Global Trade: Where The Physical World Meets the Digital World
When considering global trade (of goods, not services), people see in their minds large container ships carrying containers. Large container ships can carry more than 21,000 TEU, whereas a TEU stands for “twenty-foot equivalent unit”. Containers typically come in two forms: 1 or 2 TEU. Thus containers are either 20 foot long (6.1m) or 40 foot long (12.2m). The view of more than thousands of 40-foot containers, stacked onto one ship, is impressive!
Cargo transport modalities include not just maritime but also road, railway, air, pipeline (petrol) and in some areas pack animals (e.g. donkeys). Yet over 90% of world trade transport is sea (maritime) transport (primarily containerized cargo). Containerized maritime cargo is, by far, the most cost-effective means of transportation.
Can one conclude that Global Trade is a matter of the physical world? You’re guessing it; the answer is: No. Think about data; trade data.
Understanding the Nature of Global Trade
Definition of Global Trade
“Global trade” (or: “international trade”) is the import and export of goods and services across country borders. For the sake of the current discussion we consider only trade on goods (i.e. physical products), not in services (yet the concept “trade” covers both products and services).
Generally speaking, every trade transaction starts with a transaction between a buyer in one country and a seller in another country. The seller sells its goods to the buyer, and subsequently ships them to the buyer. Several exceptions exist, e.g. goods that are shipped temporarily for exhibition purposes, or companies moving their cargo from one place to another for internal reasons. In this article we consider the main flow of goods, which is commercial cargo that a seller in one country sells to a buyer in another country.
Four Aspects of Global Trade
Every shipment of cargo from a seller in one country to a buyer in another country entails the movement of…:
- Cargo: the actual goods that a seller sells to a buyer
- Conveyances: the container vessels, but also e.g. trucks to transport the goods from a warehouse to the port of departure, and bring the goods from the port of arrival to the buyer’s location.
- Money: Since trade entails a sales transaction, a flow of money occurs from buyer to seller. Often Letters of Credits are used for this financial process. For explanation on Letters of Credit, see for example the book Understanding Letter of Credit : Learner’s Guide to Letter of Credit by Nisha S Koshal
The Information Aspect of Global Trade
Information is an intriguing element among the four aspect of global trade, because information does not exist by itself. Instead, global trade entail a flow of information about the other three aspects of global trade:
- Information about the goods is sent by and to numerous parties. For example, seller and buyer exchange information about the products that they buy/sell; numerous Logistics Service Providers receive this information for the sake of providing the logistics services; a customs broker may receive the information for completing customs clearance process; Government law enforcement agencies will receive the information for handling the import/export procedure. Many flows of basically the same information about the goods.
- Information about the transport is also share with many parties. A freight forwarder and a number of logistics service provider all exchange information about the movement of the truck (between the warehouse and the port) and of the container ship, to optimally plan the transport and to provide the buyer predictability for the arrival date/time of the cargo.
- Information about money. In fact, nowadays money is digital, like information. The process of handling a Letter of Credit entails a series of actions based on supply chain events (e.g. the arrival of the goods at the buyer site), the goods (quantity, quality/state) and the involved actors. The same goes for handling the insurance of cargo, which depends on information concerning the payment terms (INCOTERMS), information concerning the goods and their whereabouts (i.e. supply chain events) and information concerning the involved stakeholders.
Thus while a shipment of cargo concerns primarily physical goods, its realization concerns primarily many flows of information. Think for example about commercial invoices, customs declarations, Bills of Ladings, ATA/TIR Carnets, Certificates of Origin, freight insurance documents, packing lists and more. In an ideal world, we’d be talking about a flow of structured data through IT systems, but in reality often these are documents (rather than data), and in many cases paper versions are still common. I’ve spent several years working on initiatives to simplify the processes of handling the information flow around trade. Yet this remains a key challenge.
A Future Vision: Potential For Improvement
Removing Silos: The Vision
Combining the many siloed flows of information will bring immense improvements to this process. First, by redesigning the information flows within one single aspect of trade, one can avoid many information flow redundancies (i.e. improve cost-efficiency) and achieve transparency (leading to improved supply chain operations, and thus making more money). And second, once we are able to harmonize the information flows across the various aspects of global trade, all actors in the supply chain will benefit.
Removing Silos: Concrete Example
Consider for example IoT (Internet of Things) sensors registering the arrival of a shipment of beer at the location of the buyer, and also conveying information about the quality of the product (e.g. the temperature within the container has to remain within certain boundaries, to keep the beer’s quality). This information is registered, and serves for several purposes. Few examples are:
- The buyer’s Warehouse Management System registers the new stock;
- The bank can release the payment from the buyer to the seller;
- The insurance company knows that the shipment arrived at the buyer in a good state, and thus there is no more risk of an insurance claim;
- The tax agency at the country of export has a proof of export for the beer, which entails that the exporter can request VAT refund on the goods.
All these processes can be triggered by registering and distributing information about the shipment’s arrival at its destination. Manual and error-prone paper-based processes are eliminated . The potential to simplify all processes related to global trade is immense.
And therefore information is the lifeline of global trade.
To learn more: get in touch.
- Accelerating Global Supply Chains with IT-Innovation: ITAIDE Tools and Methods; by Yao-Hua Tan (Editor), Niels Bjørn-Andersen (Editor), Stefan Klein (Editor), Boriana Rukanova (Editor). Order the book from France or from The United Kingdom.
- Understanding Letter of Credit: Learner’s Guide to Letter of Credit by Nisha S Koshal. Order the book from France or from The United Kingdom.
- Will Blockchain Revolutionize Global Trade?