It is strange to see a tiny fishing village in East Cork provide a global image for a media world currently dominated by Coronavirus cruises, Apple warnings, Love Island tragedies and a Bloomberg presidential charge. Ironically, the ghost freighter ship washed up on the rocks of Ballycotton might represent the watershed event that will endure as the world inevitably moves on to other news stories. Yes, air travel to and from China has collapsed by up to 90% but it will recover. However, the information vacuum surrounding the current state of the Chinese economy and critical supply chains in global trade is certain to raise more fundamental questions about the latter.
Global trade is not just under attack from a mystery virus. The rise of populism (or anti-globalism), 5G cybersecurity fears and the ESG revolution in investment will find China at the epicentre of all three developments.
Global trade is critically dependent on China and that may not be sustainable as these three trends develop. The US Chamber of Commerce has stated that more than 60% of its member firms with Chinese manufacturing facilities have no contingency plans for a prolonged shut down of their operations in the Middle Kingdom. This should prompt a serious strategic re-think on concentration risks in supply chains. However, not all the news on trade is gloomy. China, in fact, might be the leading light on the future of trade.
Think of trade and blocks, not rocks. Specifically, blockchains. Blockchain technology has been associated with crypto-currencies and understandably conjures up images of complexity, volatility and significant risk. However, blockchain technology can deliver significant benefits to global trade in terms of finance and security without ever touching currency units. Blockchain type solutions involve some form of private/secure digital channel to execute a transfer of goods/services in exchange for payment. The slightly more ‘techno-speak’ term is distributed ledger technologies (DLT). Note no mention of currencies or crypto!
As you can see in the language used above, technology is in effect digitizing a contract. In the context of trade, the creation of a digital contract can be enhanced further by adding additional automated/ functions customized for the contracting parties. Remember Nokia mobile phones. Now think Android or iOS powered smartphones. The former is now “a ghost”, the latter two now control 99% of the market. Step forward “smart contracts” and watch the world of trade transformed. Not yet transformed, but the Chinese are once again blazing a trail on trade. Research firm, IDC, believes 85% of China’s container shipping will be contracted and tracked using blockchain by 2024. A staggering 50% of these contracts will utilize blockchain-powered cross-border payments. The key benefits of smart contracts can be summarized as follows:
- Privacy: Blockchain technology facilitates coded privacy exclusive to the contracting parties.
- Security: The elimination of 3rd parties reduces cyber-security risks and the irreversible nature of the multi-ledger(evidenced) code in the digital contract prevents fraud/alterations.
- Environment: The elimination of mountains of paperwork is an obvious digital dividend.
- Personnel: Staff retention and engagement in higher-value activities deliver financial benefits in their own right as repetitive administration workloads are reduced.
- Funding: Trade requires funding. Banks are enthusiastic promoters of trade growth as they can earn fees on facilitating funding that growth.
- Timely Payments: We said the contracts would be smart. Not only are the contracts digitally recording the agreement, but they are also coded to execute performance ie when goods/services are verified as received, payment is triggered automatically. For smaller businesses, this is seriously good news on the cash flow front. Also, it should, in an ESG world, improve the behaviour of larger corporates who have been guilty of delayed payments to fund their own activities. In a more monitored future, it could be considered “suspicious” if a firm was unwilling to sign up to a smart contract…..
Global trade is temporarily on the rocks but it will bounce back and then face other structural challenges associated with China. Change is inevitable, as is risk and opportunity. For trade sceptics, it might surprise to read this writer’s view that companies who embrace change and smart solutions can still profit from following China. Then again, the view from Ballycotton’s cliffs has always been uplifting.