2018 Customs & Regulations Update:10 observations on the “digital trade transformation”

This is a watershed year for the digitization of global supply chains as companies respond to new initiatives enacted by governments and inter-governmental organizations. Those too timid to take the risk of making a mistake will simply lose out.

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Trade compliance has become a hot issue since the election, with economic nationalism rising across multiple global trading powers. Refuting the rhetoric, global trade has continued to grow after the short-lived dip from 2008-2009.

The reason is simple: Advances in technology and energy continue to exponentially grow GDP per capita around the world—and growth needs markets for both suppliers and customers.

In fact, the coming year will be a watershed for the digitization of global supply chains, as companies respond to new initiatives enacted by governments and inter-governmental organizations.

The key trends that will make this possible fall into three categories: facilitating trade participation; reducing uncertainty; and the rise of digital matching.

Facilitating trade participation

Despite the launching of The National Export Initiative eight years ago, the United States still lacks a comprehensive trade strategy.

This has created an acute situation for small- and medium-sized shippers and one that generates the first three observations:

Observation 1: The East will set standards. Compare the U.S.’s lack of strategy to China’s “One Belt One Road (OBOR)” initiative that combines land and maritime connections across Asia to Europe. This initiative provides China unprecedented access across the region with three-quarters of the world’s energy resources and population, yet only about a quarter of the world’s goods and services and GDP.

This is a region ripe for growth—certainly a bet with a greater upside than leaving China’s massive investments in slow-growing, low interest Western government securities. China has also stepped in to take leadership of the TPP-11.

In the meantime, China has invested almost a trillion dollars in the OBOR initiative out of a total planned $4.4 trillion, and no other country has a comparable initiative. China’s OBOR will see Chinese standards become the norm across most of Asia to Europe, and the kind of trade needed across Asia is exactly the kind of trade needed to ensure prosperity for China, India and other Asian countries and won’t include Western countries.

Smart logistics managers will watch for shifts in product performance standards and for suppliers to shift focus to OBOR and TPP-11 countries in pursuit of growth and more accessible markets.

Observation 2: The rise of global e-commerce. Global e-commerce has grown exponentially and could make up 20% of global trade by value by 2020. UPS just acquired Sandler & Travis Trade Advisory Services, the world’s largest dedicated global trade compliance management firm.

The acquisition adds world-class trade management services to UPS’s ability to provide cross-border services and advice to small and medium businesses. This is one example of a wave of companies offering services that facilitate global e-commerce.

The biggest issue afflicting North American, European and Chinese retailers is that the last mile for e-commerce is costly. Solutions like BluJay Solutions’ new MobilSTAR global transportation management system have started to provide global end-to-end supply chain visibility. And with the new trade agreements coming online and NAFTA being re-written, watch for the inclusion of e-commerce rules. In the meantime, smart logistics managers will look for services that facilitate multi-channel responsiveness to customers.

Observation 3: Prepare for distributed manufacturing. Whether you’re an established economy or a rising star, the digital economy brings with it better and more jobs. Countries like China have doubled down on the digital economy because most of its jobs are susceptible to automation—imagine the shedding of jobs that occurred in the United States over the past half-century occurring 10 times faster.

The job situation motivated the United States to begin the process of NAFTA again. The reality is that jobs will slowly dawn on various players during the upcoming year as geography no longer defines supply chains in quite the same way. For example, Alibaba has already developed “Taobao Villages,” factories distributed throughout China as well as in some of the poorest counties that are connected to the world economic network by technology.

More and more, countries are discovering that they can effectively import labor by relying on technology to connect far-flung workers to end markets. Smart companies will take the time to map their supply chains as this presents both risk and opportunity—especially for complying with labor and other standards.

Reducing uncertainty

Uncertainty refers to risk of unreliable information or behavior. Information is vital in global supply chains, and not just for tracking shipments. The spate of scandals regarding major Japanese companies—Takata, Toray, Mitsubishi, Kobe Steel, etc.—fabricating quality data as well as recent European diesel emissions cheating demonstrate how much supply chains rely on trust as much as information. Some developments in 2018 will target the reduction of uncertainty.

Observation 4: You will rely on Blockchain. Globally sprawling supply chains mean globally sprawling databases and motivations to provide accurate information. Blockchain provides a mechanism for creating and maintaining the validity of a centralized digital ledger visible by all relevant parties.

IBM is collaborating with giants like Maersk, Unilever, Walmart and Nestlé to launch a global blockchain system, citing many billions in savings. Smart managers will start planning how to leverage the unprecedented transparency and auditability of information to reduce a variety of supply chain bugaboos running the gamut from fraud, errors, inventory mismatches, and ethical and sustainable sourcing.

Observation 5: Shipping will become more reliable. The Federal Maritime Commission just approved the governance structure for the New York Shipping Exchange. The outcome may fundamentally change the risk equation for shippers and carriers. Currently, no enforcement exists for shipping contracts, so shippers can fail to show up because they found a better deal elsewhere, and ships can leave less lucrative cargo behind when they sail.

The New York Shipping Exchange creates a market that provides more certainty of cargo utilization on ships by brokering a security deposit, which provides stability to both availability of space and price. The improved capacity visibility also facilitates use of dynamic pricing, which is economically more efficient.

In a year when large container ships are projected to create an over-capacity situation, smart logistics managers will watch for services like the New York Shipping Exchange to provide stability and rational pricing in 2018.

Observation 6: Watch for zombies. A wave of zombies stalks the globe—companies that have been propped up by government support since the Great Recession. Europe, China and the United States all have companies that should have gone bankrupt, yet they continue to take customers from healthier and stronger companies, making those companies suffer and possibly become zombies themselves.

As economies strengthen and governments look to their bloated debts, smart operations will watch for a wave of bankruptcies, acquisitions, mergers and other signs of failure—and they’ll have contingency plans in case key suppliers and customers fail.

Rise of digital matching

There’s a big misconception about the future economy being based on “sharing” or “collaborating.” Nothing could be further from the truth. Companies like Airbnb and Uber do not share their assets—they perform the powerful and profitable task of matching capabilities to needs.

They do it more precisely on a finer and smaller scale than traditional companies and they exchange their service for payment. In a world awash with options, value has shifted from traditional department store “making options available” to “help the customer decide on the best option.”

Observation 7: Shipping paperwork will automate. Amazon continues its ambitious goal of becoming the king of deliveries. The company has quietly put its expertise at matching supply with demand into ocean freight forwarding and trucking, where the company has created apps that are projected to create a new wave of efficiency gains.

Currently, the trucking app Relay shows truckers where cargo is and also shows the promise of automating shipping paperwork, which is still highly reliant on phone and paper. Smart logistics professionals will watch for automation solutions, whether from Amazon or some other innovator.

Observation 8: Digital requires batteries. Ports and transport will receive new attention to their environmental impacts. In the United States, transport recently overtook utilities for the biggest polluter. A Pandora’s box of cheaper, greener power sources has passed the tipping point where the technologies make more sense—and the result will be a revolution as everyone seeks to cash in on the new efficiencies.

China launched a battery-powered ship that’s used to haul coal. Tesla is talking about battery-powered trucks, although other truck manufacturers may be better positioned. The point is that the established players have bought into cleaner energy.

Digital matching services will provide shippers with more options to choose “greener” transportation, even those that don’t run on batteries. Smart logistics professionals will watch for greener options that make fiscal and operational sense over the medium term. Customers are less forgiving of short-term vision, yet surprisingly understanding of long-term risks.

Observation 9: You are always observed. The trend toward total electronic integration will increase dramatically as there is simply too much benefit to society not to increase investments in the Internet of Things and the digital economy.

It’s the only way that developed economies can compete globally, and developing nations seek to accelerate their equalization. Some examples include ELD (electronic logging devices) for U.S. trucking and “smart ports.”

Companies may balk at the short-term costs, but should realize that failing to act may be the greatest risk of all. It’s also a powerful way for industry to integrate and coordinate with companies that make the most sense for them, instead of depending on volatile political processes to develop global trade treaties.

Smart logistics professionals will actively engage with public-private initiatives as well as industry trade groups, and successful companies will embrace the new world of openness.

Observation 10: Don’t delay. Global logistics and trade compliance have traditionally relied on intransigence to provide stability. A culture focused on tradition and rules has provided stability in the face of political, economic and social changes.

Technology has changed the equation—and industry leaders must actively engage to establish new rules and traditions for how companies interact with other companies, governments and inter-governmental organizations. Companies that delay modernizing will find themselves in danger of irrelevance.

The breadth and scope of changes in store will overwhelm many logistics managers and their supply chain organizations. True supply chain leaders will wholeheartedly—but intelligently—buy into technology-based solutions. Those too timid to take the risk of making a mistake, and those starting over, will lose out because the new wave of technology requires learning and co-creating solutions. The time to transform to digital has arrived.

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