Gold Demand in Selected Countries
3500
3000
2500
2000
1500
1000
500
0
2010

2011

2012

Greater China

2013

India

2014

Americas

2015

2016

2017

EuropeSource: World Gold Council

The Future of Trade 23

Chapter 1: The Changing Nature of Global Trade

Gold is increasingly becoming a preferredinvestment commodity. As income grows
in China and emerging Asian markets,
the demand for gold as an investmentcommodity is also likely to increase. The
household debt-to-GDP ratio for gold
consuming countries such as India and China
is also low, indicating that people in those
two nations tend to save and invest morecompared to other advanced economies.
Chinese demand for physical gold bars andcoins increased by more than 70% between
2010-2017.

FIGURE 12Gold Demand by Segment
4,703
4,228
569
461

4,229

4,362

381
584

390
323

349

371
323

1,614

1,633

868
1,596

2,499

2,139

2,055

2,054

2010

2016

2014

2012

Jewellery

Investment

Source: World Gold Council

In 2017, China
accounted for around
one third of global
gold demand
24 The Future of Trade

4,062

Technology

Central Banks

1,232

2,136

2017

Chapter 1: The Changing Nature of Global Trade

FIGURE 13

Increase in Gold Reserves in Select Countries
2000
1800
1600
1400
1200
1000
800
600
400
200
0
2000

2008

2017

China

RussiaIndia

Kazakhstan

TurkeyMexicoSource: World Gold Council

Central banks around the world accounted
for about 10% of global gold demand in 2017,
up from 2% in 2010. Their attitude towards
gold has undergone a major shift since therecession in 2009. Having been large net
sellers of gold for two decades, central banks
in major emerging economies, such as China,
India and Russia, have purchased substantial
amounts of gold. This movement diversifies
their reserve assets by reducing theirdependence on US dollars. Major European
central banks have largely stopped sellinggold following the sovereign debt crisis in
Europe which made gold more attractive tothem than sovereign bonds.

Central banks aroundthe world accounted
for around 10% of
global gold demandin 2017, up from 2%
in 2010

Traditionally, gold formed a substantial
share of central bank reserves in developed
economies that were at the centre of trade
before the gold standard ended in 1971. The
trend of buying gold is expected to continue,
especially in emerging economies, and central
banks are expected to remain net buyers in
the next decade.

The Future of Trade 25

Chapter 1: The Changing Nature of Global Trade

GOLD TRADE HUBS
The shift in trade flow from West to East is also evident
by assessing the activity of the major gold trading hubs.
Traditionally, the global gold trading hubs have been in London,
Zurich and New York. Gold’s close bond with the financial
system has led to these centres emerging as prominent goldtrading hubs.
However, with rising demand from China
and India, trading hubs are also shifting
East. Currently, the London OTC Market, theUS futures market and the Shanghai Gold
Exchange (SGE) together comprise about
90% of global trading volumes. According
to World Gold Council (WGC) estimates, theLondon OTC Market itself accounts for 70%
of global trading volume.
Established in 2002, the SGE has evolved
into one of the leading gold-trading hubs.
In 2014, the SGE launched the Shanghai
International Gold Exchange (SGEI) to
provide foreign institutions and individuals
access to China’s precious metals market.
Unlike the London and the US futures
markets, which primarily depend on paper
gold contracts, the SGE is a purely physicalgold exchange.
Gold trade volumes at SGE have substantially
increased since its inception. It was hailed

Gold trading hubs are
moving East to meetgrowing demand
26 The Future of Tradethe world’s largest spot physical gold exchange
for ten consecutive years since 2007. In 2016,
SGE introduced ‘Shanghai Gold’, a new pricing
which cemented its position in the global
gold trade market. SGE is also partnering withinternational exchanges such as the DubaiGold and Commodities Exchange (DGCX) for
its yuan-denominated gold futures contract.
Interestingly, the focus groups noted that
SGE has started pricing gold in renminbi,
and not in US dollars. Many see this as a signthat renminbi could become an increasingly
important currency as a means of exchange
for doing business with Chinese and Asian
countries. The focus groups did not reach aconsensus on whether the renminbi would gointernational and replace the US dollar, but it
was speculated on as a possible outcome of
the Belt and Road initiative.

Chapter 1: The Changing Nature of Global Trade

FIGURE 14

Shanghai Gold Exchange – Trading Volume (tonnes)
30000

25000

20000

15000

10000

5000

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0

Source: Bullionstar

Other important gold trading hubs in Asia
include Dubai, India, Singapore and HongKong. Exchanges in these locations offer
spot trading facilities and future contracts.
Some have already established themselves
as a leading regional trading hubs, such as
Dubai in the Middle East and Singapore in
the ASEAN.

Over the next decade, demand for yuandenominated gold contracts will increase. The
Chinese Gold & Silver Exchange Society (CGSE)
and Hong Kong’s Gold Exchange are in talks
with Singapore, Myanmar, and Dubai to establish
a gold commodity corridor under China’s Beltand Road initiative. Such a corridor would
increase the turnover of yuan-denominatedproducts as much as threefold.

A gold corridor including
Myanmar, Singapore andDubai would increaseyuan-denominatedproducts threefold
The Future of Trade 27

Chapter 1: The Changing Nature of Global Trade

COTTON
After a decline in 2017, global cotton production improved
by about 15% year-over-year13. The global outlook forcotton is closely linked with the dynamics of the textile andapparel industries. The low cost, light weight and multiple
applications of various synthetic fibres have partly replaced
demand for cotton over the past few decades. However,textile and apparel industries continue to use it exclusively
and in combination with other fabrics.

Asia-Pacific accounts for close to 60% of
global cotton production. China and India
together account for more than 45%. The US
share, formerly leading, has declined overthe past few years due to low prices andthe recent cancellation of subsidy on cotton
farming.

Many Taiwanese-owned factories, formerly
based in China, are relocating to Vietnam.
Although the Chinese government is providing
manufacturing incentives to cluster textile
production in central and western China, thecountry is gradually shifting its focus fromlabour intensive to high-value added sectors.

China, Bangladesh and Vietnam accounted
for more than 37% of cotton imports in 2017.
Although India is a top producer of cotton,
its imports have also increased over the past
decade, owing to the growing demand fromthe domestic textile industry and exports
to flourishing textile markets in other Asian
countries.

Africa, particularly East Africa, is also fast
becoming a major player in the global appareland garments sector. According to a projection
by the UN, sub-Saharan Africa will have thehighest growth ‘in the working-age’ population
between 2015-2035. By 2035, the working age
population in the region is expected to be aslarge as that of China, which is more than 900
million people today. This massive labour poolis capturing the attention of several industries,
including textiles. Availability of labour, alongwith preferential access to the US markets
and favourable government initiatives, has
prompted many international companies toestablish manufacturing centres in countries
such as Ethiopia and Kenya.

China remains the world’s leading textile
market. However, in recent times, itscompetitiveness has been hurt by decreasing
labour availability and increasing costs ofproduction. As a result, other Asian economies,
namely Bangladesh, Vietnam, Myanmar,
Uzbekistan, and India, stand to benefit.

13

USDA, Global Cotton Production

28 The Future of Trade

Chapter 1: The Changing Nature of Global Trade

FIGURE 15

Cotton Production (in MMT)
30
26.1

25.3
24.2

25

22.7

21.9

20.4

20.4

20

15

10

5

0
2001

2005

India

2009

China

2014

US

Pakistan

2015

Brazil2016

2017

Rest of the world

Source USDA

Currently, 65% of US imports and 40%14 of
EU imports of textiles are controlled by APAC
countries (Australia, China, India, Japan, South
Korea and New Zealand). With the probablepartial shift of the textile industry to Africa
over the next decade, its export share in the
US and the EU will eventually increase. The
signing of the African Continental Free Trade
Agreement (AfCFTA) will also drive intraregional trade in cotton as Africa strives tobecome a global textile manufacturing hub.
Historically, the US and Europe have been
the major consumer markets for apparel,
accounting for more than 40%15 of the global
apparel industry. However, Asian economies
will dominate the global textile and apparelindustries in the coming decade owing to a
growing consuming class, rising disposable
incomes and urbanisation. By 2025, thecombined apparel market of China and India
is expected to outgrow the current markets of
the US and the EU.

The textile industry is often considered
one of the major contributors to global
warming. With growing awareness regarding
environmental and social sustainability, thedemand for eco-friendly raw materials is
gaining importance. As a result, demand fororganic cotton is growing compared to that ofconventional cotton.
Dependency on synthetic fibres is high in theapparel and textile industries, with polyester
accounting for more than 50%16 share of
the global textile industry. Introduction ofpolyester from recyclable materials will further
drive its adoption. Manufacturers too, arepreferring to use a mix of organic cotton and100% recyclable polyester. Other alternatives
such as regenerated fibres Monocel andLyocell also pose a threat to cotton.

RECP and its potential impact on textile and apparel trade
Indian Textile Magazine, Global textile apparel industry fortunes to depend on five major trends
16
Textile Excellence, Overcapacity Will Continue In The Global Polyester Market For Some Years
14
15

The Future of Trade 29

Chapter 1: The Changing Nature of Global Trade

FIGURE 16

Ready-to-Wear Exports from Selected Countries (USD billion)
35
30
25
20
15
10
5

2015

2016
2016

India

2015

Vietnam

2013

2009

2001

2005

0

Bangladesh

Source: Trade Map

FIGURE 17

China’s Cotton Exports to Bangladesh
and Vietnam (USD million)
2500

2000

1500

1000

500

Vietnam

Source: Trade Map

30 The Future of Trade

2014

2009

2005

2001

0

Bangladesh

Chapter 1: The Changing Nature of Global Trade

Currently, less than 1% of the global cotton
production is organic17. The majority of
it is concentrated in India, China, Turkey,
Kyrgyzstan, US, Pakistan, Brazil andUzbekistan. In terms of demand, Germany,
US, Switzerland, Spain and Belgium areamong the largest markets for organic
cotton. Realising the growing importanceof organic cotton, African countries suchas Burkina Faso, Mali and Benin are also
increasingly growing the crop.

Demand for cotton in the next decade will
shift towards countries in close proximity
to major consumers and where the labour
cost is. With the rise of its middle class, Asia
will be at the centre of the textile industry
over the next decade. There could possibly
be a rise in intra-regional trade with bothproducing and consuming countries being in
Asia. There would also be increased demandfor cotton from emerging African textile
markets, which would mainly serve the US
and the European markets.

The increase in demand for organic cotton
is due to increased pressure on the textile
businesses for ethical sourcing. 36% of theworld’s leading apparel brands have pledged
to use 100% sustainable cotton by 2025
and abide by standards such as Fair Tradeand the Better Cotton Initiative (BCI), or
independently verifiable standards such as
the Global Recycled Standard (GRS) or the
Recycled Claim Standard (RCS). Some ofthese global apparel brands include H&M,
Kering, M&S, Nike and Sainsbury’s.

36% of world’s leading
apparel brands havepledged to use 100%
sustainable cotton by2025
17

Textile Exchange, About Organic Cotton

The Future of Trade

31

Chapter 1: The Changing Nature of Global Trade

WHEAT
The global wheat market is largely driven by farm costs,
efficiency of supply chains and the proximity between the
producing and the consuming markets. China, India, Russia
and US are the top producers, accounting for nearly 47% of
the global wheat output. In terms of trade, US, Canada andRussia dominate the exports market, accounting for around
39% by value, while Indonesia, Algeria, Italy and Egypt are
the major wheat importers, accounting for more than 19%
by value. China and India mainly focus on attaining selfsufficiency in wheat production18.
Over the past two decades, the export market
for wheat has shifted more towards countries
in the Black Sea Region (BSR)19. The share ofthese countries in global wheat export has
significantly increased to more than 25% in2016 from just under 10% in 2000. Some of thedrivers for this growth are favourable climate,improved agriculture techniques, low freightrates, depreciation of local currencies andincreased investments in agriculture. The BSR’s
major export markets include countries in the
MENA bloc.

FIGURE 18

Top Wheat Producers (MMT)
31
29

28

55

56

60

62

96

87

94

122

126

130

132

2014

2015

2016

38
27
21
53
47

26
57

58

60

63

73

52
62

48

94
81

70

69

94

98

2001

2005

2009

2013

China

India

Russia115

Source USDA

18
19

Trade Map, Global Wheat Trade
Includes Russia, Ukraine, Kazakhstan, Romania, Bulgaria, Hungary and Serbia

32 The Future of Trade

US

CanadaChapter 1: The Changing Nature of Global Trade

About four decades ago, Russia wasdependent on the US for its wheat imports.
However, with 33 million tonnes of export in2017, Russia has become the leading wheat
exporter by volume. In 2017, the country
collected 83 million tonnes, the biggest harvest
in its wheat production history20. This bumper
harvest forced wheat prices to drop, creatingcompetitive pressures for US, Canada andAustralian wheat markets.
In 2017, Russia and Ukraine accounted for about
80% of the Egyptian wheat market, which
has historically been the major wheat export
market for the US. In December 2017, the U.S.
Wheat Associates announced the closure of
its office in Cairo and started focusing on the
Asian and Latin American markets21.
Recently, wheat markets in the US and Canada
witnessed flat growth, owing mainly to thecost advantages of wheat production in the
BSR countries. The withdrawal of the US
from the TPP is likely to negatively impact US
wheat exports to overseas markets, especiallyJapan. On average, Japan imports more than
three million tonnes of wheat from the US,
annually. The full implementation of the TPP
would result in cheap wheat imports from
Canada and Australia, thus putting US wheat
producers at a price disadvantage of morethan $200 million annually22.
Growing wheat exports from the BSR
countries also pose a threat to Australia’s
wheat exports to Southeast Asian markets. As
per the Australian Export Grains Innovation
Centre, the on-farm cost of grain productionis around US$93/tonne in Russia and US$102/
tonne in Ukraine. In Australia, the on-farm cost
is US$166/23. Indonesia, the largest market
for Australian wheat export over the past 15
years, is shifting towards Ukrainian wheat.
The Ukrainian wheat accounted for more than
23% of Indonesian wheat imports in 2017,
up from less than 1% in 2012. However, othermajor wheat-importing countries in Asia such
as Japan and Korea are mainly dependent
on Australia due to the superior quality of its
produce.

FIGURE 19

Top Wheat Exporters (MMT)
24

21

19
18

27

22

20

37
29

38

27
23

16

24

14

22

20

21

35

27

28

42

35

52

44

2016

2017

18

2001

2005
BSR

2009
EU

2014
US

Australia

CanadaSource: Trade Map

USDA Foreign Agriculture Service, Russia
US Wheat Associates, U.S. Wheat Associates to Close Cairo Office, Continue Regional Market Coverage from Rotterdam, Casablanca,
22
National Association of Wheat Growers, TPP-11 Puts U.S. Wheat Exports at Risk
23
Australian Export Grains Innovation Centre, Russia’s Wheat Industry
20
21

The Future of Trade 33

Chapter 1: The Changing Nature of Global Trade

FIGURE 20

BSR Exports in the Middle East and Asia (USD billion)
6
5
4
3
2
1
0
2001

2005

2009

2013

2014

2015

2016

2017

Source: Trade Map

BSR Export to Middle East

Wheat imports from the BSR countries are also
gaining popularity in the MENA bloc countries.
Owing to its water scarcity, the region is mainly
dependent on wheat imports to meet its
domestic consumption. Saudi Arabia, whichceased wheat production completely in 2016, isplanning to become one of the leading hubs for
Russian wheat exports in the Middle East. The
majority of Russian wheat in MENA is used tomake flatbread, which does not require specificquality parameters such as those needed fornoodles or sponge and dough bread24.

regarded as inferior to the wheat exported byAustralia, the EU, the US, and Canada. Hence,
the BSR’s production is mostly used for feeding.
For instance, around 60–65% (Kingwell, n.d.)of Ukrainian wheat met livestock consumption
demands in the Philippines, South Korea andIndonesia. In addition, some countries are moreaware about the protein content in wheat. For
instance, Egypt’s General Authority for Supply
Commodities (GASC) tightened its protein
content requirement for imported wheat by 0.5%
for all supplying countries in May 201725.

Russia is also becoming an increasingly crucial
supplier for Sub-Saharan Africa, which is
focussed on low-priced supplies. With a rising
population and an increase in urbanisation, thenext decade could witness higher demand fromthis region which could be met by wheat imports
from BSR countries.

Russia and Ukraine face high inland logistics costs
and limited port handling capacity. Despite a great
harvest, Russia could export only 33 million tonnes
through its Black Sea ports, owing to its poorroad and rail transport infrastructure. However,developments at its Black Sea port of Taman andthe construction of a new grain terminal in the
country’s Far East are expected to increase grain
exports by 30 million tonnes by 202226.

In Nigeria, wheat demand has surpassed thedemand for local staples such as cassava, millet
and yam. In Kenya, the wheat market is largely
driven by expansion in milling capacity andrising population. Other potential African wheatmarkets include Sudan, South Africa, Ethiopia,
Angola and Tanzania.
The grain market in BSR countries has its own
challenges. The quality and protein content
of the wheat supplied by these countries are

Australian Export Grains Innovation Centre, Russia’s Wheat Industry
UKArgoConsult, Prospects of Black Sea wheat in the Egyptian market
26
Reuters, Extra port capacity to boost Russia’s grain exports in 5 years
27
The Economist, Asian countries are eating more wheat
24
25

34 The Future of Trade

BSR Export to Asia

The below average global per capita wheat
consumption (26 kg compared to 76 kg annually)in Asia represents huge demand potential incountries such as Indonesia, Vietnam, Thailand,
Philippines, and Japan, among others27. A growing
population, a rise in income levels, and a shift
towards Western dietary patterns would further
boost Southeast Asian demand for wheat in thenext decade.

Chapter 1: The Changing Nature of Global Trade

IN SEARCH
OF THE NEXT
MANUFACTURING
HUB
CHINA
In the past two decades, China hasestablished itself as a leading global
manufacturing hub, based not only on its low
labour costs, but also on increasing qualityof production. The manufacturing sector has
played a key role in China’s economic growthby increasing productivity, creating jobs andincreasing the standard of living. However, as
the economy has flourished and per capita
income has grown, it is becoming difficult
for China to maintain its status as a low cost
manufacturing base.

The Chinese economy is also undergoing a
structural change. Once driven by exports,
it is becoming more reliant on domestic
consumption for growth. The focus of theChinese government has also shifted more
towards advanced manufacturing. Thisis evident from the ‘Made in China 2025’
strategy that focuses on upgrading thecountry’s manufacturing sector by using
advanced technologies.

The Future of Trade 35

Chapter 1: The Changing Nature of Global Trade

As China shifts towards more advanced
manufacturing, around 100 million labour
intensive manufacturing jobs could moveto other low cost countries28. Businessfriendly policies, availability of the required
skill set and the presence of physicalinfrastructure is imperative for a flourishing
manufacturing sector. Recently, some of theSoutheast Asian and East Asian countries
have introduced business reforms and areinvesting in infrastructure development.

China, too, is playing an active part in
infrastructure development in many of thesecountries through its Belt and Road initiative.
This section discusses some of the countries
which can strengthen their positions as low
cost manufacturing bases in the next decade.
It was noted across all focus groups that
China is investing heavily in countries linked
to Belt and Road. In Pakistan, China hasinvested $65 million to build the ChinaPakistan Economic Corridor, including theport of Lahore.

100m

Not surprisingly, the power shifts in Asia
have resulted in China having more tradeand investment relations with the rest of theregion than any other country.

Labour intensive
jobs could leave
China for other low
cost countries
FIGURE 21

China - Average Wage in the Manufacturing sector

8%$3,0006%$2,0004%$1,0002%$00%

Source: China Statistical Yearbook 2016
28

HBR, The World’s Next Great Manufacturing Center, 2017

36 The Future of Trade

Average Wage in Manufacturing Sector

2015$4,000

2014

10%

2013

$5,000

2012

12%

2011

$6,000

2010

14%

2009

$7,000

2008

16%

2007

$8,000

2006

18%

2005

$9,000

2004

20%

2003

$10,000

Yearly Growth (%)

Chapter 1: The Changing Nature of Global Trade

VIETNAM
Vietnam totalled $219 billion in exports in 2016,
six-fold its total in comparison with a decadeago. Vietnam has emerged as one of the mostcompetitive, export-oriented manufacturingdestinations in Asia Pacific. In addition to its
strategic location close to China, Vietnam’s
labour cost - at about $165.3 per month - isless than one half that of China’s $334.8 permonth29. This has prompted many labour
intensive businesses in China, such as textiles
and toys, to relocate to Vietnam.
Vietnam has a young and skilled workforce,with a median age of 30.7 years compared
to 36 in China. About 70% of the country’s
population falls in the working age bracket30.
Vietnam also scores higher than China on the
English Proficiency Index. At an average of
5-6% of its GDP, the country’s public spending
on education is higher than the average of low
and middle income global economies31.

related to the ASEAN and the Comprehensive
and Progressive Agreement for Trans-PacificPartnership (CPTPP), is expected to boost its
export earnings. Furthermore, agreements
like the Vietnam-EU FTA and the Regional
Comprehensive Economic Partnership (RCEP)
will help to further liberalise its economy.
Despite its growing exports, Vietnam
is dependent on imports, especially for
production machinery. Research suggests
the country should also develop its tradeinfrastructure and focus on improving thequality of education to attract advanced
manufacturing sectors.

Vietnam has also rolled out various incentives,
including tax breaks, to attract foreign
investments. At 20%, Vietnam’s effective
corporate tax rate is the lowest in the ASEAN
bloc. Government initiatives have improved
the country’s ranking on the ease of doing
business index. For 2017, Vietnam’s score of 68
put it ten points ahead of China’s 78. Vietnam’s
signing of numerous FTAs, such as those

6xVietnam’s exports
increased 6 times in
the last decade and iscurrently at $219bn
Emerhub, Reasons to invest in Vietnam
World Bank, Population ages 15-64 (% of total)
31
PWC, Spotlight on Vietnam
2930

The Future of Trade 37

Chapter 1: The Changing Nature of Global Trade

MEXICOWith wages rising in China, Mexico has thepotential to become an alternative low cost
manufacturing hub. About 80% of the goods
manufactured in Mexico are exported to theUS, making it an ideal destination for US
companies looking to shift production bases tonearshore locations.
In addition to low-wage costs and the location
advantage, the Mexican-manufacturing sector
also benefits from the NAFTA agreement
signed in the early 1990s by the US, Canada
and Mexico. The agreement removed tariffs
on a variety of products and facilitatedcross-border investment among these three
countries. Regional trade increased to morethan $1.1 trillion in 2016 from $290 billion in
1993, while FDI investments in Mexico from the
US jumped to $100 billion from $15 billion overthe same period.
Owing to increasing competition from China in
the early 2000s, Mexico has shifted its focus
from low cost manufacturing sectors suchas textiles to more advanced industries suchas automotive, electronics and aerospace. In
2016, automotive and electronics industries
comprised more than 40% of Mexico’s exports.
In addition, government incentives suchas tax benefits and promotion of industry
clusters, Mexico has one of the largest sharesof students opting for science related tertiary
education across the OECD countries32. A
substantial number of engineering and science
graduates has helped Mexico to develop as an
automotive and electronics hub.
Recent wage increases in China also provide
an opportunity for the development of sectors
such as textile. In the early 2000s, the averagecompensation for Mexican workers in the
manufacturing sector was nearly 60% morethan their Chinese counterparts. However,in 2015, the average wage was 11%less in
Mexico33. This has resulted in the developmentof textile hubs, mainly in the southern part ofthe country, where income is lower than that in
the north.
However, Mexico remains heavily reliant on the
US for its manufacturing efforts. Any adverse
outcome from the NAFTA renegotiationagreement could hurt Mexico’s position asa manufacturing hub. Moreover, due to its
location, the country can serve only as aregional manufacturing hub to North andSouth America.

80%of goods
manufactured
in Mexico areexported to the US
32
33

OECD, Mexico- Overview of Education System
Boston Consulting Group, Mexico vs. China: How two manufacturing hubs stack up

38 The Future of Trade

Chapter 1: The Changing Nature of Global Trade

MYANMAR
Myanmar’s industrial sector started gaining
traction following economic and political
reforms in 2011. Between 2010-2016, its totalexports increased at a CAGR of 7.4% to$11.6 billion in 2016, mainly driven by greater
exports of textiles, mineral fuels, and foodand beverages. Under the new investment law
passed in April 2017, foreign firms are entitledto a tax holiday in the first three to seven yearsof operation along with various incentives for
those investing under the Myanmar Special
Economic Zone Law of 2014 (Myanmar SEZ
Law). Furthermore, as part of the tradepreferences programme, in 2016 Myanmar was
granted the Generalized System of Preferences(GSP) by the US, allowing for duty-free exports
of about 5,000 products.

Although liberalisation efforts in Myanmar are
fast transforming its manufacturing sector,
its export and FDI numbers are still lagging
behind the regional competitors. One of thebiggest challenges facing Myanmar is theunderdeveloped infrastructure across the utility
and transport sectors. The challenges related
to the unstable political scenario, and slow
decision making by the government are major
issues for prospective investors. However, theupcoming investments in Myanmar through
China’s Belt and Road initiative, growing tradeliberalisation, and rising FDI are expected to
improve the country’s proposition as the next
low cost manufacturing centre within the
ASEAN bloc of countries.

With an abundant pool of workers atcompetitive wages of about $80 per month,
Myanmar has one of the lowest manufacturingcosts in Asia. This has made the country an
attractive destination for labour-intensive
industries, especially textiles and garments. For
instance, Europe-based H&M recently shifted
its sweater production facilities to Myanmar’s
Yangon from China. With garments accounting
for nearly 16% of the country’s exports in
2016, the Myanmar Garment Entrepreneurs
Association has set an export revenue target of
US$12 billion in 2020. However, skilled labour
is a concern. Although wages are low in the
country, labour productivity is weak compared
to its Asian peers.

Myanmar is expected
to be the next low cost
manufacturing centre
within the ASEAN bloc
The Future of Trade 39

Chapter 1: The Changing Nature of Global Trade

INDIA
As China’s low cost proposition loses
conviction, India is becoming an increasingly
relevant manufacturing destination. Withmega initiatives such as ‘Make in India’, thecountry aims to increase its manufacturing
GDP to 25% from the current 17%. The FDI
equity inflow, the launch of the ‘Make in India’
initiative in October 2014, was US$99.7 billion
until March 2017, an increase of over 60%
compared to the previous 30-month cycle.
Under the initiative, the government launcheda phased manufacturing programme aimed at
locally manufactured smartphones, while also
providing select duty and tax incentives to
Indian manufacturers. In addition, to boosting
manufacturing of electronics, the government
will provide a capital subsidy of up to 25% forten years.

been reduced to 25% with effect from AY 20182019, to boost exports. Duty drawbacks andduty remission schemes are also in place.

Currently ranked at 100, India has improved its
ranking on the ease-of-doing-business index.
The government has launched online portals
such as eBiz, providing one-stop clearance
programmes for investment proposals. As aboost to the manufacturing sector, the Central
Board of Direct Taxes (CBDT) has entered into
advance pricing agreements (APA) to eliminate
compliance restrictions and ease investment.

Infrastructural developments are boosting
manufacturing and trade, as well. These
include the development of industrial parks inevery state, 21 new nodal industrial cities, andSpecial Economic Zones to promote a more
liberal regime for manufacturing investment.
The government is also developing various
industrial corridors to foster logistics andmake the country a hub for both domestic andinternational markets. For instance, the 1,483
km long Delhi-Mumbai Industrial Corridor isbeing developed as a global manufacturing
and investment destination. Under thisproject, the government has launched eight
investment regions as National Investment andManufacturing Zones.

Furthermore, with the implementationof GST, India has become a single tax
market, improving operational uniformity,
competitiveness and the ease of doing
business among manufacturers and traders.
Corporate tax for domestic companies has also60%

Increase of FDI equity
inflow between 20142017 in India

40 The Future of Trade

Although not the cheapest within the
ASEAN, India’s labour cost is about one
third that of China. According to the World
Bank, more than 12 million young people
ages 15-29 years, are expected to join India’s
labour force every two years over the next
two decades. This demographic dividend
as well as various skill building initiatives,
such as the Skill India Mission Operation,
Skills Acquisition and Knowledge AwarenessLivelihood Promotion (SANKALP) scheme andthe Skills Strengthening for Industrial Value
Enhancement (STRIVE) scheme are the major
drivers for manufacturing in India.

However, there still needs to be significant
development in the structural and economic
policies related to land laws, labour laws,
regulatory roadblocks and other logistics
challenges before India becomes a global
manufacturing destination.

Chapter 1: The Changing Nature of Global Trade

INDONESIA
Indonesia is the largest economy in the ASEAN
region, accounting for more than 36% of theregion’s GDP34. As the country progresses
beyond its agriculture predominance, its
manufacturing sector’s contribution to GDP
increased to 23%35 in 2017, showcasing a vastpotential to become the next manufacturing
powerhouse in Asia. In 2016, Indonesia wasranked 19th on the Global Manufacturing
Competitiveness Index and by 2020, it is forecast
to rank 15th36. A working age population of
more than 180 million, competitive wages(nearly one-third of China’s) and rising foreign
investments are boosting its manufacturingsector. A rapidly growing middle class and oneof the highest rates of GDP per capita in theregion (at $3,570) are also boosting domestic
demand of its manufacturing sector37. Whilefood and beverages, and the automotive
industry account for major shares in Indonesia’s
manufacturing sector, manufacturing of labourintensive commodities such as toys, textiles andbasic electronics are gaining prominence andcompeting with Chinese products38.
Between 2015 and 2017, the Indonesian
government launched more than 15 reform
packages to promote a conducive businessenvironment through easy licensing, labour
regulations, logistics costs and easy access,etc39. For instance, the average number ofannual tax payments that a firm is required tomake was cut down to 43 in 2017 from 65 in
201540.

In addition, various trade agreements, suchas RCEP and the Indonesia-European Free
Trade Association are under negotiations andexpected to bring many manufacturing andtrade benefits to those looking to invest inIndonesia.
Although Indonesia has been ramping up efforts
to boost its manufacturing competitivenessthrough deregulation, the sector still faces
significant challenges such as government
bureaucracy, difficulties in accessing credit,
regional competition, inadequate infrastructureand high logistics costs.

Indonesia is thelargest economy in
the ASEAN region,
accounting for morethan 36% of theregion’s GDP

The government has built 70 industrial zones toprovide a three hour investment express service
to facilitate foreign investors with incentives ofduty exemption on the import of machines andincome tax reduction under specific categories41.

European Commission, Countries and Regions – Indonesia
World Bank, Manufacturing, value added (% of GDP)
Deloitte, Global Manufacturing Competitiveness Index: Country rankings
37
World Bank, GDP per capita (Current US$)38
Oxford Business, Indonesia’s industry boosted by widening markets and easing imports
39
Indonesia Investments, Indonesia’s 16th Economic Policy Package to Focus on Investment
40
Indonesia Briefing, Indonesia’s Investment Outlook for 201841
Indonesia Briefing, Indonesia’s Investment Outlook for 2018
34
35

36

The Future of Trade

41

Chapter 1: The Changing Nature of Global Trade

AFRICAN ECONOMIESAt the cusp of graduating from its low cost
manufacturing status, China is expected tofree up nearly 100 million labour-intensive
manufacturing jobs between 2016 - 2030,
leading to opportunities for African countries
as well. Our research shows that China
continues to aggressively invest and build

ports in Africa, particularly in Kenya, a major
export hub with a stable government. Likewise,
Ghana and Nigeria are becoming increasingly
attractive hubs for Chinese investments andfirms. The focus groups believe that in a 10 year
time frame, West Africa will start seeing thebenefit of China’s investment.

KENYA
Kenya, the fifth largest economy in subSaharan Africa, has one of the largest
manufacturing sectors in Eastern Africa.
However, its manufacturing growth has
remained flat for more than a decade. To offset
this status and transform the country into
an industrial hub in Africa, the government
launched the industrial transformation
programme (2015–2025) in 201542.
Leveraging Kenya’s rich natural resources andeasy availability of various raw materials, thegovernment aims to boost local and export
manufacturing competitiveness across agroprocessing, textiles and apparels, timber,chemicals, iron and steel, and the leather
industry. To achieve this, it is taking initiatives
to develop industrial parks, export processing
zones, (EPZs) and sector specific projects.
In 2015, Kenya launched a Special Economic
Zones Act43 offering various fiscal incentives,
infrastructure capabilities and duty redemption
benefits. For instance, VAT exemption on all
supplies of goods and services to enterprises,

and reduction in corporate tax to 10% from30% for ten years of operation and 15% for the
next ten years44. In addition, being a memberof the East African Community (EAC) and theCommon Market for Eastern and Southern
Africa (COMESA), Kenya enjoys preferential
tariff rates45, 46. Forward looking agreements
such as EU-EAC EPA, Tripartite Free Trade Area
(TFTA) and AfCFTA are expected to boost thecountry’s regional and international foothold.
With the garments sector accounting for
more than 60% of total exports and 80% of
employment within export-processing zones
in Kenya, the country is becoming one of the
major centres for apparel sourcing in East
Africa47, 48. Since the renewal of AOGA in
2015, the textile apparel sector is expected
to maintain its stance as a growth engine forexports by granting duty free access to the
US market for more than 6,400 products49.
Furthermore, to reduce reliance on textile
imports, in early 2018 the government
announced plans to launch biotechnologicalproduction of cotton by end of 201850.

Ministry of Industrialization and Enterprise Development, Kenya’s Industrial Transformation Program
KPMG, Analysis of Special Economic Zones Act 2015
Overseas Development Institute, Manufacturing in Kenya: features, challenges and opportunities
45
Burundi, Kenya, Rwanda, Tanzania, and Uganda
46
The Common Market for Eastern and Southern Africa is a free trade area with nineteen-member states stretching from Libya to Swaziland
47
Export Processing Zones Program, Annual Performance Report 2016
48
Export Processing Zones Program, Annual Performance Report 201649
Export.gov, Namibia - Market Opportunities
50
Strategic Intelligence Service, Kenya To Create Over 50,000 Jobs In Textile Industry Through Biotechnology Cotton Production By End Of 2018
42

43

44

42 The Future of Trade

Chapter 1: The Changing Nature of Global Trade

Kenya is the third largest livestock holder
in Africa and has significant prospects indeveloping its upstream leather industry toboost production and exports of handbags andfootwear. With about 90% of Kenya’s leather
exports being in raw and semi processed forms,
the processing of finished leather into shoemaking can replace US$86 million in annual
shoe imports51. There is also potential for highvalue added speciality products, targeting
US and EU customers, and finished leather,targeting Chinese and EU markets52. However,operational issues such as the low quality ofhides, scarce availability of designs, and poor
labour skills continue to plague the sector.

Kenya needs to address quite a few of
its shortcomings before it can become amanufacturing hub in Africa. Underdeveloped
infrastructure, utilities and low educationlevels lead to higher cost of factory operations
and labour training. This high cost of labour(US$160)53, transport and other overheads
are increasing production costs by 20%
compared to low cost Asian manufacturers.
Limited access to export markets and lackof pro market reforms, among others, arealso challenging the potential of Kenya’s
manufacturing sector.

TABLE 1

Snapshot of the Upcoming Manufacturing Countries
Country

Vietnam Myanmar Bangladesh Indonesia India Kenya Mexico

Minimum monthly
wage ($)

16555

8056

6557

10058

11059

16060

280

Working age population(% of total population)61

70%

67%

55%

67%

66%

56%

66%

FDI Inward Flow2016 ($ bn)62

12.6

2.2

2.3

2.6

44.4

0.4

26.7

Average Real GDP growth
per year (2012-2017)

6.2%

7.2%

6.7%

5.1%

7.2%

5.5%

2.5%

Logistics Performance
Index (Rank across 160
countries)63

64

113

87

63

35

42

54

Manufacturing (as% of GDP64)

16%

23%

18%

21%

17%

10%

19%

Ease of Doing Business
Ranking (Rank out of 190)65

68

171

177

72

100

80

49

Effective Corporate
Tax Rate %66

20%

25%

25%

25%

35%

30%

30%

Regulatory
quality score67

35.1

18.8

22.1

50

41.3

41.8

64.4

51
Ministry of industrialization and Enterprise Development, Kenya’s
Industrial Transformation Program
52
World Bank, Accelerating Kenya’s Leather Industry
53
Kenya Association of Manufacturers, Manufacturing Priority Agenda
2018
54
Ministry of industrialization and Enterprise Development, Kenya’s
Industrial Transformation Program
55
Vietnam Briefing, Vietnam: Minimum Wages on the Rise in 2018
56
Asia Times, Minimum wage war in Myanmar
57
South Asia Business News, Myanmar, Bangladesh, Cambodia,
Djibouti Have World’s Lowest Labour Costs
58
Rappler, FAST FACTS: Minimum wage in ASEAN countries

HKTDC, Make in India: Comparative Production Costs of Selected
Indian States
Kenya Association of Manufacturers, Manufacturing Priority
Agenda 2018
61
World Bank, Working age population
62
UNCTAD, Country Factsheet
63
World Bank, Global Rankings 2016
64
World Bank, Manufacturing Value Added (% of GDP)
65
World Bank, Ease of Doing Business
66
KPMG, Corporate Tax Table
67
World Bank, World Governance Indicators 2016
59

60

The Future of Trade 43

Chapter 1: The Changing Nature of Global Trade

COMMODITYTRADE INDEXThe Commodity Trade Index (CTI) is a
new measurement which assesses therole of ten key commodities trading hubs
within the global commodity trade. The
index also looks ahead at which global
locations can expect to maintain theirstatus as trading hubs. It incorporates
ten indicators to produce an index score
for US, Netherlands, Singapore, UK, UAE,
Switzerland, Hong Kong, China, South
Africa and Nigeria.

Commodity
endowment factors
4.
5.

Tonnes of oil exported annually
Hub’s share of global commodity tradefor coffee, grains, sugar, gold, diamonds,
soya beans, tea, cotton, silver, animals andanimal products, and plastic
Natural resource rents as a share of GDP

The ten indicators analysed are:6.

Locational and trading
partner factors

Institutional
factors

1.
2.
3.

Headquarter locations of majorcommodities trading houses
Proximity to markets (based oncommodity export data)
Commodity trade partner tariffs on
primary goods

44 The Future of Trade

7.
8.
9.
10.

Financial services infrastructure
Attractiveness of the tax regime
Strength of contract enforcement
Ease of trading across bordersChapter 1: The Changing Nature of Global Trade

In order to create the index, the data for each indicator were standardised and scaled within the
0-100% range. Data was also adjusted for outliers and then combined to create the composite
index. Each of the three sub-categories is given equal weighting. The CTI is looks at three major
factors important to commodity trade via ten individual sub-indicators. The data behind theindicators are taken from renowned sources such as Comtrade – the UN’s international trade
statistics database – and The World Bank, ensuring the robustness of our findings.

TABLE 2

Commodity Trade Index results
Country

Commodity
endowment
factors

Locational andtrading partner
factors

Institutional
factors

Index

Rank

UAE

74%

33%

64%

57%

1

US

44%

37%

86%

56%

2

UK

24%

48%

80%

50%

3

Netherlands

6%

83%

57%

49%

4

Switzerland

11%

68%

66%

48%

5

Singapore

1%

42%

87%

43%

6

Hong Kong

11%

23%

83%

39%

7

China

38%

9%

49%

32%

8

Nigeria

39%

2%

28%

23%

9

South Africa

15%

8%

31%

18%

10

The UAE ranks first on the CTI, propelled byits substantial natural resource endowment.
The Middle Eastern trading hub ranks at
the top for the commodity endowment
sub-index, with a score of more than 70%.
However, the hub does receive a weaker
score for locational and trading partner
factors, as well as institutional factors. The
top importer of UAE commodities is India,
while Switzerland, Belgium and Hong Kong
also feature in the top ten export destinationsof UAE commodities. These are all locations
which take a considerable amount of time
to reach from the Middle East. The hub’s
institutional sub index is also weak, relative tothe other nine hubs, at 63.9%.

1#

The UAE ranks
first on the CTI,
propelled byits substantial
natural resource
endowment

The US ranked second on the CTI, with anindex score of 55.9%. This high score isdriven by the fact that US is the location

The Future of Trade 45

Chapter 1: The Changing Nature of Global Tradeof choice for the headquarters of manyof the world’s largest commodity trading
companies, contributing to the hub’s score on
the locational and trading partner sub index
of 37.5%. The nation also has strong financial
services infrastructure, ranking at second placein the world for access to credit. US is also amajor global player in exporting oil and otherprimary commodities.
Following just behind US, the UK has a scoreof 50.5% on the CTI, reflecting its attractive
financial services infrastructure and low
tariffs of trade partners. These strong factors
represent the nation performs well on boththe commodity endowment factors sub index
and the locational and trading partner factors
sub index, with scores of 23.9% and 47.9%
respectively. The UK currently experiences notariffs on its commodity exports to most of its
top trading partners, due to its EU membership.
Ranking fourth out of the ten countries
analysed for the CTI, the Netherlands has
a score of 48.8%. A particular strength the
Netherlands can boast is that it is close to
the importers of its commodities. The largest
importer of Dutch commodities is neighbouring
Germany, followed by Belgium and UK.
Another strength of commodities trading in the
Netherlands is the brief transaction times andlow costs associated with the logistical process

46 The Future of Tradeof exporting and importing goods. As a result,the hub scores 57.1% for the institutional factors
subindex.
Switzerland has a CTI score of 48.5%, driven
by high scoring locational and trading partner
factors. The nation is headquarters of fourof the world’s largest commodity trading
companies, and trades commodities withcountries with low tariff rates. Therefore, thelocational and trading partner subindex for thenation is 68.0%. Switzerland also scores 10.9%
for commodity endowment and 66.4% for
institutional factors.
Singapore ranks sixth, with a CTI score of
43.4%. The Southeast Asian hub benefits froman attractive tax regime, and fast and costeffective enforcement of contracts, whichmakes it an appealing centre for businesses.
However, Singapore cannot compete with thenatural resource giants such as the UAE when it
comes to commodity endowment factors.
Similar to Singapore, Hong Kong is limited
by its lack of natural resources available toextract. However, the region is strengthened
by its institutional factors, including a highly
attractive tax regime, meaning that theinstitutional subindex score is 83.2%.

Chapter 1: The Changing Nature of Global Trade

China places eighth out of the commodity
trading hubs analysed. The country is restrictedby relatively weak institutional factors, with an
institutions subindex of 49.1%. Also, China isa long distance from the top importers of its
commodities, with the top importer of Chinese
commodities being the US. China comes inthe top half of the ten hubs for the commodity
endowment subindex, with a score of 38.0%,
reflecting its high share of global trade for key
commodities, including coffee, tea and cotton.
Nigeria ranks ninth, with poor scores forlocational and trading partner factors (2%) andinstitutional factors (28%). However, the African
nation does have the third highest score outof the ten hubs for commodity endowment
factors. Nigeria exports a large amount of oileach year, second only to UAE out of the ten
countries in the CTI. Natural resource rents
made up 5% of GDP in 2015.

three subindexes, US places second overall on
the index. However, if trading companies arelooking for a hub with strong institutions whichfacilitate businesses, then Singapore is the top
location. The CTI also revealed the importanceof location for commodities hubs, with
European countries in particular (such as the
Netherlands) benefitting from a close location
to their commodities trading partners.

South Africa has the lowest score out of theten hubs analysed, with a score of 18.1%. The
country’s biggest strength is its endowmentof commodities, but the total score for naturalcommodities factors is still only 15%.
Overall, the results from the index show that
the UAE is the top hub for commodities tradedue to its very high score for natural resource
endowments. With high scores across all

US is the location of
choice for many of theworld’s largest commodity
trading companies
The Future of Trade 47

Chapter 1: The Changing Nature of Global Trade

CONCLUSION
This report analyses the current state of global trade with aparticular focus on the role of digitalisation and commodity
trade. Looking at trading hubs for commodities, the report also
focusses on which locations are best prepared to succeed in the
new trading environment. The Commodity Trade Index (CTI) looks
at ten countries across four continents and evaluates each statebased on three large groups of factors: commodity endowment,
institutions and location. The results show that UAE is the top
hub for commodities trade due to its very high score for natural
resource endowments. The US and the UK rank second and third,
respectively, scoring highly among the institutional factors.

Indicator

Summary

SourceYear

Locational and trading
partner factors

Headquarter locationsof major commodities
trading houses

Location of global and regional headquarters of thelargest commodities trading companies are analysed
and used to assign points to each hub.

Various commodities
trading companies
websites

2018

Proximity to markets (basedon commodity export data)

The sum-product of the share of each hub’s commodity
exports by trading partner and distance to trading
partner is calculated and then assigned an index value.

Commodities export data:
Comtrade
Distance data: CEPII

2016

Commodity trade partner
tariffs on primary goods

The sum-product of the share of each hub’scommodity exports by trading partner and eachtrading partner’s average tariff on primary goods
is calculated and then assigned an index value.

Commodities export data:
Comtrade
Primary goods tariff data:
World Bank

2016

Commodity
endowment factors

Tonnes of oil exported annually

Total annual crude oil exports by weight, by hub

Comtrade2016

Hub’s share of global soft
commodity trade for key
commodities

Total annual coffee, grain, sugar, gold, diamonds,
soya bean, tea, cotton, silver, animals and animal
products and plastic trade by value, by hub

Comtrade2016

Natural resource rents as ashare of GDP

Total natural resources rents are the sum of oil rents,
natural gas rents, coal rents (hard and soft), mineral
rents, and forest rents. Estimates are calculated as thedifference between the price of a commodity and theaverage cost of producing it.

The World Bank

2015

Institutional
factors

Commodity Trade Index (CTI) data sources

Financial services
infrastructure

The strength of credit reporting systems and theeffectiveness of collateral and bankruptcy laws infacilitating lending are used to analyse hubs.

The World Bank Doing
Business indicatorsGetting Credit

2017

Attractiveness of the
tax regime

Analyses the taxes and mandatory contributions thata medium-size company must pay or withhold in agiven year, as well as measures the administrative
burden in paying taxes and contributions.

The World Bank Doing
Business indicatorsPaying Taxes

2017

Strength of contract
enforcement

This indicator looks at the time and cost for resolving acommercial dispute through a local first-instance court,
and the quality of judicial processes index.

The World Bank Doing
Business indicatorsContact Enforcement

2017

Ease of trading acrossboarders

Measures the time and non-tariff costs associatedwith documentary compliance, border complianceand domestic transport.

The World Bank Doing
Business indicatorsTrading across Borders

2017

48 The Future of Trade

CHAPTER 2:

THE
IMPACT OF
DIGITALISATIONThe Future of Trade 49

Chapter 2: The impact of Digitalisation

At a time where digital is driving our
economies, growth and productivity, ourresearch revealed that the adoption of digitalstrategies by global importers and exporters
presents a profound shift in the Future of Trade.
With more than $4 trillion in goods shipped each year, global trade has
not witnessed much innovation since the introduction of the shipping
container in the 1950s. Goods are still transported by sea or land.
Despite a digital revolution across sectors, cross-border trade is still
synonymous with paperwork, from letters of credit to product quality
documentation and bureaucracy.
Furthermore, the physical movement of large volumes of paper
documents leaves the window open for fraud, human error andunplanned delays.
But global trade, according to our discussions, is at the cusp of a digital
revolution. Blockchain is seen as the game changer that will provide
a faster, more secure and effective way to handle document approval
workflows in order to move goods across international borders. In fact,
experts claim the cost savings could be enormous. For example, it isestimated that the costs of trade documentation makes up 20% of theactual physical transportation costs. The adoption of Blockchain would
eliminate a large degree of paper-based documentation required whiledriving speed and efficiency.
Still in its infancy, Maersk and IBM recently announced a joint venture toprovide more efficient and secure methods for conducting global tradeusing Blockchain technology. The initiative aims at bringing the industry
together – from manufacturers to shipping companies or government
authorities – on an open global trade platform that offers a suite ofdigital products and integration services. This would include ability
to monitor cargo in real time, as well as the speed with which cargo
shipments can be processed.

50 The Future of Trade

Chapter 2: The impact of Digitalisation

THE VALUE
OF DATAOur research extensively assessed the role of data.
According to McKinsey & Company’s “Global Flows in a
Digital Age,” GDP growth could increase between $250
billion to $450 billion per annum if and when data flows
freely. And countries that support cross-border data flows
are reaping a 40% economic benefit over less connected
countries. At the same time, usage of data and dataflow
across borders is becoming increasingly controversial.
Over the past decade, companies have seen
exponential growth in the volume, variety
and speed of data. Companies are becoming
aware of the opportunities embedded intheir enterprise data, and governments arecatching up, looking to regulate usage throughstrengthening of data privacy controls, andenforcing enhancement of technology for
management of personal data.
Google, Facebook, Amazon and Uber allknow more about citizens than authorities
do. A case in point being, the EU General
Protection Regulation (GDPR) which is being
implemented this year, is considered the mostimportant change in data privacy regulationin 20 years. Focus groups were in agreementthat GDPR is one of many regulations on datato come – not just to ensure privacy of citizens,but also to nationalise data and control how it
is used in terms of trade.

In fact, governments are realising that data
must be viewed as a natural resource, likeoil. This means data collection and analytics,
servers, and transmission lines are as integral
to economic interests as offshore wells,
refineries and tankers.
As more trade evolves, and virtually every
company becomes a digital business, they will
be navigating a world where data nationalism
guides policies and requires the developmentof nation specific strategies.
Digital is also changing how payments are
made. In a world where currency is data,businesses are seeking alternative ways suchas PayPal, Swype, and Square – and crypto
currencies – to complete trade transactions,while governments are struggling to keep up
with regulation.

Governments are realisingthat data must be viewed asa natural resource
The Future of Trade

51

Chapter 2: The impact of Digitalisation

THE DIGITALEVOLUTION
The role of the development in digital technologies
as the single-most important phenomenon of the past
two decades cannot be overstated. From a humble
base of less than 1% of the global population, the shareof Internet users has risen exponentially over the past
two decades. Today, almost one half of the world’s
population is on the Internet.
In 2017, around 47% of the world population
had access to the Internet, more than double
the 21% recorded just a decade earlier. Mobile
phones and other portable devices havebrought Internet access into remote areas of
the world where a fixed line broadband accessinfrastructure does not exist. This is an increaseof tremendous scale – the slow pace in growthof the global GDP or global consumption percapita levels cannot even be compared on thesame scale.
Ambitious projects in the private sector push
for ever further increases in Internet reach.
For example, ‘Project Loon’ aims to provide
communities in underserved areas with
Internet access using high altitude balloons
floated in the stratosphere1. Given these
efforts, it is reasonable to assume that theInternet coverage ratio will increase further inthe coming years. This increase in Internet use
means that more people will be connectedto physical and virtual marketplaces around

The increasing Internet
coverage ratio will growcross-border trade1

https://x.company/loon/

52 The Future of Tradethe world, thus leading to further expected
growth in trade volumes.
The latest regional data, shown in Figure 2,
demonstrate impressively how the relative
differences in Internet coverage between
world regions have shrunk over the past two
decades.
In 1996, the Internet was still in its infancy,
hardly available in many parts of the world
for private or commercial use, with the
exception of North America, where the shareof users already stood at 15%. Ten years later,
however, the Internet had conquered most of
the US and Canada, and a handful of otherregions also had a sizeable share of their
populations connected.

Chapter 2: The impact of Digitalisation

FIGURE 1

Internet Users as Shareof Population
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%

2017

2016

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

0%

Source: World Bank World Development Indicators, Cebr analysis

FIGURE 2Internet Users as Share of the Population
by Region, Selected Years
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1996

North America

2006

Europe & Central Asia
Middle East & North Africa

2016

Latin America & Caribbean
South Asia

East Asia & Pacific

Sub-Saharan Africa

Source: World Bank World Development Indicators, Cebr analysis

The Future of Trade 53

Chapter 2: The impact of Digitalisation

But the differences between regions were still
immense, with South Asia and Sub-SaharanAfrica both reporting only 3% of their population
online. This had changed drastically by 2016, with
the introduction and popularity of mobiles. The
number of Internet users has risen almost ninefold in South Asia, and more than seven-fold in
Sub-Saharan Africa, far outstripping growth inEuropean and American markets. Latin America
and East Asia & Pacific, meanwhile, both reportthat more than 50% of their populations hadaccess to the Internet in 2016. The Middle East
& North Africa have seen their shares of Internet
users quadruple in the decade to 2016.
This is not to say that digitalisation has run its
course. To the contrary, there is still a long way
to go until the world is fully digitalised. The miles
covered on the road to full digitalisation varyconsiderably from region to region.
Going forward, we expect further growth in thenumber of Internet users across all regions as well
as further convergence as advanced parts of thedigital world catch up. At the same time, firms andgovernments are preparing for the launch of thenext generation of mobile Internet, 5G.

Blockchain is a immutable digital ledger
system implemented in a distributed
fashion (without a central repository)
and usually without a central authority.
At the most basic level, they enable
a community of users to record
transactions in a ledger public to that
community and no transaction can bechanged once published.

4x

increase in Internet use
in the Middle East andNorth Africa between
2006 and 2016
With drastically increased speeds, the industry
is getting ready for the next step up in mobile
connectivity, paving the way for a newgeneration of technical innovations ranging
from autonomous connected vehicles to theInternet of Things.
Blockchain, which can be either private or
public, provides a secure, decentralised recordof transactions.
Focus groups agreed that digital ledger
technology is making inroads into goods
transport through financial instruments,
such as letters of credit, and through thedigitalisation of traditional trade and shipping
documents. The result is that participants
would benefit from the simpler, automatedworkflows and smart contracts.
The two main security features of Blockchain
are secure data exchange and a tamperproof
record of transaction, making it an extremely
safe way of communicating and storing data
for all participants. Blockchain can therefore
be used to build trust between unknown
parties and overcome the need for a central
authoritative institution at unrivalled pace.

Blockchain will lead to simpler,
automated workflows and smart
contracts driving trade at pace
54 The Future of Trade

Chapter 2: The impact of Digitalisation

20%

An industry expert in one focus grouphighlighted that Blockchain today is where theInternet was ten years ago, therefore making
it difficult to determine the exact value its
implementation would deliver to global trade.

of the $1.8
trillion cost of
global trade
is related topaperwork anddocumentation

However, a study by Maersk found that the costof trade globally is roughly about $1.8 trillion.
The study further found that 20% of that cost is
related to paperwork, indicating that significant
savings could be achieved. According toestimates by the World Economic Forum,
reducing supply chain barriers to trade could
increase global GDP by nearly 5%, and tradevolumes by 15%2.
Increased connectivity and Blockchain are
just two examples showing how digital cantransform global economies and, the World
Economic Forum estimates that the cumulativevalue of digital transformation in the 10 sectors
shown in Figure 3 stands at almost $13 trillion.
Scaling this up across all industries, the value ofdigital transformation to the global economy
could reach more than $45 trillion in the decadeto 2025.

FIGURE 3

Billions

Cumulative Value of Digitalisation to Industries, 2016-2025$6,000$5,000$4,000$3,000$2,000$1,000$0Consumer

Logistics

Electricity

TelecomMedia

Oil & Gas Automotive

Aviation

MiningChemistry

Source: World Economic Forum, Digital Transformation Initiative

2

Enabling Trade – Valuing Growth Opportunities – World Economic Forum (2013)

The Future of Trade 55

Chapter 2: The impact of Digitalisation

THE INDUSTRYDIGITALISATION INDEXIn an increasingly connected world, the spread of technology and data is having a significant
impact on GDP. This is why we are looking at how businesses across different sectors are taking
advantage of digital, as well as their progress in doing so.
The Industry Digitalisation Index (IDI), independently commissioned, which was established in2016, tracks businesses’ digitalisation progress across sectors, and spans four separate functionsof digitalisation in the processes of trade and general business activities. These four functions are
outlined below:

Upstream supply
chain phase

Production
phaseThis component studies how much businesses
are digitalising their practises when it comes toconnecting with external suppliers. Measures
such as the share of enterprises purchasing
online from suppliers, or the extent to which
enterprises use the Internet to access external
information, are included.

This measures the extent to whichbusinesses are digitalising their internal
processes. This incorporates the share ofbusinesses using automated exchangesystems, the use of cloud computing and big
data, or the share of enterprises using open
source operating systems.

Downstream supply
chain phase

Digitalinfrastructure

A measure of how much businesses are
digitalising their practises when it comes toconnecting with their clients – be it consumers,
other businesses, or governments. Examples
include the share of enterprises selling online
or the share of enterprises providing theoption of online ordering or reservation totheir customers.

This final component looks at progress made bybusinesses in setting up a digital infrastructure
to support the digitalisation of the production
phases covered in the rest of the index. Specifically,measures of connectivity are studied, such asbroadband access and the share of employees whoare provided with a portable device that allows
them to access the Internet.

56 The Future of Trade

Chapter 2: The impact of Digitalisation

Looking at the four different components ofdigitalisation in the processes of trade andgeneral business activities, there is a high levelof variability in the IDI. Digital infrastructure
scores an index level of 79, where 100 is fully
digitalised. In contrast, downstream supply
chain scores only a 23.
The high digital infrastructure index resultsfrom 96% of enterprises having broadband
access and 94% of businesses using DSL
or other fixed broadband connections in2017. As might be expected, the informationand communication sector has the leading
digital infrastructure, with an index scoreof 89. Professional, scientific, and technicalservices follow in second place, with an index
of 84 for digital infrastructure. In the first
IDI report (published in 2016), the overall
digital infrastructure index was 78, and the
top two industries were the same; withdigital infrastructure index scores of 89 and
83 for information and communication andprofessional, scientific and technical services
sectors, respectively.

Upstream supply chain is the business function
which scored the second highest digitalisationindex score at 41. One factor which
contributes to the high index score is that
78% of businesses use the internet to obtain
information from public authorities. However,
only 5% of enterprises purchase online fromother countries. In the 2016 report, the index
for upstream supply chain was only one point
lower, at 40.
Production achieved a digitalisation index
score of 34 in 2018, up from 32 in the inaugural2016 report. The increase in the index score
was driven by the fact that 43% of enterprises
have a mobile connection to the Internet forprocessing (up from 33% in the 2016 report),
and also a three percentage point increase in
the share of businesses using Radio Frequency
Identification (RFID) technologies.

FIGURE 4

Score on Industry Digitalisation Index (IDI), Average AcrossAll Industries (1-100 where 100 is fully digitalised) in 2018
100
90
80
70
60
50
40
30
20
10
0
Upstream
supply chain

Production

Downstream
supply chain

Digitalinfrastucture

Source: Eurostat, Cebr analysis

The Future of Trade 57

Chapter 2: The impact of Digitalisation

The weakest performing component for
the Industry Digitalisation Index is in thedownstream supply chain, which has anindex score of 23, up from 22 in the 2016
report. The performance of enterprises on
this index is limited by the fact that very few
businesses (6% on average) use electronic
data interchange (EDI) messages to receive
orders. The top sector for the downstream
supply chain index is accommodation andfood services, achieving an index score of 57.

Accommodation and food services have thesecond-highest IDI score. This sector has thehighest index score for downstream supply
chain and the third-highest for upstream
supply chain. This shows that in highly
competitive sectors, such as hospitality, it isimportant to connect to clients and suppliers
using technology. In this sector, it has now
become commonplace for customers tobook online, leading to the high downstream
supply chain index.

Results for the IDI vary significantly by
sector. The top scoring sector on the index isinformation and communication, which was
also the top performer in the last report. This
sector has the highest index number for threeof the four components of the IDI (upstream,
production, and digital infrastructure), withthe third-highest rating for downstream
supply chain.

The slowest moving sector on the IDI isconstruction, which has the lowest index
score for production and also for the
upstream and downstream supply chain. The
wholesale and retail trade sector also has along way to go before being considered fully
digitalised, despite the rise in online shopping
in recent years.

FIGURE 5

Score on Industry Digitalisation Index (IDI), by industry group(1-100, where 100 is fully digitalised)
Information and communication
Accomodation and food services
Professional, scientific and technical activities
Computers, electronics, machinery and equiptment
AutomotiveAll
Utilities
Commodities
Administrative and support services
Real estate activities
Basic manufacturing
Transportation and storage
Wholesale & retail trade
Construction
0

10

2018

Source: Eurostat, Cebr analysis

58 The Future of Trade

20

2016

30

40

50

60

70

Chapter 2: The impact of Digitalisation

It is expected that the IDI will gradually increase towards
100 over the next decade, meaning that all four componentsof business are becoming further digitalised. However, it
is likely that we will continue to see persistent differences
across sectors and differing levels of progress towards total
digitalisation among the different components.
To put the IDI (which relies on EU data) in a broader global
context, OECD data for e-commerce are analysed, showingthat the most digitalised industries digitalised in Europe tend
to be the industries that are most digitalised in other parts of
the world.

Industries that drive consumerpurchase in online booking
for example, have made thebiggest leaps in digital
FIGURE 6

Businesses with a Website or Home Page in 2015

Information and communication
Professional, scientific and technical activities
Wholesale trade
Manufacturing
Real estate activities
Accomodation and food and beverage service activities
Administrative and support services activities
Construction
Transportation and storage
Retail trade

0

10

20

30

Non-EU OECD countries

40

50

60

70

80

90

100

EU countries

Source: Eurostat, Cebr analysis

The Future of Trade 59

Chapter 2: The impact of Digitalisation

It can be seen from Figure 6 that while EU
countries are more likely to have a website
or home page, the industries with thehighest share of enterprises with a website
are the same for EU and non-EU countries(in the OECD)4. Equally, retail trade is theindustry for which the lowest proportion ofindustries have a website for both countrygroups: 56% of retail businesses in nonEU countries and 66% in EU countries
have a website. This may be surprising,
especially as nearly every large retailer has asignificant online presence.

Only 66% ofretail businesses
in the EU have a
websiteFIGURE 7

Businesses Receiving Orders Over Computer Networks in 2015

Wholesale trade
Accomodation and food and beverage service activities
Information and communication
Retail trade
Manufacturing
Transportation and storage
Administrative and support services activities
Real estate activities
Professional, scientific and technical activities
Construction

0

5

10

Non-EU OECD countries

Source: Eurostat, Cebr analysis
4

Non-EU OECD countries are Australia, Colombia, Japan, Korea, Norway, Turkey and Brazil

60 The Future of Trade

15

20

25

EU countries

30

35

40

Chapter 2: The impact of Digitalisation

When looking at data for businesses
receiving orders over computer networks,
split by industry across OECD countries,
the top sectors are wholesale trade andaccommodation and food services forboth EU and non-EU countries. In non-EU
countries, 33% of wholesale businesses
receive orders over computer networks,
while the figure is 35% in EU countries.
Among the top ten OECD countries thatreport data for the share of businesses thatreceive orders over computer networks,
seven are in EU. However, Australia is the
top country for this statistic, with 44%
of businesses reporting that they receive
orders over computer networks.

FIGURE 8

Top 20 B2C (Business to Consumer) Internet Use in 2016
Average survey response to question: In your country, to what extent do businesses use the Internet
for selling their goods and services to consumers? [1 = not at all; 7 = to a great extent]

6.6

6.4

6.2

6

5.8

5.6

5.4

New ZealandIsrael

IcelandDenmark

Switzerland

Slovak Republic

Luxembourg

LatviaCanadaNorwayLithuania

Korea, Rep.

Germany

Estonia

Malaysia

SwedenNetherlands

Japan

United States

United Kingdom

5.2

Source: The World Bank - TCdata360

The Future of Trade

61

Chapter 2: The impact of Digitalisation

Figure 8 shows the top 20 countries in theworld for businesses making goods andservices available to clients over the internet.
The UK comes out on top. Other developed
countries, including US, Japan and theNetherlands, also perform well. Overall, the EU
countries tend to sell goods and services overthe Internet slightly more than the rest of theworld, with the average EU score being 5.2 andthe non-EU score standing at 4.3.
There are several non-EU countries in the top
ten for the number of active mobile broadband
subscriptions per 100 inhabitants. Finland
has the most broadband subscriptions per
100 people at 144 (some people have morethan one subscription), with Singapore andKuwait following closely behind. On average,
in EU, there are 77 active mobile broadband
subscriptions per 100 inhabitants while there
are 44 on average in non-EU countries.

FIGURE 9

Top Ten Active mobile broadband subscriptions per 100
inhabitants in 2017
180
160
140
120
100
80
60
40
20
0
Japan

Finland

Australia

Source: OECD, Broadband Portal

62 The Future of Trade

Denmark

UnitedStatesEstonia

Sweden

Korea

Iceland

IrelandChapter 2: The impact of Digitalisation

ASSESSING
THE IMPACT OF
DIGITALISATION
ON TRADE
We measure the impact of digitalisation to identify and discuss the ways in which digitalisationis transforming global trade.

Digital trackingof physical goods
Technology is playing a significant role inchanging the way global supply chains are set
up, managed, and monitored. Digitalisation
benefits businesses by increasing efficiency
and widening access to markets as wellas increasing transparency in terms ofconsignment location tracking and cost of
shipment. This enables businesses to raise
productivity and lower risk.

the production of Black Angus beef throughthe various parties in its supply chain6. The
information offered by Blockchain means that
Chinese consumers of the beef can trust in its
safety for consumption. The ability to track
who and what has come into contact with the
product means businesses are better able tomitigate any potential risks concerning foodhygiene and safety.

One of the more established methods of digitaltracking is Radio Frequency Identification(RFID), which was used by 13% of EU
businesses in 20175. This technology uses
electromagnetic fields to automatically identify
and track tags attached to objects. Unlike
barcodes, the tags do not need to be visible
to the scanner. RFID is commonly used, forexample, to track cars through the assemblyline and the tags are often implanted inlivestock.

In the future, it is estimated that consumers
will be able to scan meat products with theirsmartphone and tell the animal’s birth date,vaccination history, and farming location.

Blockchain has the potential to improve global
supply chain efficiency and reduce risk as itallows a secure and linked list of records tobe created. JD.com, one of China’s largest
e-commerce sites, uses the technology to track5
6

OECD: ICT Access and USge by Businesses dataset
https://qz.com/1223228/jd-is-using-blockchain-to-track-how-meat-gets-from-australian-farms-to-chinese-tables/

The Future of Trade 63

Chapter 2: The impact of Digitalisation

Advancement of
e-commerce platforms
The advancement of e-commerce platforms
is also transforming global trade. Over the
past decade, the share of online sales as aproportion of all retail has been increasing
globally. E-commerce is becoming an
integral part of the business model ofenterprises, complementing conventionalcommercial activities for sales and enhancing
performance. In the UK, e-commerce reached17.2% of total retail sales in February 2018.

FIGURE 10

UK e-commerce, as % of Total Retail Sales
20%
18%
16%
14%
12%
10%
8%
6%
4%

Seasonally adjusted value of internet sales as a proportionof all retailing (all retailing excluding fuel), %2%

Source: ONS, Cebr analysis

64 The Future of TradeFEBRUARY 2018

AUGUST 2017

FEBRUARY 2017

AUGUST 2016

FEBRUARY 2016

AUGUST 2015

FEBRUARY 2015

AUGUST 2014

FEBRUARY 2014

AUGUST 2013

FEBRUARY 2013

AUGUST 2012

FEBRUARY 2012

AUGUST 2011

FEBRUARY 2011

AUGUST 2010

FEBRUARY 2010

AUGUST 2009

FEBRUARY 2009

AUGUST 2008

FEBRUARY 2008

0%

Chapter 2: The impact of Digitalisation

Figure 11 shows that across all major world
regions, the share of e-commerce sales has
been growing in recent years. East Asia andPacific has the highest share of e-commerce
sales, at 11% in 2018, followed by Europe andCentral Asia at 9%.

This illustrates how important e-commerce
is to driving international trade and global
economic growth.

In looking at how e-commerce drives crossborder international trade, business tobusiness e-commerce makes up the largest
share of global e-commerce. It also is likely tobe the most important component of crossborder sales online7.
PayPal has conducted a study across six of theworld’s largest e-commerce markets (China, theUS, the UK, Germany, Australia and Brazil) andfound that $307 billion will be spent on crossborder business to consumer transactions in
2018, with 130 million shoppers using overseas
websites8.

FIGURE 11

E-commerce Sales as % of Total Retail Sales,by Region (Baseline Scenario)
12%

10%

8%

6%

4%

2%

0%
2016
South Asia

Latin America & Caribbean

2017
North America

2018
Europe & Central Asia

East Asia & PacificSource: E-Marketer, World Bank, Cebr analysis

7
8

UNCTAD, In search of cross-border e-commerce trade data (2016)
https://www.ebayinc.com/stories/news/paypal-unveils-modern-spice-routes/

The Future of Trade 65

Chapter 2: The impact of Digitalisation

CONCLUSION
This section analyses the current state of global trade with aparticular focus on the role of digitalisation. Building on our2016 report, the current research updates the latest analysis
on the state of world trade and the progress countries aremaking towards digitalisation.
Technological progress presently seems
unstoppable with new breakthroughs in
AI, autonomously driving vehicles, anddistributed ledger technology bringing
digital advances ever closer to our daily lives.
A key recent innovation has been the further
development of Blockchain – a system of
immutable digital ledgers without the needfor a central controlling authority.
Applications for Blockchain are versatile, but
it seems clear that logistics and trade aresectors that stand to benefit tremendously
from this technology. Further digital trends
that will shape the world of trade over the
next years include artificial intelligence, 3D
printing, autonomous vehicles, the Internetof Things, drones and advanced robotics.
The economic value of these technologies is
estimated to stand at around $45 trillion in
the decade to 20259.
Since the publication of our last report, the
new geopolitics of trade have started toemerge. The US imposition of tariffs on steel
and aluminium, its trade dispute with China,
as well as the start of the UK-EU negotiating
regarding their post-Brexit trade relations
show that politics remain highly influential in
the world of international trade. Looking at
average applied import tariffs, it may seem
like the world has made further progressin terms of eliminating trade barriers overrecent years. The reality, however, is that

9World Economic Forum, Digital Transformation Initiative

66 The Future of Trade

many non-tariff trade barriers remain in place,reducing the volume of global trade flows.
The US and China meanwhile pursue national
interests in their own way – the US by imposing
tariffs and trade penalties as a measureof forcing trade partners to renegotiate
trade barriers; and China by leading one ofhumankind’s largest infrastructure and public
investment programmes, the Belt and Road
Initiative, aiming to connect the economies ofmore than 70 countries, covering 62% of theworld’s GDP.
The latest instalment of our Industry
Digitalisation Index (IDI) shows which sectors
and which business processes made the largest
advancements towards further digitalisation.
Between the 2016 and 2018 edition of theindex, the biggest gains were recorded in theaccommodation and food services industry,
which is boosted by a large share of orders
and bookings being done online as well as
increased automation and implementationof AI. Other industries with large increases intheir progress towards full digitalisation areautomotive and wholesale and retail trade.
Looking ahead, it is expected that the IDI will
gradually increase towards 100 over the next
decade, meaning that all four componentsof business are fully digitalised. However, it islikely that we will continue to see persistentdifferences across sectors.

CHAPTER 2:

THE
IMPACT OF
DIGITALISATION(ADDENDUM)The Future of Trade 67

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 1

Number of worldwide internet users by region as ofJanuary 2018 (in millions)

East Asia

947

Southern Asia

673

Southeast Asia

380

North America

320

South America

290

Eastern Europe

215

Weatern Asia

175

Western Europe

175

Western Africa

147

Southern Europe

118

Eastern Africa

118

Northern Africa

116

Central America

110

Northern Europe

98

Central Asia

36

Southern Africa

34

Ocenia28

Caribbean

21

Middle Africa

20
0

100

200

300

400

500

600

700

800

900

Number of internet users in millions

Sources:Internet World Stats; We Are Social; Wikipedia; Internet Live Stats© Statista 2018https://www.statista.com/statistics/249562/number-of-worldwide-internet-users-by-region/
Additional information:
Worldwide; Internet World Stats; We Are Social; Wikipedia; Internet Live Stats; January 2018

68 The Future of Trade

1000

1100

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 2

1.1.1. Total fixed broadband subcriptions, by country, millions,
June 2017

United StatesJapan
Germany
FranceUnited Kingdom
Korea
Mexico
Italy
Spain
Canda
TurkeyAustralia
Netherlands
PolandBelgium
Switzerland
SwedenGreecePortugal
Czech Republic
Chile
Hungary
Austria
Denmark
Israel
NorwayFinland
New ZealandIreland
Slovak Republic
Slovenia
LatviaEstonia
Luxembourg
Iceland
Colombia
0

20

40

60

80

100

120

Notes:
Colombia is in the process of accession to the OECD
Israel, Switzerland and United States: Data are estimates
Source: OECD, Broadband Portal, www.oecd.org/sti/broadband/oecdbroadbandportal.htm

The Future of Trade 69

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 3

Enterprises with a website or home page, by firm size, 2016as a percentage of enterprises in each employment size class
All enterprises

10-49

50-249250+

Finland

95.3

94.4

99.7

100.0

All enterprises, 201087.3

Denmark

93.3

92.6

96.4

98.2

87.8

Switzerland

91.7

90.5

95.7

99.1

90.1

Sweden

89.7

88.7

95.0

97.4

88.7

Germany

88.9

87.7

93.5

96.9

81.4

Netherlands

88.7

87.4

93.5

96.3

81.5

Japan

88.6

#N/A

85.9

94.3

91.5

Austria

88.1

86.7

95.3

98.6

80.2

Iceland

84.7

72.9

89.7

92.2

77.2

United Kingdom

83.0

80.6

94.2

97.2

75.7

Slovenia

82.6

79.8

94.1

100.0

72.8

New Zealand

82.2

80.5

90.4

97.8

68.8

Czech Republic

82.1

79.2

92.8

95.1

73.6

Luxembourg

81.3

78.7

90.7

98.3

70.2

Belgium

81.0

78.9

90.4

96.3

78.5

Norway

80.4

78.2

92.5

96.3

78.4

Slovak Republic

78.3

76.8

83.0

85.6

74.1

Estonia

77.9

75.1

89.6

95.8

70.0

Canada

77.5

73.7

88.8

91.5

69.7

Lithuania

77.0

73.4

90.6

98.8

65.0

OECD

77.0

73.9

88.2

94.0

69.6

Ireland

76.1

82.1

95.0

100.0

68.0

Spain

75.0

72.3

88.1

95.0

61.6

Australia

74.5

73.0

82.1

93.5

66.1

United States

72.9

70.7

#N/A

#N/A

61.9

Italy

71.3

69.5

84.2

89.7

61.3

France

68.5

64.9

87.9

94.6

57.7
56.6

Hungary

67.8

65.7

77.7

83.9

Poland

67.0

62.3

86.1

91.8

65.5

Colombia

66.5

58.1

81.9

90.9

54.0

Turkey

66.0

62.4

79.0

89.7

52.5

Greece

65.9

62.9

85.4

90.8

57.9

Portugal

64.2

60.8

80.1

95.2

51.9

Latvia

63.5

58.8

84.2

96.3

48.4

Korea

60.1

57.4

73.4

87.9

59.7

Brazil

60.0

57.1

78.9

88.7

55.6

Mexico

41.5

35.9

69.8

78.6

49.8

Notes: Except where otherwise stated, the sector coverage consists of all activities in manufacturing and non-financial market services. Only
enterprises with ten or more employees are considered. Size classes are defined as: small (10-49 employees), medium (50-249 employees), large(250 employees and more). OECD data are based on a simple average of the available countries. For country exceptions, see note [i] below.
Source: ICT Access and Usage by Businesses (database), http://oe.cd/bus (accessed June 2017).
[i].
For Australia and New Zealand, data refer to the fiscal years 2010/11, ending 30 June, instead of 2010 and respectively to the fiscal year 2014/15
and the fiscal year 2015/16, ending 30 June, instead of 2016. For industrial classification, ANZSIC06 division is used instead of ISIC Rev.4 division.
For Australia, data include agriculture, forestry and fishing.
For Canada, data refer to 2013 instead of 2016 and to 2007 instead of 2010; medium-sized enterprises have 50-299 employees and large ones 300
or more. For industrial classification, the North American Industry Classification System (NAICS) was used instead of ISIC Rev.4.
For Brazil, Colombia, Japan and Korea, data refer to 2015.
For Japan, data refer to businesses with 100 or more employees instead of 10 or more; medium-sized enterprises have 100-299 employees andlarge ones 300 or more. For industrial classification, JSIC Rev.13 division is used instead of ISIC Rev.4.
For Mexico, data refer to 2008 and 2012 instead of 2010 and 2016.
For Switzerland, data refer to 2011 instead of 2016.

70 The Future of Trade

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 4

Proportion of internet users purchasing online and participating
in social networks, selected countries, 2015 (%)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

Participation rates in social networks

Switzerland

IsraelAustralia

Republic of Korea

Japan

BahrainBalarus

Qatar

TurkeyRussian Federation

Macao, China

Islamic Republic of IranIndonesia

Ukraine

The former Yugoslav Republic of Macedonia

Jamaica

MexicoParaguay

Kazakhstan

Colombia

Morocco

Peru

Egypt

0%

Purchasing or ordering goods or service online

Source: https://www.opengovasia.com/articles/unctad-policy-brief-calls-for-holistic-policy-approach-towardsdigitalisation-and-trade

The Future of Trade

71

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 5

E-commerce sales as % of total retail sales

20%

17.5%

18%

15.5%

Share of e-retail sales

16%

13.7%
14%

11.9%
12%
10.2%
10%
8.6%

8%

7.4%

6%

2015

2016

2017

2018*

2019*

Source: eMarketer; Website (retailtechnews.com) © Statista 2018https://www.statista.com/statistics/534123/e-commerce-share-of-retail-sales-worldwide/
Additional information: Worldwide; eMarketer; 2015 to 2017

72 The Future of Trade

2020*

2022*

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 6Enterprises adopting technologies for e-business, by enterprisesize, EU-28, 2017 (% of enterprises)
76

80
70

62
57

60

48

47

50
40

28

30

44

28

27

30
20
10

15

Averagefor allenterprises:
33%

Averagefor allenterprises:
34%

Averagefor allenterprises:
18%

9

Averagefor allenterprises:
12%0
Have enterprise
resource planning(ERP) software

Use customer
relationship management(CRM) software

Small enterprises (10-4 persons employed)

Have business process
automatically llinked tosuppliers and/or customers

Use radio frequency
identification (RFID)
technologies

Medium enterprises (50-249 persons employed)

Large enterprises (50-249 persons employed)

Source: Eurostat data: isoc_eb_iip and isoc_eb_ics
http://ec.europa.eu/eurostat/statistics-explained/index.php/Digital_economy_and_society_statistics_-_enterprises

FIGURE 7

Number of digital buyers worldwide from 2011 to2016 (in millions USD)

Digital buyers in Millions

1,500

1,250

1,000

750

500

250

0
2011

2012

2013*

2014*

2015*

2016*

https://codeable.io/e-commerce-market-share-how-much-cost/

The Future of Trade 73

Chapter 2: The impact of Digitalisation (Addendum)

FIGURE 8Enterprises connecting to the internet via fixed
broadband and enterprises having a website,
EU-28, 2011-2017 (% of enterprises)

100
90
80
70
60
50
40
30
20
10
0
2011

2012

2013

2014

2015

2016

Internet connection: fixed broadband access
Having a website
Speed of fixed internet connection: > 2 Mb/s but < 10 Mb/s
Speed of fixed internet connection: > 10 Mb/s but < 30 Mb/s
Speed of fixed internet connection: > 30 Mb/s but < 100 Mb/s
Speed of fixed internet connection: > 100 Mb/s

Source: Eurostat (online data codes: isoc ci it en2 and isoc ciweb)
http://ec.europa.eu/eurostat/statistics-explained/index.php/Digital_economy_and_society_statistics_-_enterprises

74 The Future of Trade

2017

CHAPTER 3:

BRIDGING THE
GAP IN TRADE
FINANCEThe Future of Trade 75

Chapter 3: Bridging the gap in trade financeOutside the universe of financial publications,the term ‘trade finance’ is not one that hascreated bold headlines unless under the premiseof a scandal or major regulatory change. Nor
has trade finance been the topic of conversation
outside of major financial institutions. The
reason is simple. There was no need.
But the stark reality is that banks reject 50% of SMEs applications
for funding, and it has created a $1.5 trillion trade finance gap that ispreventing global trade to evolve at pace.
Digitalisation, primarily in the context of Fintech and Blockchain, has
finally brought trade finance to the centre stage. At the cusp of what
is being described as a revolution in global trade, there is generalconsensus that Blockchain will bridge the trade finance gap.
In a rapidly evolving playbook, powered by digital, alternative tradefinance solutions are becoming accessible to a much larger extent thanpreviously. In this new environment, the role of banks is up for debate.
In fact, our research shows that start-ups and SMEs are no longer as
reliant on banks as before, and that new alternatives to seek finance israpidly gaining ground.
The potential to significantly reduce cost and bureaucracy with
Blockchain, in addition to new alternative financing solutions becoming
available is a game changer for the future of trade.
The view was echoed by market participants across focus groups
with C-suite executives held in London, Singapore, Zurich, Dubai,
Johannesburg and Hong Kong; Blockchain is the big disruptor andbanks will have to re-discover their role in a decentralised digitalised
economy. Likewise, regulators will need to accept that fundamental
change is on the horizon, and play catch-up.

76 The Future of Trade

Chapter 3: Bridging the gap in trade financeHowever, as the rules of engagement arechanging, new market dynamics are still
crystalising and there are many questions
left unanswered. As alternative financesolutions are becoming increasingly
available, businesses will need to gain
deeper understanding to stay ahead, andto understand to what extent data will be
regulated and by whom.
San Francisco-based, Ripple, a paymentsfocused Blockchain technology that could
be about to disrupt the banks, is a relevant
example of an organisation that hasembraced this space. According to CNBC’s
special report on ‘The Fintech Effect’, Ripple
has raised $93.6 million so far.

standards and vets and manages invited
participants. It is even thought that Fintechs
like Ripple could eventually rival SWIFT forinternational cross-border payments.
And with broad consensus that Blockchain
will be a game-changer for trade financein the next decade, supported by Fintech,
WTO is at the same time forecasting tradevolumes to rise 3.2% by the end of 2018, andthat trade finance volume is expected to riseat a CAGR of 3.7% between 2016 and 2020.
So with demand established, the question
is no longer if the trade finance gap will be
bridged, but rather, when this will happen?

Starting out as a payment protocol offering
retail payment, foreign exchange (FX) andother end uses, it now wants to grow into a
global network that can serve corporates,banks and others that need to transfer
money globally. Not surprisingly, it uses
Blockchain.
As Blockchain adoption takes off andmatures, the applications and opportunities
are numerous including settlement, data
storage for insurance claims, diamondauthentication purposes, trade finance andpayments.
The ledger can be public, open source andavailable to all, as per the original Bitcoin(BTC) cypto-currency ledger, or it can be a
private “permissioned” chain that enforces

3.7%

Expected CAGR of
trade finance volume
2016 - 2020
The Future of Trade 77

Chapter 3: Bridging the gap in trade finance

TRADE FINANCE
ACCESS – CHALLENGINGFOR SMES
Trade finance has been a catalyst for expanding
global trade. Traditional debt finance - bankloans, overdrafts, Letter of Credits (LCs), export
credit and insurance, account for roughly 80%
of financing for world trade.
However, for the majority of SMEs, access totrade finance has been a challenge due to strict
collateral needs and credit history checks.
Following the 2008 financial crisis, banks werereluctant to SME lending. Mandatory processes,
such as Know-Your-Customer (KYC) andAnti-Money Laundering (AML) requirements,
have further increased cost and due diligencetime for banks. A survey conducted byThomson Reuters in 2016, found that banks
had to spend more than $60 million on due
diligence measures. Given the increased costand competition, banks prefer high net worthclients over SMEs.
In its 2017 survey, Asian Development Bank
(ADB) quantified the market gap for tradefinance at $1.5 trillion in 2016. While Western
Europe, China and Advanced Asia accounted
for 45% of global demand for trade finance,
40% of this gap originates from the APAC
region. Also, 74% of dismissed trade financetransactions came from SMEs and midcap
firms, which form the backbone of global
trade. Within Asia, developing Asia had 15%
rejection rates, compared to 8% in China andadvanced Asian countries1.

FIGURE 1

Reasons for Rejecting Trade Finance Transactions

Were rejected due to KYC concerns

29.3%

Were completely unsuitable for financedue to low quality of applications

21.4%

Lack of additional collateral orcleaner financial requirements

20.0%

Were suitable, but
profits were too low

14.9%

Other

14.4%

Source: ICC Banking Commission, 2017 Survey

78 The Future of Trade

Chapter 3: Bridging the gap in trade finance

FINTECHS PROVIDE AN
ALTERNATIVE TO TRADITIONAL
TRADE FINANCE
Fintechs have enjoyed phenomenal growth sincethe 2008 financial crisis, and global investments
in Fintech farms amounted to approximately $122
billion between 2013- 2016. Fintechs have alreadyrevolutionised the payments industry, and haveventured into the trade finance space throughdigital lending platforms. The ability to evaluatea borrower’s credit score in real time, along withinformation symmetry, efficiency, scalability, andreduced cost of due diligence have boosted thegrowth of alternative finance globally.

are channelled through Fintech platforms.
Alternative finance platforms have reachedmaturity in Western economies, especially in the
UK. Data released by the Cambridge Centre for
Alternative Finance (CCAF) in 2016, revealed
that online alternative finance market volumes
in Europe grew to $9.5 billion in 2016 from $6.7
billion in 2015, a 42% increase year on year. SME
funding remained strong, accounting for 40% of
the market, led by P2P business lending, invoice
trading, and equity-based crowdfunding.

For instance, obtaining trade finance solutions
via traditional routes used to take months. In
comparison, invoice trading platforms have
reduced this to just two weeks, and somelending platforms, such as peer-to-peer (P2P)
and crowdfunding, take just a few days. Lenders
such as OnDeck, Funding Circle, Kabbage,
Fundera, Lendix and Afluenta have recognised
this and provide SME-tailored solutions tobridge the trade finance gap.

Within Europe, UK’s regional share fell by 7%
in 2016, however it still accounted for 73% of
the total alternative finance market in Europe,
amounting to around $6.9 billion. Going forward,
the UK’s share in the alternative finance market
could decline further due to uncertainties
associated with Brexit, prompting Fintech farms
to open offices elsewhere in Europe. In addition to
the UK, France, Germany and the Netherlands are
the leading hubs in alternative finance in Europe.

Fintechs also play a pivotal role in developing
platforms that foster supply chain financing
for SMEs. For instance, Culum Capital, aSingapore-based Fintech, recently launched its
online lending marketplace where institutional
investors can bid to fund the working capital(invoices or other forms of receivables)for various SMEs. Similarly, Fundbox offers
advances on outstanding invoices to small
businesses. Currently, more than 12% of all
Supply Chain Finance programmes in Europe

The alternative finance market in the APAC region
more than doubled between 2015 and 2016 to
the total value of $245.2 billion. China is in poleposition with a market share of 99.2%. Factors
such as low penetration of banks, the promise ofhigher returns above bank deposit rates, higher
smartphone penetration and a pro-growth
government have promoted the developmentof alternative finance market in China. Other
key markets in the region include Hong Kong,
Indonesia, Malaysia, Philippines, and India.

245.2bn$

Value of China’s alternative
finance market in 2016,
double that of previous year

The Future of Trade 79

Chapter 3: Bridging the gap in trade finance

FIGURE 2

APAC Alt Finance Volume, excl. China (US$ Million)
2,500

2,004
2,000

1,500

1,119
1,000

500

137

271

0
2013

2014

2015

2016

Source: Cambridge Centre for Alternative FinanceThat said, there are also lessons to be learned.
Further to a number of fraudulent activities
taking place in China, such as the $7.6 billion
Ezubao fraud, the authorities introduced
regulatory standards in 20161.

space. The logistics companies track dataaround physical movement of merchandise
and typically use the merchandise as acollateral for providing short term loanrequirements for its clients.

Global powerhouses like Amazon, are also
investing in Fintechs in India. Further to its
BankBazaar investment in 2015, it is planning
to invest $5 - $10 million in Capital Float,a technology-led platform providing small
businesses with working capital. Singapore, on
the other hand, with a total of $163.7 million infunds raised through online lending, was ranked
as the sixth largest market in APAC in 2016.
This ranking was spearheaded by three major
Fintechs (Funding Societies, MoolahSense andCapital Match) working in the SME lending
space in Singapore.

A good example is UPS, which provides
funds against traders’ inventory held at its
distribution centre, and offers in-transit cargofinance, up to 100% of its value. Similarly,
Maersk, the Danish shipping giant, offers
finance shipments by taking security overgoods shipped through any shipping line
under it where a seller’s container is the only
collateral against the funds to be repaid upon
the release of their purchase order.

Several players, including e-commerce andtechnology companies, have entered thealternative finance market in the last five years.
The growth potential of the market has also
attracted major logistics companies in the1

Reuters, China’s $7.6 billion Ponzi scam highlights growing online risks

80 The Future of Trade

Chapter 3: Bridging the gap in trade financeBanks Adopting Different Strategies to Collaborate with Fintechs

ACQUISITION

Some banks are acquiring the technology platforms from the Fintechs to be white-labelled
as their offerings. For instance RBS signed a deal with Ezbob, the UK-based SME businessfunding firm, to leverage the Fintech’s technology in developing the “Esme Loans“

PARTNERSHIP

Some banks like Bank of America, JP Morgan Chase and ING are partnering with Fintechs toimprove their tech capabilities and offerings. For instance, Dutch-bank ING, has partnered with
Kabbage, a leading Fintech in data platform to expand its lending capabilities for SMEs

INCUBATORSAND ORGANICDEVELOPMENT

Some banks are developing in-house capabilities to compete in the space. For instance,
Santender has launch incubator programmes for Fintech Barclays Bank, launched a mobile
business lending service app, to providing instant business loans to the UK SMEs

BANKS NAVIGATING FINTECH DISRUPTIONTO BOOST TRADE FINANCE INCLUSION
Currently, the alternative trade finance market
is mainly accessed by SMEs or companies withurgent fund requirements. Big companies still
depend on banks for their trade financing needs
largely due to trust and expertise. However, as
alternative finance solutions go mainstream, banks
are addressing the challenge posed by Fintechs.
A report by McKinsey predicts that the banking
industry’s return on equity (ROE) could fall to 5%
by 2025, from the current 8 - 10%, if the banking
customers shift to Fintechs at the current rate2.
As a result, the banking industry, historically
cautious adopters of digital disruption, is taking
measures to see whether or not this evolution oftech is viable to be able to compete effectively.
A survey conducted by PwC in 2017 found that82% of banks, insurers and asset managers intend
to increase partnerships with Fintech firms in thenext five years3.
2
3Mckinsey, Remaking the bank for an ecosystem world
PwC, Global Fintech Survey

Banks are also focusing on acquiring
Fintech companies and launching in-houseincubator programmes to develop own
capabilities. Irrespective of the path taken,
our research points to the next decade withexpectations of banks taking a much more
active role in the Fintech space.

-5%

Predicted reduced
return of equity forbanks if customers
shift to Fintech
The Future of Trade

81

Chapter 3: Bridging the gap in trade finance

BLOCKCHAIN SET TO
TRANSFORM GLOBAL TRADE
FINANCE
Blockchain, the technology behind
cryptocurrencies such as Bitcoin, is now
more than a tech novelty. It is importantto remind ourselves that the concept ofledger has actually seen little innovation
since it was introduced in the 15th century.
Every participant in a supply chain network
would maintain its own records. Regulators
also participate to monitor the integrity ofthe business networks as there was little
trust between the participants. As every
participant maintained their own ledger,
there would be volumes of paper moving
across the supply chain which involved highcost, time consuming processes, in addition
to transparency and security challenges.
Since supply chains have relied on thephysical movement of large volumes of
paper documents, the window has beenleft open for fraud, human error, andunplanned delays. Meanwhile, Blockchain
acts as the middle man for decreasing
such bureaucracy. It records transactions
in sequential blocks by creating encrypted
data that can be shared among several
parties through the supply chain, updating
instantly without risk of fraud.

1.8tn

$

The cost of global trade.
Paper accounts for 20%of that cost
82 The Future of Trade

Digital ledger technology is making inroads
into goods transport through financial
instruments, such as letters of credit, andthrough the digitalisation of traditional tradeand shipping documents. In cross-border tradeand for SMEs, participants will benefit fromthe simpler, automated workflows and smart
contracts once Blockchain is embraced in full.
Maersk is taking this to the test. According to
its research, the cost of trade globally is about$1.8 trillion where paper accounts for about
20% of that cost.

Chapter 3: Bridging the gap in trade finance

ADOPTION OF SMART
CONTRACTS COULD
TRANSFORM THE USAGE OF LCs
Trade Finance Through Smart Contracts

The trade agreement
between the importer andexporter is shared with theimport bank using smart
contract on Blockchain

The import bank will beable to review a trade
agreement in real-time andcreate obligation to pay
export bank

Export bank will review thepayment agreement, and uponconsent a small contract will be
generated on Blockchain, lockingin specified terms and conditions

The exporter digitallysigns the electronic LC
on Blockchain within thesmart contract to initiate
shipment

Upon acknowledgement
Blockchain will self-execute
payment from importer toexporter via smart contract

Upon delivery, the importer
will digitally acknowledge
goods receipt and approvefor payment

Real-time trackingof goods in transit

Post the inspection of goods
by third parties and custom
agents in the exporting country,
they will digitally sign the smart
contract on the Blockchain

A 2017 survey by the International Chamberof Commerce (ICC), supports Maersk’s
observations in that commercial Lettersof Credit (LCs) account for around 40% of
the trade finance product mix. Though LCs
have been a long-used mode of facilitating
global trade, their application is limited
by growing costs, contractual delays, andprocess complexities. Moreover, instancesof delayed or denied payments due to data
discrepancies between the LC contract andthe underlying trade documents can further
create rejection of applications, leading tolosses. Blockchain technology prevents this
scenario in that it creates real-time value
through smart contracts.
Smart contracts are rule based self-executing
contracts that create automated execution,as and when the terms of the contract aremet, moving away from human intervention
entirely. Using Blockchain technology to
execute LCs can therefore streamline themanual processing of trade documentationand make companies’ working capitalrequirement more predictable.

Letters of Credit accountfor 40% of the tradefinance product mix
The Future of Trade 83

Chapter 3: Bridging the gap in trade finance

REAL TIME SHIPMENT
THROUGH ASSETTOKENISATION
Until the actual delivery of shipment, buyers often lack visibility ofthe status of goods in transit. As a result, they run into the risk ofdelays and cargo damages. A bill of lading is also required for thephysical ownership of the goods. Blockchain addresses this areaby digitalising trade assets (asset tokenisation) and by linking its
transfer across trade participants on the Blockchain network withthe physical movement of goods, enabling real-time tracking andreducing delay in cargo delivery.

DIGITALISATION OF TRADE
FINANCING INSTRUMENTS TO
IMPROVE SME CREDIT FUNDING
Most suppliers generate working capital through sale of various
payment instruments such as promissory notes, checks, drafts orbills of exchange to banks and other financial intermediates throughdiscounting. However, banks face risks due to limited access to trade
information, sole reliance on documentary proofs, and the high costof manual screening. These trade instruments can be directly createdon Blockchain networks as financial contracts between the issuing
and redeeming parties. This could avoid discrepancies and fraud
which in turn will improve SME financing options.

84 The Future of Trade

Chapter 3: Bridging the gap in trade finance

BANKS BETTINGBIG ONBLOCKCHAIN
While most banks have steered clear of
cryptocurrencies, they have not shiedaway from experimenting with Blockchain.
Blockchain usage is not confined only to
trade finance, rather it finds application acrossdifferent banking operations from payments tocompliance management. Nothing illustrates
the Blockchain frenzy among banks moreclearly than the $107 million financing for R3,
the Blockchain consortium formed by majorbanks and technology firms. R3 is alreadytesting a Blockchain pilot project to develop
post-shipment trade finance solutions. Some of
the leading banks that have joined R3 include
SBI Group, Bank of America Merrill Lynch,
HSBC, Intel and Temasek. More banks are
expected to join R3 by the end of 2018.
Having successfully achieved the first proof ofconcept, the R3 consortia has begun to test
Blockchain for enabling connectivity among
trade participants on a single information page,
simplifying access to credit, offering real time
visibility in the supply chain and risk mitigationin trade lifecycle. Other major Blockchain
projects underway include the IBM-backed
Hyperledger Fabric project and the Utility
Settlement Coin project4.
While the pilot run for Blockchain is on,
some banks have already begun deploying
the technology. For instance, BBVA, in
collaboration with Wave, carried out thefirst Blockchain-based international tradetransaction that automated the electronic
submission of documents between Europe
and Latin America. BBVA could reduce thetime required to send, verify, and authorise aninternational trade transaction, which normallytakes from seven to ten days, to just 2.5 hours.

Blockchain Benefits
Immutable
Transactions

Eliminating
Middlemen

4

Low Transaction
Cost

Automated
Settlement

Reduced Counter
Party Risk

Ownership
Proof

Regulatory
Transparency

Real-time
Tracking

r3cev, r3 partners with Monetary Authority of Singapore to launch Asia blockchain centre of excellence

The Future of Trade 85

Chapter 3: Bridging the gap in trade finance

REGULATORY, PRIVACY
AND SCALABILITY
CONCERNS LOOMLARGE IN BLOCKCHAIN
DEPLOYMENTAs in many other technologies, regulation has
often played catchup with innovation. The
rules governing documentary credit or lettersof credit were devised in the early 1930s. They
now need to be thought of in the context ofBlockchain. The rapid evolution of Blockchain
technology is already outpacing regulators’ability to keep pace.
The financial sector, being one of the mosthighly regulated industries, must come up
with laws to regulate the information sharing
feature of the distributed ledger. Blockchainsused in the financial services industry will haveto be built on entirely different foundations.
Banks need to comply with rules regarding
verification of the identity of customers toprevent money laundering, making security
a key requirement. Unlike cryptocurrencies,
which use a public Blockchain, a private
Blockchain is more suitable for the financial
services industry.
There are also issues regarding the scalabilityof the Blockchain platform. Compared to 115
and 2,000 transactions per second (tps) under

For now, Blockchain
technology today is only
applicable for high value,
low volume transactions
86 The Future of Trade

PayPal and Visa respectively, a Bitcoin network,on average, can process only 7-10 tps. As thenumber of Blockchain transactions increases,
the Blockchain begins to grow rapidly, leading
to higher time per transaction numbers.
Blockchain technology today is only applicablefor high value, low volume transactions. Efforts
to increase transaction speeds are still at aconceptual stage.
Another challenge is the consensus among
participants regarding Blockchain. For instance,in the traditional system, a bank can cancel
a fraudulent transaction and does not needto seek permission from a network of otherbanks or third parties. However, in a Blockchain,members must reach a consensus before
arriving at a decision to cancel a transaction.
Blockchain technology will not gain mainstream
adoption overnight. Blockchain technology
undoubtedly has the potential to become an
integral part of the global banking industry in
the future. But there are challenges that need
to be addressed before it goes mainstream.

Chapter 3: Bridging the gap in trade finance

BEYOND THE HYPE
OF THE BLOCKCHAIN
BANDWAGON
Mainstream adoption does not take place
overnight. It took more than 50 years for the
telephone to captivate consumers, and almost
10 years for the smartphone, so how long until
Blockchain technology captivates the banking
industry?
It is estimated that Blockchain today accounts
for less than 0.1% of global trade. However, thetechnology behind it is progressing quickly.
In 2016, many companies were focusedon assessing the viability of Blockchain. In
2017, companies like Maersk focussed oncommercialising the technology. Maersk
has formed a joint venture with IBM for thispurpose. According to a PwC global survey
report, 77% of financial institution respondents
say they are expected to adopt Blockchain as apart of their processes by 20225.
Gartner expressed similar views. In 2017,
Gartner’s Hype Circle predicted that it willtake another five to ten years for Blockchain
technology to become commercially viable andsustainable over the long term.
It was just three years ago, in early 2015, thatbanks started to see the potential of Blockchain.
Since then, banks have been experimenting
and collaborating with technology providers
to check the viability of Blockchain. This is77%

Amount of financial
institutions expectedto adopt Blockchain
by 2022
expected to continue for the next two to
three years before we see new regulations
introduced by the central banks. In light ofthese observations, it is likely that Blockchain
technology will see early adoption in the latter
half of the next decade.
From increasing access to finance throughto visibility into lenders’ credit history andproviding real-time trade flow visibility,
Blockchain has the potential to cut banking
infrastructure costs by $15 - $20 billion by2022. However, Blockchain is still at a nascentstage and it will require huge investments andcommitment from the banks to replace theircurrent legacy systems as well as train theworkforce for Blockchain implementation.
There will also be an opportunity for non-bankplayers to provide trade finance to sectors thatare typically overlooked by banks. For instance,
providing micro loans to SMEs.

15-20bn$

Cost cuts in bank infrastructure that
could be enabled with Blockchain
5

PwC, Global Fintech Survey

The Future of Trade 87

Chapter 3: Bridging the gap in trade finance

CRYPTOCURRENCIESIN GLOBAL TRADE
From an era of barter to commodity money,
metals and coins, gold and silver, to theintroduction of fiat money, currency as a
medium of exchange could undergo anotherrevolution – digital currency underpinnedby cryptographic coding and blockchain
technology. The legality of the usage of
cryptocurrencies for international payments
is still widely debated. Nevertheless, like
Blockchain, cryptocurrencies could alsotransform cross-border trade. Currently, there
are more than 700 cryptocurrencies in use, anindicator of its growing popularity. Some of
the most popular ones are Bitcoin, Ethereum,
Ripple, Litecoin, and IOTA.

various currencies, the exchange rates forwhich are subject to global volatility. Using
Bitcoin means that all the market participants
are dealing in the same currency with the samevalue, doing away with the hassle of monetary
exchange.

Cryptocurrencies such as Bitcoin continue
to make steady headlines, due to their value
appreciation. Trading at about $950 at the endof 2016, the value of Bitcoin jumped to morethan $17,000 in December 2017, promptingsome central banks to take a more cautious
approach.

However, Bitcoin is not widely accepted andcentral banks are wary of using it as a medium
of exchange. Unlike paper currencies, which
are issued based on demand and supply,
cryptocurrencies follow a technology protocol
and are heavily susceptible to speculation.
So, its mainstream adoption as payment forbusinesses remains limited.

Apart from the security of transactions,
cryptocurrency usage for international
payments brings a wide array of benefits.
Cross-border trade involves the usage of

700+

Crypto currencies
in use today
88 The Future of Trade

Usage of cryptocurrency could also bringspeed and efficiency in B2B transactions
through disintermediation. Unlike traditional
means of trading, which involves paperwork,
brokerage fees, commissions, and a numberof other conditions which may apply,
cryptocurrency transactions are held on a peerto-peer network.

Chapter 3: Bridging the gap in trade financeA rising tide of regulations has weighed upon
the crypto market since its appearance inthe global economy. China, one of the global
powerhouses in international trade, has banned
cryptocurrency trading. South Korea issued
regulations to curb speculation in Bitcoin,
and is considering issuing capital gains tax on
crypto trading. The European Central Bankand the US Federal Reserve have also issued
cautionary advice for investment and trading incryptocurrencies.
For cryptocurrencies to succeed in crossborder payments, the entire value chain must
rely on Blockchain. If any participant is not able,
or is not willing, to use cryptocurrency, there
should be an alternative mode of settlement
in conventional currencies. Considering theprice volatility of cryptocurrencies, it may posea serious risk for both the importer and theexporter.

to borrow physical cash and exchange it for
cryptocurrency. However, in such a case, theborrower is exposed to the volatility of theexchange rate.
While some countries have taken a prohibitive
stance on cryptocurrencies, others such as
Venezuela, France, Switzerland and Japan havetaken a proactive approach and are draftinglaws for proper usage of cryptocurrencies. The
central banks of countries such as Sweden,
Estonia, and Venezuela are contemplating the
introduction of digital currencies. However,it remains to be seen whether the digitalcurrencies issued by central banks aredecentralised or are totally issuance controlled
by central banks.
Regardless of the future of cryptocurrencies,
it is likely that Blockchain technology will becentral as an enabler of cross-border tradefinance over the next decade.

Most cross-border trade is financed via credit
provided by banks. However, Bitcoin works ona pre-funded basis, meaning that the payer
must have cash on hand to pay for purchases.
There are very few credit providers in thecryptocurrency world, so obtaining tradefinance could be a problem. The solution is

It remains to be seen
whether digital currencies
issued by central banks will
be de-centralised
The Future of Trade 89

Chapter 3: Bridging the gap in trade finance

DEVELOPMENTS ACROSS TRADING HUBS
Major trading hubs are making significant inroads in experimenting and deploying
Blockchain, collaborating with Fintechs, and testing cryptocurrencies.

Singapore becoming hotbed
for Blockchain deployment

London eyes SME funding opportunity
through smart contracts

The Monetary Authority of Singapore (MAS)has undertaken Project Ubin, in collaboration
with banks and tech companies, to develop
ways in deploying Blockchain on payment
and securities clearing. The consortium
involved in Project Ubin include local banks(e.g. DBS etc.), foreign banks (e.g. Bank ofAmerica, HSBC, Merrill Lynch etc.), and theSingapore Exchange. The project is expected
to be carried out in five phases, with twophases complete in 20186.

Populous, a UK-based Fintech start-up is exploring theinvoice financing space through its launch of smart
contracts, underpinned by Blockchain technology. It
uses custom created tokens called Pokens that are
pegged to fiat currencies to remove the risk of volatility.
The platform is being funded from the $10mn procured
through initial coin offerings (ICOs)9.
To unlock the huge opportunity for millions of SMEs,
the UK-based ModulTrade has raised $7 million throughthe issue of ICOs in a bid to launch Blockchain-enabled
smart contracts replacing the letter of credit. The
company is using its own crypto token, MTRc, which
is based on Ethereum and enables transactions at
reduced cost and high speed10.

In late 2016, financial innovation firm R3
collaborated with MAS to launch its first
dedicated distributed ledger technology(DLT) Center of Excellence in Asia, called R3
Asia Lab.

Zurich foraying into the Fintech lending space

Singapore-based Fintech, Cites Gestion, hasentered into partnership with Prudential
Singapore and StarHub to launch Fasttrack
Trade (FTT). It will be Singapore’s first
Blockchain based digital trade platform
for SME to facilitate trade transactions andaccess to the capital7.

The SME lending space in Zurich is growing quickly
with the expansion of Fintechs within the business
lending sector. Recently, Tradeplus24, a Zurichbased Fintech, collaborated with Trade Ledger tolaunch its trade finance platform for the Australian
SME sector. The range of solutions offered includes
invoice lending and receivables finance whileautomating the credit risk assessment process.

Hong Kong ramping up Blockchain
powered trade finance offerings

Dubai experimenting with statepowered cryptocurrencies

The Hong Kong Monetary Authority(HKMA), together with Deloitte and five
regional banks (HSBC, Bank of China, Bankof East Asia, Hang Seng Bank and Standard
Chartered), launched a Blockchain platform
for trade finance after conducting a proof ofconcept for lending, issuing LCs, factoring,
export credit and insurance functions8.
The platform aims to increase efficiency,transparency, and security in trade financewhile eliminating the possibility of fraudulent
activities by process automating.

With the aim of making Dubai the first Blockchainpowered government in the world by 2020, thecountry has launched emCash, the first statesponsored cryptocurrency11. emPay would allow
UAE residents to make varied payments, using nearfield communication (NFC). The users will have theoption of a secure digital currency, and merchants will
receive payments in real time without going throughintermediaries. The Dubai International Blockchain
Summit held in January 2018 was one of the first of
its kind held in the Middle East, aimed at unlocking
Blockchain opportunities in the region.

Monetary Authority of Singapore, Project Ubin: Central Bank Digital Money using Distributed Ledger Technology
r3cev, r3 partners with Monetary Authority of Singapore to launch Asia blockchain centre of excellence
Deloitte, Deloitte, HKMA and leading trade finance banks in Hong Kong have developed a Distributed Ledger Technology proof ofconcept for Trade Finance9
Pymnts.com, Blockchain Startup Populous Opens Its Doors With New Funding
10
Crypto Currency News, ModulTrade ICO Raises $7 Million, A Revolutionary Digital Marketplace For Small Businesses To Trade Globally
11
Cointelligence, The United Arab Emirates recently made history by releasing the first-ever governmental cryptocurrency, emCash
6
7

8

90 The Future of Trade

CHAPTER 4:

SHAPING THE
FUTURE OFSUSTAINABILITY
IN TRADE
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Chapter 4: Shaping the Future of Sustainability in Trade

Does sustainability equal ‘good forbusiness’? And why does it appear
increasingly on the agendas inboardrooms around the world?
What is clear is that there is increasing pressure on companies tooperate in a manner that is socially and environmentally responsible.
The modern customer is increasingly empowered and digitally vocal,
while product quality and safety have become tightly integrated withtraceability and supplier scorecards.
Meanwhile, many businesses are challenged by the dual demands of theinternal economic drivers of an organisation and the external customer
requirements for quality and efficiency.

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Chapter 4: Shaping the Future of Sustainability in Trade

OPTIMISING TRADEVALUE THROUGHADOPTINGSUSTAINABLE
SUPPLY CHAINS
In the early years of sustainability, its application waslargely confined to tree-planting or cheque-writing forcharities. That has fundamentally changed.
Sustainability is a process whereby companies integrate social,environmental, and ethical issues into their business operations andstrategy. Companies are the pioneers. They voluntarily pursue socialand environmental initiatives that go further than laws or other models,
because it is in their interest to do so, but also because of increasingpressure from media, government, and groups of consumers who are
actively vocal, especially across digital channels.
The scope of sustainability is multi-dimensional, covering areas
including the following:
Human rights, labour, and employment practices
Environmental issues
Combating bribery and corruption
Community involvement and development
Consumer interests
Responsibility through the supply chain
Disclosure of non-financial information

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Chapter 4: Shaping the Future of Sustainability in Trade

It might seem tempting to discard
sustainability as an add-on, an offset, or a risk
management tool rather than an important
contributor to reputation and, ultimately,
profit. A key misconception is that it is only
about philanthropy or charitable giving.
But sustainability is not just about being
politically correct and socially conscious.
Research shows, sustainable business models
can lead to long-term benefits for businessincluding increased profit – a connection
many companies have not yet made.
So can sustainability, in reality, grow business?
The answer is yes. A 2014 Nielsen Global
Survey on sustainability revealed that 64%
of consumers in Asia-Pacific were inclined tobuy from socially responsible brands.
A global average of 55% of respondents
in Nielsen’s corporate social responsibility
survey said they were open to paying apremium when companies are committed topositive social and environmental impact.
And in the global war of attracting andretaining talent, the impact is noticeable; the2015 Deloitte Millennial Survey, which polled
7,800 people across 29 countries, foundthat millennials prefer to work for a businesswith a heart and expect businesses to have apositive impact on wider society.

sustainability. Conclusively, they say thatcompanies that are the leaders in sustainable,social, and good governance policies have
25% higher stock value than their lesssustainable competitors.
While sustainability is certainly not the only
way to increase profits, achieve growth,and foster innovation, it by no means is ahindrance.
With data showing that the average lifespan ofa business has fallen from 67 years to 17 years
in a few decades – it is worth considering thefollowing: If you want a long-term sustainablebusiness, it makes sense to have a sustainablebusiness model.
For companies that see sustainability as anopportunity to strengthen the business, thebig challenge is execution and developing anapproach that can truly deliver.
And if the question remains: “Should
companies use their profit to make adifference or should they profit by making
a difference?” Our research implies that theanswer could be “both.”Goldman Sachs, Deloitte, and Harvard
Business Review, have furthermore publishedreports that prove the business case forCompanies that are the leadersin sustainable, social, and good
governance policies have 25%
higher stock value
94 The Future of Trade

Chapter 4: Shaping the Future of Sustainability in TradeRESPONSIBLE SOURCING ANDSUSTAINABLE SUPPLY CHAIN
MANAGEMENT GAINING TRACTION
Declining natural resources and rising social
awareness among certain consumer groups
regarding environmental issues has turned the
spotlight on sustainability. Amidst changing
weather patterns and raw material shortages,
companies have come to realise that placing
ethics over profits, especially when it comes tosupply chain, is imperative for a competitive
advantage.
Traditionally, supply chain management
was aimed at reducing costs and improving
the on-shelf availability of products. Withsustainability taking centre stage, functional
areas such as sustainable logistics, reverse
logistics, sustainable supplier and vendor
management, and internal sustainable
operation management are gaining
prominence. The aim is to conserve natural
resources, ensure efficient energy and water
usage, reduce CO2 emissions, and offer better
traceability.

the impact on the environment, but is also
unlocking opportunities for improving
operational efficiencies and logistics costs.
A small step in the form of optimisation oftransportation routes can help reduce mileage,
which, in turn, will have a great impact on
carbon emissions. The impact of sustainability
can also be seen in quantifiable terms in theform of reduced costs, particularly in logistics.
For instance, simply switching from road tobarge transportation helped Auchan Retail,a leading French international retail group,achieve twin benefits; first in the form of
reduced logistics spend and second, in theform of a simplified administrative process anda social contribution by ensuring that there arefewer trucks on the road.

Governments and companies are working
in alliance to replace the linear ‘take, makeand dispose’ model with a circular ‘reduce,reuse, recycle and return’ model. This hasturned companies’ focus towards reviewing
their supply-chain and operations froman environmental perspective. Focus onsustainable supply chains is not only reducing

It’s not just about environmental impact.
Focus on sustainable supply chains is
also unlocking operational efficiencies
and logistics cost savings
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Chapter 4: Shaping the Future of Sustainability in Trade

Some of the initiatives taken by Unilever
include - replacing the one litre Omo dilute
bottles with a flexible film doypacks leading
to an annual cost savings of around €2 million,
and a 73% reduction in plastic. Similarly useof innovation in packaging for its RIN laundry
powder pouches and the VIM dishwash bars
resulted in cost savings of €3 million owing to a
850 metric tonne reduction in use of polymer1.
CDP, an environmental organisation thatcollects carbon data from companies, reported
that more than 4,300 suppliers reduced their
CO2 emissions by 434 million tonnes, resulting
in cost savings of $12.4 billion in 20162.

A growing segment of younger consumers,
especially millenials, want to be sure that
their purchases have been produced underconditions that respect human rights. For
example, in order to tackle trust issues in
the gold industry, the World Gold Council
developed the Conflict-Free Standard,
which provides an assurance to consumers
that gold has been extracted in a way that
does not support unlawful armed conflict.
Similarly, companies such as Unilever andTata Global Beverages have announcedplans to achieve 100% sustainable sourcing
by 2020.

SHIFT IN CONSUMERPREFERENCES TOWARDSRESPONSIBLE BRANDSAND PRODUCTS
With consumers, becoming increasingly
aware about the impact of their purchases ofgoods and services on the environment, green
purchasing is gradually taking precedence.
With the increasing consumer sentiment forsustainable products, various companies
across the globe have started to realise theneed for creating greener products, andhave started working towards minimising theharmful impact of their business operations
on the environment. This has also fosteredeco-innovation within companies, which
focuses on incorporating environmentally
sustainability practices at each stage of its
production, be it goods or services.
An international study conducted by Unilever3
in 2017 covering 20,000 respondents from fivecountries revealed that one-third of consumers
are now buying from brands based on theirsocial and environmental impact. The survey

Unilever company website
CDP Global Supply Chain Report 20173
Unilever survey
1

2

96 The Future of Trade

12.4bn$cost savings achievedby reducing carbon
emissions across 4,300
companies 2016

Chapter 4: Shaping the Future of Sustainability in Tradealso revealed that 21% of the respondents
would actively prefer green products andbrands if they made their sustainability
credentials clearer on the product packaging
or in their product promotions. The study
also revealed that purpose-led purchasing
is greater among consumers in emerging
economies than in developed markets. Purposeled purchasing is defined as consideration ofenvironmental and social impact before buying
any goods or service.

66%

Amount ofconsumers willingto pay more forsustainable products
and services

An online global survey conducted byNielsen in 2015 found that consumers are
increasingly willing to pay more for socially
responsible products. 66% of the respondents
said they’re willing to pay more for products
and services that come from companies
that are committed to positive social andenvironmental impact, up from 55% in 2014
and 50% in 2013. The same survey also
revealed that consumers in Latin America,
Asia, the Middle East and Africa are 23-29%
more willing to pay a premium for sustainable
offerings than developed countries are.

Consumers in Latin America, Asia, theMiddle East and Africa are 23-29% more
willing to pay a premium for sustainable
offerings than developed countries
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Chapter 4: Shaping the Future of Sustainability in Trade

GOVERNMENTS
UNDER PRESSURE TO
MEET SUSTAINABLE
MANUFACTURING STANDARDS
A few vocal consumers groups, especially
activists and NGOs, are keeping a tab on
businesses and exerting pressure on them tobecome more environment friendly and socially
responsible. Media has played a central role inelevating the agenda. For instance, throughout
the 1990s Nike, a leading sports apparel
manufacturer was targeted by labour activists
and anti-globalisation forces for allowing its
suppliers in poor countries to abuse and exploit
workers. As a result, Nike eventually set up an
extensive and expensive system for monitoring
and remedying factory conditions in its supply
chain, which the rest of the footwear andapparel industry followed. Today, Nike is aperceived leader in sustainable practices.
Changes are also taking place at the policy
levels as a response to the increasing pressure
to ensure sustainable production andconsumption practices. As a result, various
governments across the world are enforcing
greater efficiency in the usage of energy andresources and promoting products that saveenergy and use renewable energy sources.
Governments have been earmarking greater
resources for R&D in environmentally friendly
technologies, enforcing the usage of renewable
natural resources and the introduction ofsustainable products. South Korea was among
the first countries to include green initiatives
in its national development plan. During the
global financial crisis in 2008, the country
allocated 80% of its fiscal stimulus plan ingreen projects, particularly in infrastructure
and transportation. In 2009, it announcedplans to invest $85 billion in clean energy
technologies and implement its green growthplan, which aims to reduce greenhouse gas
emissions by 30% by 2020 and increase thecountry’s renewable energy dependency to 11%
of energy supplies by 2030.

98 The Future of Trade

Through awareness campaigns, governments
have been helping individuals and households
to make sustainable purchase decisions.
Governments, in association with industry
and other relevant groups, are encouraging
environmental labelling and otherenvironment-related product information
programmes (PIP) developed to support
consumers in making informed choices. For
example, EU has issued a directive for energy
labelling of all household electrical appliances
including refrigerators, washing machines,
tumble dryers, dishwashers, lamps, airconditioners, and electric ovens. EU member
states have the responsibility to ensure thatthe labelling schemes are accompanied byeducational and promotional information
campaigns aimed at encouraging more
responsible choice of products and use ofenergy by consumers.

Chapter 4: Shaping the Future of Sustainability in Trade

IMPACT OFSUSTAINABLE
DEMAND ON MAJOR
COMMODITIESWith the shift in demand for more sustainable
goods, the production and trading of majorcommodities like cotton, iron ore, gold, crudeoil, and wheat are expected to be impacted in
the coming years.

CottonCotton, used in hundreds of everyday items,
is a key raw material for the textile industry
and represents about 30% of all fibre usedin the sector. Globally, cotton is planted on
more than 30 million hectares of land, which
produces approximately 25 million metrictonnes of cotton annually. More than 100 million
households across 80 countries are directly
engaged in cotton cultivation and depend on it
for their income4.
Consumers have been demanding sustainablecotton mainly due to the amount of pesticides
being used to grow conventional cotton,
which is more than any other crop. Cotton
also requires substantial amounts of water,
chemicals, energy, and land for cultivating
conventional cotton that threaten thesustainability of the sector. In 2016, thecultivation of more sustainable cotton reached
2.6 million tonnes, which was around 12% of the
global cotton supply. For 2017, it was estimatedthat the cultivation of more sustainable cotton
accounted for about 15% of the global cotton
production. However, only just greater than onefifth of this amount is estimated to be actively

412%of global
cotton supply issustainable

100%

The amount ofsustainable cotton
Bestseller, Decathlon,
and Tesco havecommitted to sourceby 2020sourced as sustainable cotton, with theremainder being traded as conventional
cotton.
Companies heavily dependent on cotton
as a raw material play a critical partin securing the future of sustainablecotton industry. Some of the companies
such as Patagonia, a US-based outdoor
clothing company have committed tomore sustainable, cotton sourcing andreport steady progress in actual uptake ofsustainable cotton. In 2017, at least 16 large
companies including Bestseller, Decathlon,
and Tesco had committed to sourcing 100%

WWF, Sustainable Cotton Ranking 2017 Report

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Chapter 4: Shaping the Future of Sustainability in Tradesustainable cotton by 2020. However, still there
are many of the world’s largest companies thatuse cotton as a key raw material, but do notconsider or address the negative impacts of its
production.

with virgin fibres for further use. Emerging
technologies offer some hope for chemicalcotton fibre recycling that would allow
production of recycled fibre equal in quality
to virgin fibre.

A number of global initiatives have been
introduced to promote cultivation ofsustainable cotton. Sustainability standards
and programmes aim to address thechallenges associated with conventional cotton
cultivation. They provide guidance for farmers
on more sustainable farming practices andassure buyers that the product meets specified
requirements. Although not the only way toincrease sustainability, such standards provide
an immediate first step that all companies
can take. The Better Cotton Initiative is one
such step, and is backed by companies suchas Levi Strauss, Marks & Spencer, IKEA, H&M,
and Adidas. The initiative’s goals are to makeglobal cotton production better for the people
who produce it, better for the environment
it grows in, and better for the sector’s future,by developing Better Cotton as a sustainable
mainstream commodity.

Thanks to these and other efforts to drive
the adoption of more sustainable cotton, thegap between supply and uptake is slowly
narrowing. However, in recent years, somemanufacturers such as Germany-based
Rudolf Group have started to produce
ecologically-optimised regenerated fibres asa substitute for cotton in more sustainable
ways. They rely completely on raw materials
from certified sustainable forestry. Marketed
varieties include Monocel, Lyocell, Modal
Edelweiss, Cupro, Acetate and, Triacetate. The
fibre yields per hectare of forests, measured
by kilograms per year are up to four times
higher than those of cotton. Also, there arecompanies such as Taiwan-based Singtex that
produce fibres from coffee grounds, which
are completely harmless to the environment.

With increasing emphasis on sustainability,
recycled cotton is also gaining importance.
Cotton is currently recycled mostly throughmechanical fibre recycling which downgrades
fibre length and quality and requires blending

100 The Future of Trade

The clothing industry places a lot of faithon these improved regenerated fibres.
Thanks to their wearability, these fibres arealso becoming increasingly popular with
consumers.

Chapter 4: Shaping the Future of Sustainability in Trade

Iron ore
The steel manufacturing industry, being thedominant consumer of iron ore, is the largest
energy consuming manufacturing sector andthe second-largest industrial consumer ofenergy, after the chemical sector. The industry
accounts for about one-fourth of direct CO2
emissions from the industrial sector. The CO2
emissions are quite high due to a large share ofcoal and oil in the energy mix.
In 2017, steel production reached 1,691 million
tonnes (Mt). By 2050, the demand for steel
is expected to increase by 1.5 times that ofcurrent levels, to meet the need for buildings,
infrastructure and transport in a sustainable way.
Steel is an essential commodity which is needed
in both developed and developing economies
in applications that support sustainable
development, resulting in a green economy.
Steel is crucial for the sectors and technologies
that enable and drive a green economy.
Renewable energy, energy-efficient buildings,
low-carbon transport, infrastructure for fuelefficient and clean energy vehicles, and recycling
facilities are completely dependent on steel.
According to the World Steel Association, in
addition to providing employment and steel
products that support a green economy,
the global steel industry is taking steps tomake improvements in its own sustainability
performance. The efforts include:
Reduce carbon footprint of steel
manufacturing
Ensure world-class safety performance

Promote life-cycle thinking andintelligent product design to allow for
dematerialisation and increased reuse
Improve end-of-life steel productrecovery and recycling rates

25%of the emissions fromthe industrial sector
come from steel
manufacturing

1.5x

The expected increasein steel supply tomeet demand for
new buildings,
infrastructure andtransport by 2050

Full support for the application of steel inproducts that reduce CO2 emissions, such as
Advanced High-Strength Steel (AHSS)
in vehicles
5

World Steel, Energy use in the steel industry Factsheet

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Recycling steel saves energy and natural
resources, with an energy savings equivalentthat can power 18 million households per year.
In addition, for every metric tonne of steel
recycled, 1,250kg of iron ore, 700kg of coal, and60kg of limestone are saved6.
For instance, ArcelorMittal, a leading producer ofsteel has committed itself to make a progressive
reduction in the amount of CO2 emitted in thesteel-making process in the coming years. The
company has set a target of reducing emissions
by 170kg per tonne of steel produced by 2020.
As part of the company’s long-term strategy
to achieve sustainability, it is also working
to develop breakthrough technologies torecycle steel. Being a part of the Ultra-low CO2
Steelmaking (ULCOS) project, the company
is developing a technology that combines

18m

households that
could be powered
per year byrecycling steel

CO2 capture through top gas recycling andpossible storage later on. Similar initiatives arebeing adopted by other steel manufacturers
to reduce emissions, conserve resources, anddevelop new ways to reduce GHGs in thesteel making process the raw material.

Gold
Today, consumers, retailers and industrial
players expect to see documented evidenceof compliance with ethical and legal standardsof production and traceability across the
supply chain. To address these issues, suitablelegislations have already been laid, such as the
Dodd-Frank Act in the US and the European
Market Infrastructure Regulation (EMIR) in
EU. Also, the World Gold Council released its
Conflict-Free Gold Standard in 2012 to raiseindustry standards and set best practices forothers to follow. The standard aims to stopgold mining from funding wars in conflictstates encompassing the entire supply chain.

programs that have a wider impact on thesocieties they operate in, apart from the jobs
and investments brought to the communities.
These community development programmes
mostly aim at investments in education,
entrepreneurship, and healthcare. For instance,
Newmont Mining Corp., a Colorado, US-basedmining company, is working in collaboration
with the national Ministry of People’s Housing
to build and improve houses for low income
communities in the West Sumbawa Regency
region of Indonesia. Similar, initiatives are also
being driven by other mining companies suchas Anglo American and Goldcorp Inc.

Also, gold mining companies have beenlaunching several initiatives to impact thesociety and environment. Mining companies
have been building community development

These mining companies have also started
implementing an array of new initiatives
to adopt renewable energy sources to run
their routine operations, as a measure to cut

6

ArcelorMittal, Sustainability of Steel

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Chapter 4: Shaping the Future of Sustainability in Trade

down their carbon footprint and achievesustainability in the gold mining industry.
Harmony Gold, a South African mining
company, has built two solar parks at one ofits sites to help the company reduce pressure
on peak energy usage. The company is also
growing biocrops in the form of giant king grassand sugar beet, which are used as feedstock to
generate natural gas as a fossil fuel substitute.
Other sustainability initiatives implemented
by some of the major gold mining companies
include transparency in the system, respectfor human rights, and proper reclamationof mining sites post mining. In the coming
years, with consumers becoming more awareof sustainability, the remaining gold mining
companies are also expected to shift their focus
towards environmental and social welfare.

Crude oil
Due to depleting oil resources, increasing
oil prices, and negative impact on theenvironment, consumers and industries
across the globe have slowly started
adopting sustainable or renewable energy
resources. As a result, governments ofboth developed and developing countries
have been making significant investments
in developing infrastructure for producing
alternative or renewable energy suchas wind, solar, geothermal, and electric
batteries. India has planned to increase
its renewable power capacity to 175GW
by 2022 from the current 61GW, mainly
consisting of wind and solar units.
With government subsidies for newenergy sources on the agenda, interest is
expected to increase in the generation ofalternative or renewable energy sources.

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Chapter 4: Shaping the Future of Sustainability in Trade

Wind and solar energy have been catching
the most attention of governments dueto their potential availability and minimal
effect on the environment. For instance,
it is estimated that the US saved between$35 - $220 billion between 2007 - 2015 dueto government subsidies for the increased
adoption of renewable energy sources. This
step avoided deaths, fewer sick days, andhelped mitigate climate change7.
Wind energy demands large investments
in infrastructure, which includes windturbines, collection, and transmission centres.
Additionally, these wind parks requirehuge land areas to become economically
viable. Solar energy also faces the samebarrier of high costs, combined with anadditional factor of low yield. In comparison
to conventional energy sources, energy
generated by solar units cost 3-to-6 times
more. However, with the development offurther innovations and technologies in thisspace, the initial capital cost of constructing
wind and solar power plants are expected tocome down in the coming years.

7

Electric batteries have been developed toreplace the conventional engine vehicles inorder to reduce toxic emissions. However,
the technology has its own challenges
and opportunities. Like wind and solar
energy, its cost is still higher in comparison
with other conventional energy sources.
The penetration rate of electric batteries
is currently low in vehicles, and so is theinfrastructure to use them. The disposalof used batteries remains a challenge, as
they carry a risk of giving off toxic gases
and ingredients such as lithium and cobalt
can lead to water pollution and depletion.
Carmakers, recyclers and tech startups areworking to solve the question of how todeal with worn out lithium-ion batteries.
However, with the growing implementationof smart grids and intelligent energy
transmission systems, the use of electric
batteries is likely to increase.

Quartz Media, One of the biggest criticisms against wind and solar energy has been quashed

104 The Future of Trade

Chapter 4: Shaping the Future of Sustainability in Trade

CASE STUDY:

Nokia – a leader in
responsible sourcing
Scandinavian countries and companies arevery well-known worldwide for their focus onsustainability. It is not a surprise for Finlandbased Nokia, a Microsoft company, to be oneof the sustainable business practice leaders.
The importance of sustainability is wellreflected in various processes followed by theorganisation and embodied within Nokia’s
leadership team that approves sustainability
and related KPIs as part of the company’s
strategic planning process.
The company has been manufacturing
environmental friendly products by sourcing
raw materials that are either biodegradable
or made from recycled materials. Since 2007,
Nokia has been striving to make “sustainabledevices”. In fact, 100% of the materials usedin these devices can be and are used again
through collection of e-waste.
To achieve sustainability, all suppliers definedin the company’s supplier base management
process must comply with its robust
requirements which are based on international
standards. In addition, Nokia expects its
suppliers to have a code of conduct in place

and policies related to ethical behaviour,human rights, fair employment, health andsafety, environment, and conflict minerals. To
promote sustainable improvements throughout
the supply chain, Nokia expects its suppliers to
put in place similar sustainability requirements
for their own suppliers, which include vendors,
subcontractors, service providers, partners,
etc. As of result of all these efforts, Nokia wasranked in the top 10% of the 2,500 largest
companies that lead in sustainability in 2017 by
Dow Jones Sustainability Indices (DJSI).
Nokia is one of the first telecom vendors to
set out long-term energy and GHG reduction
targets under the independent Science
Based Targets initiative. The initiative set up
by various non-governmental organisations,encourages and independently verifies
companies’ long-term targets to help theworld move to a low-carbon economy. Under
this initiative, Nokia aims to reduce the energy
usage in its offices, factories, vehicles, andother facilities by 41% by 2030. It has also
set an ambitious target to reduce the GHGs
emitted by the usage of its products by 75% by2030 against 2014 levels.

Nokia aims to reduce theenergy usage in its offices,
factories, vehicles, and otherfacilities by 41% by 2030
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Chapter 4: Shaping the Future of Sustainability in Trade

ADOPTION OF GREEN SOLUTIONSTO REDUCE CARBON FOOTPRINT
IN TRANSPORTATIONWith companies aiming to shrink their carbon footprints, the supply chain often
plays a key role in achieving this. To reach their green targets, companies are slowly
shifting towards the adoption of advanced technologies and use of less polluting
fuels in their supply chain.

ADVANCEDTECHNOLOGIESADOPTED TO ACHIEVESUSTAINABILITY
New technologies are being implemented
in the supply chain to enhance its efficiency
and achieve sustainability. Some of the latest
technologies adopted include transportation
management software, Radio Frequency
Identification (RFID), big data & analytics,
Internet of Things (IoT), and telematics.
These technologies help simplify supply
chain management by enabling businesses
to operate efficiently, providing highvisibility and control over inventory, andreducing operational costs. In the long run,this helps companies curb their carbon.
The use of shipping and tracking software
helps integrate all the supply chain
operations into a single panel. Also, thispanel can be viewed and managed througha mobile device, meaning a company cancontrol its inventory data, manage shipping,monitor distribution, settle payments,
etc. while on the go. This could result in
reduction in errors in the entire supply chain
process and enhance customer experience.
RFID has been gaining popularity within the
manufacturing supply chain for managementof assets, inventory, and materials
transportation. Also, as RFID enables moreaccurate inventory tracking, it can be used to

106 The Future of Trade

1 tn

The amount ofsensors estimatedconnected to theInternet by 2022

reduce unnecessary truck deliveries, resulting
in reduced fuel consumption.
Transportation is being transformed
through data-driven insights. An
unprecedented amount of data can be
captured at various points along the supply
chain. The analysis of this big data offersa massive potential to optimize capacity
utilisation and routes, improve customer
experience, reduce risk, and achievesustainability by curbing fuel consumption.
IoT is enabling supply chain managers toachieve greater accuracy and visibility inall processes. It also notifies any possible
faults throughout every supply chain

Chapter 4: Shaping the Future of Sustainability in Tradeoperation including transportation andlogistics. The shipping element of the supply
chain is already leveraging sensors to tracktemperature, battery, and fuel levels, andpotential errors that could affect goods andvehicles. According to research by the World
Economic Forum, by 2022, 1 trillion sensors
are estimated to be connected to the internet.
Telematics is also revolutionising thetransportation and logistics sector, especially
fleet management. It provides supply chain
managers the access to data, such as timingsof routes and how vehicles are driven, to

USAGE OFALTERNATIVEFUELSWith concerns over energy security andstricter emission regulations, transportationand logistics providers, mainly in US andEurope have been shifting towards alternativefuel vehicles (AFVs). The AFVs mainly use
fuels including compressed natural gas (CNG),
liquefied natural gas (LNG), biofuels, hybrids,
etc. The benefits offered by AFVs include
lower initial costs, smaller carbon footprints,
and reduced emissions.
Transportation is a major source of carbon
pollution, accounting for about 24% of
greenhouse gas (GHG) emissions worldwide.
According to the European Environment
Agency, the transport sector is the secondlargest source of carbon pollution in Europe,
accounting for about 20% of GHG emissions.
Looking specifically at road transportation
emissions, it is estimated that the emissions
from vehicles could be cut by 29% by 2030
through a combination of low-carbon fuels,
AFVs and improved fuel efficiencies. An early
adaptor of AFVs was States Logistics Services,
Inc., a third-party logistics solutions provider
based out of California, US. The logistics
provider runs its entire California fleet using
B99 biodiesel fuel, a blend of 1% diesel withallow them to make intelligent decisions
about fleet and reasons for breakdown,
training, fuel consumption, component failure
rates, and so forth.
The future of logistics and transportation will not
only include autonomous trucks on the roads,
but also autonomous vessels traversing acrossoceans. UK-based Rolls Royce has set a target to
deploy remotely controlled autonomous vessels ininternational waters by 2025. All these advanced
technologies will help in the reduction of the
carbon footprint of various companies in the longrun, resulting in sustainability.

24%

The amount ofgreenhouse gas
emissions stemmingfrom transportation

29%

Reduction ofemissions estimatedby 2030

99% biodiesel that can be used in diesel
engines with little to no modifications.
This shift to biodiesel was based on therequest of a customer and due to thebenefits biofuels offer.

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In a recent development with respect to curbing of carbon emissions, the Finnish
capital is aiming to ensure that all commercial vehicles and machinery operated by
Helsinki as well as the bus services commissioned by Helsinki Region Transport (HSL)
will completely shift to renewable fuels by 2020. Also, some of the major logistics
service providers such as DHL and UPS have shifted towards alternative fuels to power
their fleets and offices across the world with the aim of reducing their carbon footprint.
Similar trends are further expected to continue in the transportation and logistics
sector in the coming years, as emission regulations would get more stringent.

CASE STUDY:

DHL – environmental
protection programme
Since 2008, the DHL Group has been focusing
its efforts towards climate protection, mainly
through the cutting down of carbon dioxide(CO2) emissions. The company set a clear
carbon emission target and launched the“Go Green” sustainability program in 2008.
Under the program, the group had set atarget to reduce its carbon emission levels
by 30% by 2020 (based on 2007 levels) andincrease transparency on company’s carbon
emission levels. It was a first of its kind movein an industry that has a business model that
extensively relies on carbon emissions to survive.
At the end of 2016, the group had managed toreach its 2020 climate protection goal early,
by achieving 30% carbon efficiency between
2008 - 2016. To realise a more sustainable
future, in 2017, the company set a new climate
protection target to reduce all logistics related
emissions to zero by 2050.
To realise the vision of zero emission logistics,
the group has set several interim goals acrossthe key action areas of its sustainability
strategy. By the end of 2025, the group aims toincrease carbon efficiency by 50% compared
to 2007 levels.

108 The Future of Trade

The group is also aiming to develop
environment friendly logistics solutions
and bring the group’s divisions together tocommercialise these solutions. These initiatives
not only strengthen the group’s market
position, but also benefit its customers, society,and the environment, which is the crux of thegroup’s shared value approach.
UPS, a US-based logistics services provider,followed the footsteps of DHL and deepened its
commitment to alternative fuels in 2012 when
it set a goal of reaching 1 billion miles driven
by AFVs by the end of 2017. However, UPS
achieved this target in 2016, a full year aheadof the original target date. In the long term,
the company seeks to transform commercial
transportation and logistics, spurring growth in
the adoption of alternative fuels.

Chapter 4: Shaping the Future of Sustainability in Trade

INCREASING DEMAND
FOR SUSTAINABLE
PACKAGING ACROSS
THE VALUE CHAIN
Consumer demand for green packaging
is continuing to increase, as consumers
are becoming more aware about theenvironmental impact of products theypurchase and use. This has resulted insustainability and green efficiencies playing
a key role in consumer purchasing decisions,which has consequently driven demand forsustainable packaging.

203bn

$

Estimated market
value for sustainable
packaging in 2021
The most common trends in sustainable
packaging are:reduction in weight of packaging
increase in recyclability and re-use

At the manufacturing end, companies aretaking efforts towards achieving long-termsustainability goals such as optimisationof resource utilisation and wastage inpackaging and efficient disposal andrecycling. The packaging manufacturers
are responding to consumer demand
for green packaging solutions by using
environment-friendly packaging materials
and emphasising efficiencies throughout theentire manufacturing process.

increase in use of recycled materials
increase in use of naturally-sourced or
biodegradable materials
improvements in packaging andlogistical efficiency
decrease in usage of non-renewablesources of energy and raw materials

The materials used in green or sustainable
packaging can be easily bent or moulded
as required and can also return to their
original form once released. One of the
major advantages of green packaging is
the low toxic emissions it produces, once
discarded after use. Due to the increasing
environmental concerns worldwide and thegrowing need to reduce toxic emissions,green packaging is widely being adopted
by the food & beverage, healthcare, andpersonal care industries.

According to a study by Smithers Pira,
the issue of sustainable packaging willcontinue to grow in importance over the
coming years and is predicted to become
the top challenge faced by companies by2023, because of consumer conscience,
government regulations, and improved
profitability to companies due to the usageof biodegradable and recyclable materials.

The market for such packaging is expected
to reach $203 billion by the end of 2021,
growing at a CAGR of about 6%. The US
is the largest market for green packaging.
The US and Europe are considered moremature markets for green packaging due totheir already extensive use of eco-friendly
products, while the Asia-Pacific region is
the fastest growing market.

Sustainable
packaging ispredicted to bea top challenge
for businesses
by 2023
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CASE STUDY:

PepsiCo – Sustainability
achieved through innovative
packaging
In 2014, PepsiCo identified a range of materials
issues including innovating its packaging
to make it more sustainable. This stood as
the key material issue given the company’scommitment to strive for the minimal possible
carbon footprint while still exceeding thevalue, cost, and performance expected bycustomers. Packaging materials account fora significant share of PepsiCo’s supply chain
spend. The reduction in packaging materials
in the company’s products not only reduced
the cost for the company, but also decreased
the amount of wastage. The company is also
constantly working towards designing morerecyclable packaging to achieve sustainability.
In the same year, PepsiCo saved more than
$11 million and $29 million pounds of film andcorrugated packaging respectively from its
global food and snacks packaging, resulting ina total savings of $20 million. In its beveragebusiness, the company eliminated 46 million
pounds of packaging, which consisted of 20
million fewer pounds of plastic, 23 million
fewer pounds of paper-based packaging,

600m

$

Cost savings achieved
by PepsiCo in six years
realised by sustainability
initiatives
110 The Future of Tradeand 3 million fewer pounds of aluminium
as compared to 2013. These were mainly
the result of light weighting, film downgauging, bag optimisation, carton size
reduction, and increase in the recycledcontent and recyclability of PepsiCo’s
packaging.
PepsiCo’s environmental sustainability
initiatives launched in 2010 resulted in costsavings of $600 million in the six years to
2016. The company also announced its
2025 Sustainable Agenda in 2016 aimed atincreasing the company’s efforts to protect
the planet. In a move to reduce waste andwarehousing costs, the company has also
been installing automated storage andretrieval system (AS/RS) and warehouse
control system at its plants.

Chapter 4: Shaping the Future of Sustainability in TradeSUSTAINABLE
WAREHOUSESWith increasing utilities and warehousing
costs and stringent certification requirements,
companies have been slowly shifting towards
sustainable warehousing. It mitigates harmful
effects to the environment, encourages worker
safety and comfort, and earns the respectof customers and society overall. From a
critical business perspective, sustainable
warehousing also lowers operating costs,
resulting in improved financial performanceof any company. Sustainability is now anessential component of a Class A warehouse.
Companies are investing in sustainable
warehousing mainly due to:
Location and transportation – thewarehouse is near public transportation
spots and does not damage habitats ofhumans or endangered species
Sustainable sites – no damages caused
to vegetation during the construction of
the warehouse; placement of rainwater
mitigation programs, etc.

Energy and atmosphere – usage ofenergy efficiency equipment; efficient
usage of energy and utilisation ofsustainable energy sources for various
operations
Materials and resources – usage ofsustainable materials to build thewarehouse facility; purchasing ofmaterials with recycled content for
packaging; and usage of energyefficient lights
Indoor environment quality–
establishment of a safe and clean
environment for employees to work
Other key certifications obtained forsustainable warehousing facilities include
the Net Zero certification, where the facility
can produce as much energy as it uses. Also,
various digital technologies such as cloud,big data and analytics, mobility etc. areplaying a key role in achieving sustainability
in different warehouse operations.

Water efficiency – minimal usage of water
for landscaping purposes and inside thewarehouse building

Sustainable warehousing
lowers operating costs
and improves financial
performance
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Chapter 4: Shaping the Future of Sustainability in Trade

ROLE OFTECHNOLOGYIN SUSTAINABLE
WAREHOUSESDue to rising cost pressures and increasingly
stringent emission regulations, supply chain
and warehouse operators have been adopting
various digital technologies to contain
operational costs and reduce their carbon
footprint. Cloud, mobile, and other digitaltechnologies have already made a significant
impact on supply chain and warehousing.
Digital technologies, powered by mobile
devices, help make the supply chain efficientand accurate, thereby reducing costs.

Also, companies have been partnering withsuitable players to leverage the synergies
and forge innovations to optimise their
supply chain and warehousing operations.
For instance, a company could select awarehousing partner depending on volume,
season, and other conditions. A collaborative
platform to distribute fulfilment orders basedon predicted fleet movements could reduce
operational costs for both the partners andreduce their impact on the environment.

Cloud-based warehouse management
systems (WMS), accessible from any location
helps maintain optimal stock levels andavoids wastage of goods. It is estimated thatby 2020, 3 out of 4 WMSs will be on thecloud, with enterprises adopting cloud firstor cloud only approaches to their supply
chain management. Application of predictive
analytics is expected to rise as it improvesforecasting accuracy. A lean organisation
could use predictive analytics to enable justin time (JIT) inventory model, with optimised
inventory levels at every point of their supply
chain. The result is improved productivity,
revenue gain, and reduced carbon footprint in
the medium to long-term.

It is estimated that by
2020, 3 out of 4 warehousemanagement systems will beon the cloud
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Chapter 4: Shaping the Future of Sustainability in Trade

CASE STUDY:

Amazon.com – early
adopter of sustainable
warehousing solutions
Automation of supply chain and warehousing
operations has been gaining importancedue to the growing need for efficiency invarious associated processes. Machine visionand robotics that are already widely used inindustrial applications are poised to entersupply chain and logistics.
E-commerce player, Amazon.com has been at
the forefront in the adoption of various digital
and automation solutions to optimise andstreamline its supply chain and warehousing
operations. For example, Amazon’s Kiva
Robotics is one of the innovative automatedwarehouse solution adopted by the company.
By the end of 2016, Amazon had deployed
45,000 robots across 20 of its warehouses.
These robots helped cut about 20% of thecompany’s operating expenses. This move also
helped the company increase its inventory
space significantly by smarter use of space bydiscarding several material handling systems.
As of January 2018, Amazon had roughly
100,000 such robots in use across the world.
In the short term, the continued addition andusage of robotics in its warehouses can save
up to $2 million in operating costs for every
automated warehouse.

100K
Robots deployedin Amazon
warehouses

2m$

Estimated saving inoperating cost forevery robot-automatedwarehouse

The increasing focus on reduction ofenvironmental and social footprints ofwarehouse facilities has been driving theleadership of various warehousing partners to
adopt sustainable solutions. These solutions
mainly include sustainable technologies such as
cloud, big data and analytics, optimised designof warehouses, and sustained use of energy.

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GREENER WAYS
TO CUT THROUGH
SUPPLY CHAINCOMPLEXITYCHANGING
DYNAMICS ACROSS
THE VALUE CHAIN

Transparent supply chains forsustainable economies
An ethical supply chain is no longer a trend, but has become acornerstone for businesses. Lack of transparency creates grounds
for economic, environmental, and human rights violations within an
organisation’s supply chain. Consumers are increasingly conscious
about sustainability and prefer products that are grown and harvested
using environmentally and socially responsible practices. This is a
critical factor pressurising corporations to incorporate traceability andtransparency across the value chain.

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Chapter 4: Shaping the Future of Sustainability in Trade

REGULATORY PRESSURESACCELERATING THE PACE
OF TRANSPARENCY IN
SUPPLY CHAINS
Regulators across the globe are of theopinion that an opaque supply chain is thebiggest barrier to achieving sustainability.
The 2016 United Nations (UN) Climate
Change Conference held in Marrakech
witnessed the launch of TRASE(Transparency for Sustainable Economies),
a revolutionary platform for tracking thecommodity supply chain. The platform,
developed by Stockholm Environment
Institute (SEI) and UK-based Global Canopy
Programme (GCP), was launched with a
primary goal of achieving deforestation-freecommodity trade through improvements
in commodity production, procurement,
and investment strategies8. By tracking
commodity flows from production
landscapes to consumer markets, TRASE
can help detect problem areas and act asa catalyst in bringing about improvements
across the board.

The UN, through various other initiatives suchas Sustainable Development Goals and the
UN Guiding Principles on Business and Human
Rights, has been laying down the foundation
for tackling sustainability issues.
Market regulators across the globe arealso playing a pivotal role in global tradeby promoting a culture of transparency insupply chain operations. Various legislative
frameworks have been enacted which
require multinational companies to trace
their supply chains and be transparent about
their environmental, social, and governanceinitiatives.
Some of the notable regulations include theDutch Child Labour Due Diligence Law, UK
Modern Slavery Act, French Corporate Dutyof Vigilance Law, California Transparency
in Supply Chains Act, and the EU Conflict
Minerals Regulation.

Regulators are playing apivotal role in global trade bypromoting transparency acrossthe supply chain
8

EUREDD Facility: Global supply-chain transparency

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Chapter 4: Shaping the Future of Sustainability in Trade

SUPPLY CHAIN
TRACEABILITY
AUGMENTING REVENUE
AND PROFITS
Implementing traceability can help
companies gain more visibility of supply
chain processes, which in turn, could
heighten operational efficiencies through theelimination of unnecessary middlemen andredundant processes, logistics tracking, andreduced inventory management costs.
Another benefit to businesses could beenhanced reputation and a strong brandrecall. A survey conducted at the end of2016 by GT Nexus, a commerce network
provider, concluded that 46% of millennials
switched from their favourite brands
because the brand was not eco-friendly or
the brand did not pay or treat its workers
well9. Companies that have adopted thepractice of transparency could be in a better
position to acquire customer loyalty bycurbing their concerns about the ingredientsused, production method, labour standards
implemented, and the environmental impact
of production.

For instance, H&M, a clothing retailer
publishes names and addresses of its
suppliers, which ensures that H&M canbe held accountable for the conductof their suppliers. Anyone can verify
if their suppliers are living up to thestandards set by the company. In
addition, H&M has announced a goalof using only recycled or sustainably
sourced materials by 2030.

100%

The amount ofsustainability
sourced or recycledmaterials H&M hascommitted to use by
2030

BENEFITS TO THE
ENVIRONMENT
Traceability systems provide a means ofmonitoring impacts on the environmentand can be used as a tool to support theconservation of natural resources. For
instance, a huge demand for palm oil has
been causing mass deforestation and eating
away the habitats of endangered species inthe tropical region.
9

GT Nexus Commerce Network

116 The Future of Trade

In response to this, companies such as
Unilever and L’Oreal have set a goal ofsourcing 100% of its palm oil needs from
responsible and sustainable sources by2020.

Chapter 4: Shaping the Future of Sustainability in Trade

LEVERAGINGTECHNOLOGY
Consumers’ inquisitiveness to understandthe supply chain has long been met throughtraceability systems such as RFID and Quick
Response (QR) codes, which are the dominant
identification and traceability technologies.

from mine to retail. De Beers are developing
a new Blockchain platform called Tracr withfive other diamond manufacturers that will be
open to the entire diamond industry, and help
avoid imposters and conflict minerals.

Blockchain, as discussed in this report,
creates a permanent record of transactions,enabling transparent knowledge sharing
between stakeholders in the value chain.
This technology is also expected to result in
reduced costs and delays from paperwork,
easy identification of bottlenecks, improved
inventory management, increased compliance,a secure audit trail, and reduced potential ofrisk from supply chain malpractices.

Everledger, a global startup that uses thebest of emerging technology including
Blockchain, smart contracts and machine
vision to assist in the reduction of risk
and fraud for banks, insurers and open
marketplaces, is developing Blockchainbased solutions for provenance tracking andcertification and is focused particularly on
the diamond and jewellery industry.

Companies across industries are trying theirhand at Blockchain. Capitalising on blockchain
principles, Walmart has developed an app whichallows customers to track the origin of products
and also helps its employees streamline therestocking process. Similarly, Maersk, the world’s
largest shipping company, through various tests,
concluded that Blockchain can simplify logistics
tracking by remotely accessing data about the
shipped cargo.
The use of Blockchain in diamond tradingis also expected to substantially enhancetransparency.
De Beers has announced that it tracked
100 high-value diamonds from the mine to
the retailer using Blockchain technology.
According to the company, this is the first timea diamond’s journey has been digitally tracked

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EVOLVING ROLE OF CHIEF
PROCUREMENT ANDSUSTAINABILITY OFFICERS
The role of a Chief Procurement Office(CPO) is no longer confined to achieving
cost efficiencies. The need to conserve
natural resources has placed sustainableprocurement at the top of their agendas,
with most companies framing policies
for responsible sourcing. Pressure fromconsumers and regulators to achieve supply
chain transparency has put the onus on
CPOs to set up new procurement systems
and processes by leveraging technology
such as Blockchain.

These challenges have been driving innovationin organisations including Anheuser-BuschInBev, Mars, and McDonald’s, which have createddedicated sustainable sourcing/supply chain
sustainability teams, work in close collaboration
with internal operational teams and external
suppliers, and brainstorm new ways of recycling
and reusing materials. The CPOs and CSOs areplaying key roles in furthering sustainability
goals of organisations and are acting as
catalysts in leading the organisations towards a
revolution in supply chain management.

INCENTIVISING SUPPLIERS FORADHERENCE TO ENVIRONMENTAL
GUIDELINES
Apart from accommodating internal processes,
companies have come up with a uniquesolution to motivate their suppliers to follow
environmental standards. Companies havestarted to tie financial terms not only tothe supplier’s credit rating, but also to theirenvironmental and social scores. Per thismetric, suppliers adhering to the sustainability
objectives laid down by the buyer are offeredbetter financing.
This affordable source of financing enables
suppliers to expand the scope and width ofbusiness operations, and at the same timeencourages them to consider environmental
aspects of their activities.
Levi’s pioneered this programme in 2014 incollaboration with the International FinanceCorporation (IFC). The better the supplieris at assuming responsibilities towards theenvironment and its workers, the better therate provided as part of the tiered supply
chain financing, thereby creating a win-win

118 The Future of Tradesituation for the suppliers, the workers, and theenvironment. PUMA and Nike are some of theother companies who have followed in Levi’s
footsteps.
“In the last few years, companies that perhaps
didn’t take sustainability as seriously before,
now see it as one of the primary risks to theirbusiness and there is a greater realisationthat financing and sustainability need tobe more closely linked in order to achieve
better results” says Farzin Mirmotahari, Senior
Operations Officer, IFC.
Together with garnering support from IFC,
this innovative method of financing has also
been embraced by global banks. With its
participation in PUMA’s ‘variable financing
program’, BNP Paribas became the firstmarket listed bank in the world to accept
a sustainability-based interest rate grid forsupply chain finance.

Chapter 4: Shaping the Future of Sustainability in Trade

COMPETITORS: FROMFOES TO FRIENDS“As an industry, we need to make sustainability
a top priority, and this means coming together
to tackle the big social and environmental
issues of our time,” says Chip Bergh, President
and CEO, Levi Strauss. Trade has madethe world a smaller place and has acted
as a stimulant in promoting efficiencies in
production through technology transfer andenhanced competition. Companies havecome to realise that horizontal and verticalcollaboration is crucial for success in achieving
traceability. Collaborations also aid in thepooling of best practices and resources; thus,
expediting the adoption of sustainability insupply chains.

Nestle partnered with Coca-Cola, Danone,
Ford, Heinz, Nike, P&G, and Unilever to forma Bioplastics Feedstock Alliance, aimed at
encouraging the use of plant matter for
manufacturing plastics.
Nike, the global clothing and footwear brand,
is the founding member of the Sustainable
Apparel Coalition and the Zero Discharge
Hazardous Chemicals and is working closelywith H&M and Zara in its bid to eliminate
the use of hazardous chemicals in textile
production by 202011.

A notable example is the horisontal logistics
coalition between PepsiCo and Nestlé, where
they bundled their warehousing, packaging,and outbound distribution functions in
Belgium to address the problem of low truck
fill rates. This coalition led to a range ofbenefits to Nestlé in the form of better service
levels, a 44% reduction in transportation
costs, together with spiralling benefits to thesociety in the form of reduced traffic and 55%
reduction in carbon emissions10.

CONCLUSION:
Embracing sustainability as a major business driver, partnering withsustainable suppliers, and ensuring traceability to enable transparency
are all expected to pave the way for a truly sustainable world.
10
11

Beyond Supply Chains: Empowering Responsible Value Chains report by Accenture
Network for Business Sustainability

The Future of Trade 119

Future of Trade Conclusion

FUTUREOF TRADECONCLUSIONAt the outset of our journey to understandhow the future of trade will evolve over the
next decade, we asked ourselves: Will thesweeping advance in tech and finance fuelglobal trade? Or will rising protectionism
and the threat of trade wars keep markets
in a state of flux?

120 The Future of TradeFuture of Trade Conclusion

When it comes to global trade, technological advancements and politicaldevelopments can affect the nature of how goods and services areexchanged. Political adjustments and protectionist polices can strain
relationships, resulting in disavowed multilateral trade agreements,
fluctuating commodity prices, and the fall of manufacturing hubs. Althoughchanges may be unpredictable, new challenges will create opportunity andsteer the landscape within which trade will operate over the next decade.
For example, as highlighted in this report:

Geopolitics challenge the
Future of Trade

Global trade is at the cuspof a digital revolution

In the last decade, barriers in major trading
hubs have decreased. However global trade
has been sluggish. Stalled trade negotiations
and non-tariff barriers could be hindering
global trade growth. Political changes suchas the election of US President Donald Trump
and Brexit have also had significant effects on
businesses and trade.

Against a backdrop of a synchronised upswing
in 2017, primary commodities account for
more than one-quarter of total goods traded,and global trade value is likely to increase.
The development of blockchain, advanced
robotics, and the Internet of Things presents a
profound shift for the future. Blockchain, whilestill not deployed at an industrialised scale,will begin to streamline business efficiency for
global importers and exporters; reducing costs,
increasing productivity, and driving economies
over the next decade.

The world’s economic
centre of gravity is shifting
towards Asia
China is seen as the emerging champion of
globalisation. The Belt and Road initiative
aims to connect markets across Asia, Africa,
and Europe by expanding maritime, rail
and road networks, and infrastructure. The
initiative also includes energy corridors andtelecommunications.

New manufacturing hubs
are emerging
As China’s economy becomes more reliant on
domestic consumption and technologicallyled manufacturing, around 100 million labourintensive manufacturing jobs will move toother low cost countries including Vietnam,
Mexico, Myanmar, India, Indonesia, and Kenya.
Although Africa and South America are yet tomake a significant impact on global economy
and trade, these regions have a wealth ofnatural resources at their disposal. This wealthmakes them likely to play major roles in global
trade in the next decade.

Digital trade finance could
revolutionise the Futureof TradeTechnological advances are putting tradefinance in the spotlight. Traditional debt
finance - bank loans, overdrafts, Letterof Credits, export credit, and insurance accounts for roughly 80% of financing forworld trade. However, due to strict collateralneeds and credit history checks, 50% of SME
funding applications are rejected by banks.
This has resulted in a $1.5 trillion gap in tradefinance. As digital trade finance becomes asought-after alternative, start-ups and SMEs
are no longer as reliant on banks as before.
After revolutionising the payments industry,
FinTechs are venturing into the trade financespace through digital lending platforms.
Predictably, blockchain is seen as the big
disruptor and enabler.

The Future of Trade 121

Future of Trade Conclusion

Reduce, reuse, recycle
and return will transformthe Future of Trade
With the decline of natural resources andthe rise of social responsibility, more andmore consumers are demanding ethicallysourced and environmentally friendly goods.
Sustainable supply chains will increasingly
reduce the impact on the environment as wellas unlock opportunities to improve operational
efficiencies. As various governments aroundthe world enforce energy and resource
efficiency policies, sustainable businesspractices will have the competitive advantage
in years to come.

Trade wants
to be free
There is no question that digital will help drive
global trade forward. But it’s impossible notto highlight the current global world orderand protectionism rising when discussing thefuture of trade.
From our research, it is clear that some predict
the world will transition from a globalised
system where countries are interconnected
through trade, moving to a more multipolarsystem with several regional centers. Somealso argue that globalisation has powered a
growing crisis of inequality in the West.
But equally, our research reveals that
globalisation remains a predominant economic,
strategic, and political force that has narrowed
the wealth gap between rich and developing
countries.
Put in context, we are witnessing the most
rapid expansion of the middle class the world
has ever seen. Experts estimate that around
2020, the middle class will become a majorityof the global population for the first time. This
will drive a surge in consumer demand. Muchof this new consumer demand will come fromemerging urban clusters in Asia, particularly
in China and India, and to a lesser degree in
Europe and the US.

122 The Future of Trade

As an emerging middle class applies its buying
power, a connected world of trade will ensurethat Ethiopian coffee, Chinese mobile phones,
and sweaters made in Myanmar will make their
way to end users in all corners of the world.
Although changes may be unpredictable, newchallenges will create opportunity and steer
the industry over the next decade. But there
is one thing about global trade that does notchange: people.
Global trade is, at the end of the day, initiatedby individuals connecting with one another.
Like people, the goal of trade is to connect andbuild relationships. Regardless of geopoliticaluncertainty or policies, trade will seek newroutes and ways to flow.
In the 1960s, American writer Stewart Brandcoined the term, “Information wants to befree” which emphasised that people shouldbe able to access information freely. This termseems acutely relevant now that we see an
exponential growth in volume, variety, andspeed of data.
In a time where global trade is increasingly
digital, data driven, and more transparent,
protectionism and trade barriers can be seen
as obstacles. But trade, like information, wants
to be free.
Yesterday, today, and tomorrow, free trade
begins with a handshake. In the future, thathandshake will indisputably and increasingly
be taking place in a digital universe.
Indeed, the future of trade is digital. But our
research keeps us optimistic with certainty thatthe future of trade will also remain ever global.

Future of Trade Conclusion

The Future of Trade 123

About DMCC
Headquartered in Dubai, DMCC is the world’s mostinterconnected Free Zone, and the leading trade andenterprise hub for commodities. Whether developing
vibrant neighbourhoods with world-class property
like Jumeirah Lakes Towers and the much anticipated
Uptown Dubai, or delivering high performancebusiness services, DMCC provides everything its
dynamic community needs to live, work and thrive.
Made for Trade, DMCC is proud to sustain and growDubai’s position as the place to be for global trade
today and long into the future.