According to ourworldindata.org, global exports today are more than 40 times larger than 100 years ago. Much of this due to long-term relentless focus on developing free trade – across the world, but especially between the three powerful nations: The European Union, The United States of America, and China. Albeit with the global commerce climate changing daily, there are growing concerns. A recent report by the Economist Intelligence Unit (EIU) uncovers what industry professionals are doing to prepare for the potential changes and further explore why geopolitical issues are dominating.
The free market has thrived for decades. So much so that the young generation of business professionals haven’t experienced the closed alternative. But due to shifting trade dynamics, the free market we have grown accustomed to may be threatened. And not everyone is prepared for this change. According to the new survey report from the Economist Intelligence Unit (EIU), only 35% of respondents are confident in their organisation’s ability to adapt to global trade trends and have secured alternative leads or markets.
Free trade is the heart of modern business
If you are a procurement and finance professional, you’ve got to agree that a free market and mutually advantageous regulations have made business easier. Cross-border shipping, VAT handling, cross-border invoicing—all of which are more straightforward when governments cooperate with one another. All that mundane work and those non-productive tasks required to move money, people, and goods between countries is decreasing.
As a result, businesses can:
source materials where they are the most accessible,
produce goods and services where it’s most economical,
and sell final products in the markets where the profit can be maximised.
A European Strategy and Policy Analysis System (ESPAS) report has estimated that by 2030, the amount of trade between USA and China will grow by 80%, and over 85% between EU and China. Given these numbers, free trade must surely be part of the recipe for growth. Or will it?
EIU highlights global trade concerns
In the recent EIU report sponsored by Basware, we interviewed hundreds of supply chain and finance professionals to find out how they’re preparing for the future.
Almost one in four of the respondents believe that the post-Brexit climate of trade will have the greatest effect on global commerce, with 21% believing that the impending US-China trade war will pack the biggest punch to global trade dynamics. On the whole, survey respondents revealed that they’re generally quite concerned. The most common impacts expected from these changes are:
An increase in procurement costs (35%),
Greater supply-chain complexity (29%), and
A decrease in business opportunities (22%).
And these professionals are justified in their worries.
Questions regarding international trade post-Brexit and the customs introduced between the USA and its trading counterparts make even the most experienced supply chain experts scratch their heads.
Discussions of the current and future geopolitical landscape have become permanently rooted both in board meetings and watercooler conversations. The competitive nature of businesses is no longer merely determined by the typical factors of economies of scale, product differentiation, switching costs, or access to distribution channels. Instead, it’s also determined by businesses’ abilities to manage ever-increasingly fragmented supply chain for goods and services and production relocations.
According to Ernst & Young Global Limited (EY), one in five executives say that there is “too much uncertainty” to predict the full effects of the trade actions recently instated by the US government. As products and services become more and more dependent on tangled interdependencies of businesses and therefore subject to trade restrictions, the chances of non-compliance increase. As the probability that these sanctions hit your supply chain increase, so does your business risk.
Steps to prep for the future of trade
How can procurement and finance professionals then take destiny in their own hands and make sure that they are a part of the solution and not the problem?
Participants in the EIU report state that reviewing internal controls and procedures, forecasting costs through simulations, and developing end-to-end supply chain visibility measures are all ways they are prepping.
Here are three steps you can follow, to future-proof your organisation’s global trade strategy:
1. Move to a digital flow of information. Move away from paper and email-based orders and invoices and adopt electronic commerce to take advantage of digital financial supply chain and its economies.
2. Consolidate financial and supply chain information to identify risks. Combine information regarding your supply chain from different sources to learn more about your supply chain. Develop alternative sourcing options to diversify supply chain risk.
3. Automate where possible, in order to move people around from transactional duties into business advisory and forecasting. Develop and train staff to adapt to change.
It may seem like a lot of work. But, it’s worth it. In fact, many companies may not be able to face the consequences of not doing it. In 2014, The US Department of Justice fined more than $1.5 billion in violations of US rules and regulations collectively. But in 2019, just a single sanction for a non-compliant company exceeded $1.1 billion. Businesses must apply increased internal controls and procedures to continuously monitor their compliance and the compliance of their supply chains.
Ready to learn more?
To learn more about automation, digitisation and the future of the global trade, download the new EIU report, sponsored by Basware. Learn how finance and procurement executives are preparing their organisations – and how you can do the same. Questions? Contact us – we’re here to help!