Regionalization/localization

Although digital globalization looks set to continue apace, trade globalization has been slowing down over the past 10 to 15 years as the number of bilateral and regional trade agreements proliferates, and countries increase their use of restrictive, trade policy measures.^[1,2]

Regional trade agreements may increase the intensity of trade between their signatory countries^[3] while regional connectivity initiatives (for example, the Master Plan on The Association of Southeast Asian Nations [ASEAN] connectivity) will make intra-regional trade more efficient.^[1] This may have particular impacts for developing economies – the African Continental Free Trade Agreement, for example, integrates a market of 1.2 billion people and may significantly stimulate the growth of African economies by considerably increasing intra-continental trade.^[4] The potential downside is that regionalized trading could lead to disconnected markets and protectionism, particularly if there are conflicting technology standards between regions.^[5]

Alongside this shift from international to intra-regional trade, there is also a shift from countries to cities, as the drivers of wealth creation and innovation (localization). Cities will increasingly “shape the dynamics of international trade”^[1] over the next 30 years as more people move to urban areas because of better opportunities for work and education. Cities may even strengthen their position in the global economy to the extent that they “could replace countries as the most important economic entities” (see ‘Smart cities’).^[6]

Increasing South-South trade

Trade between emerging economies (known as South-South trade) has increased significantly over the last 20 years and this trend is predicted to continue alongside economic growth in those countries. South-South Regional Trade Agreements (RTAs) already make up more than half the total number of RTAs in the world, with the majority in Asia.^[3] Further South-South trade growth will be driven by an increase in demand for consumer goods from a growing middle class (often goods that are produced in emerging economies), alongside better communications and easier customs arrangements.^[6]

What and how we trade

The composition of trade flows and the means by which they are transported are evolving. In terms of what we trade, for several decades, international trade in services has grown at a much faster pace than trade in goods, and, despite being hit hard by the COVID-19 pandemic, global trade in a wide range of services (e.g. financial, communications, tourism) is expected to increase over the next 20 years.^[2] Trade in digital services (i.e. services provided over digital networks, such as computer network maintenance, entertainment, broadcasting, or financial management) is one area that has seen a huge growth recently (see ‘Services moving online’), and this has led to a massive increase in the amount of cross-border data flows.^[7] Such cross-border data flows are essential for digital services trade but must also be carefully managed due to privacy concerns. Countries must ensure they place adequate restrictions on cross-border data flows to protect personal data and national security, without these restrictions being so severe that they negatively affect the level of digital services trade.^[8] The importance of trade in digital services means that all countries will have to make big investments in digital capacity and data infrastructure to keep up with this evolution of the global trading system.^[1] Countries less able to do so will be at a huge disadvantage in terms of economic and social development. The digital divide (related to levels of connectivity and access to the Internet) and data-related dive (related to the ability to capture, analyze and transform data into digital intelligence) between developed and developing countries is therefore a major challenge to overcome.^[7]

In terms of how we trade, climate change, new technologies and shifting customer preferences are all contributing to reshaping the trade and logistics sectors. The potentially disruptive effects of climate change are causing companies to modify the way they operate to increase the resilience and reliability of their supply chains.^[1] In some cases, this means the shortening of supply chains, which is made possible by new digital technologies such as automation and ‘5G’ (note: this contributes to the trend away from trade globalization).^[9] Growth in the 3D-printing market (see ‘Additive manufacturing’) also facilitates this, by allowing for what’s called ‘re-shoring’ or ‘near-shoring’ of production – where manufacturing can be performed on demand and much closer to the end user. While this may decrease the need for long-distance transport, it will not eliminate it and thus the long-distance transport sector is also evolving in the face of new technologies and the imperative to reduce carbon emissions. For example, driverless freight using autonomous trucks may become a reality in the next 10 to 15 years, improving delivery times, and reducing traffic congestion, operating costs and accidents.^[1] Meanwhile, in shipping, many companies are exploring low-carbon fuels, renewable energy, and new ship designs (e.g. hulls and propellors) to increase efficiency and reduce carbon footprints.^[10] These kinds of changes are also propelled by an increasing customer demand for more sustainable production and more customized products (see ‘Consumption’).

New business models

As digitalization has accelerated, so has economic connectedness, leading to the emergence of today’s data-driven digital economy and, with it, some new business models.

Digital platforms

The use of digital platforms (e-commerce platforms) has allowed sellers to connect directly to buyers, to make more efficient exchanges, and to gain greater access to international markets (especially in the case of SMEs).^[2] The role of the ‘middle-man’ in the economy (e.g. distributors and physical retailers) has been transformed and may eventually become redundant.^[3] Advanced uptake of technologies such as ’Artificial intelligence‘ and ’Blockchain’ are spurring this trend and the expansion and diversification of digital platforms is expected to steadily increase over the next ten years.^[11] Because these digital platforms have the ability to collect data at a massive scale, there is growing concern that large digital platforms are already creating monopolistic or undesirable market conditions and that better regulation and global data governance are needed to combat this.^[3,7]

Sharing economy

One notable new business model that has been made possible by digital platforms is the sharing economy (also called the ‘gig’ or ‘peer-to-peer, P2P’ economy), which refers to a model of collaborative consumption where people can use or consume a product or service without taking full ownership (i.e. the owner of that resource shares it), allowing people to redistribute and make use of excess capacity of goods or services in the economy.^[12] Transactions are usually facilitated by a digital platform – Uber, the ride-sharing app, and Airbnb, the online marketplace for accommodation, are some well-known examples. The sharing economy is expected to grow significantly over the next ten years (with a predicted 35% growth per year in Europe) and this growth is driven by societal and environmental trends such as ‘Urbanization’, consumer demand for ‘Sustainable production’ and ‘Consumption’, and ‘Natural resource scarcity’.^[3,12]

Digital currencies

Alongside changes in how people buy and sell goods and services, the emergence of digital currencies is changing the way people pay for them. Digital currencies include cryptocurrencies, virtual currencies and central bank digital currencies (CBDC). Today, the most popular digital currencies are cryptocurrencies like Bitcoin, which use ‘Blockchain’ technology to verify transactions (in a very energy-intensive manner).^[13] However, it is predicted that digital currencies will gain wider acceptance over the next 20 years as more central banks begin to issue them to supplement or replace fiat (physical) currencies.^[2] Developing countries, particularly in Africa, have already shown a huge interest in digital currencies, driven by the high use of mobile-banking services and young consumers. Nigeria launched Africa’s first CBDC, the eNaira, in October 2021.^[14] China, South Africa and Sweden are amongst 14 countries piloting a CBDC and, as of January 2022, 87 countries (making up over 90% of global GDP) are exploring a CDBC (up from only 35 countries in May 2020).^[15] The advantages of digital currencies include that they are cheaper to administrate than fiat currency and allow faster and lower-cost transactions (by cutting out intermediaries). Their disadvantages include that they could enable the shadow economy by facilitating the movement of funds by criminal organizations, they are vulnerable to hacking, and can be volatile in value.^[3,6] Strong regulation will therefore be needed to control the impacts of digital currencies.