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History of International Trade: Global Supply Chain

By Karen Lynch

Today’s global supply chains contribute about two-thirds of international trade, according to research by the World Trade Organization (WTO), Brookings Institution, and others.1,2 This research on global production arrangements accounts for flows of raw materials, components, and other “intermediate goods,” as well as upstream and downstream services. Its findings are illustrated by a smart phone that is designed in the U.S., has semiconductors and processors produced in Asian countries, is assembled in China, and is marketed and serviced after-sale in Europe.

That’s a far cry from the origins of international trade. For centuries before the mid-1400s, ancient trade routes like the Silk Road mainly transported finished goods from one market in the East to another in the West. But by the mid-1700s, in an early example of a simple international supply chain, raw cotton was being imported from India to England, spun into cloth, and re-exported to the U.S., back to India, and elsewhere.

 

Fast-forward to today: in just one of a multitude of complex global supply chains, a U.S. airplane manufacturer sources millions of parts from thousands of outside suppliers, worldwide.3

 

Global supply chain evolution has involved a complex mix of advancing technology, management innovations, international trade relations, business imperatives, and the shifting equation of labor and transportation costs from country to country. Today, the global supply chain is being remapped again, under pressures as diverse as robotics, changing consumer demands, and trade tensions between nations.

 

Technologies Help Shape Global Supply Chain History

 

Among the many factors shaping the history of the global supply chain have been technologies ranging from steam ships to telephones to shipping containers. “It was only in the 18th century that shipping technology improved enough to allow the large-scale functioning of an international production network,” according to a supply chain history published by The Globalist.4

 

A big shift toward globalizing supply chains came in the mid-1900s, when containerization (packing goods in standardized containers that move seamlessly from ships to trucks to trains) coincided with the widespread international uptake of telephones and faxes. “Improved communications meant that it was possible to exactly specify components and products. Containerization meant that these components could be transported cheaply and be delivered ‘just-in-time,’” according to The Globalist’s historical account.

 

Technologies continued to evolve, and in the early 1980s personal computers provided planners with better tools, such as spreadsheets and map-based interfaces, according to Cerasis, a third-party logistics company.5 Cloud computing, mobile networks, and robotics are all technologies reshaping the global supply chain today, even as blockchain, artificial intelligence, 3D printing, and the Internet of Things are beginning to re-fashion tomorrow’s global production networks.

 

Business and Finance Also Drive the Global Supply Chain

 

Beyond technology, Cerasis’ account explains the important impact in the 1980s from widespread recognition that logistics had become very expensive, very important, and very complex. “Company executives became aware of logistics as an area where they had the opportunity to significantly improve the bottom line if they were willing to invest in trained professionals and new technology,” Cerasis notes.6

 

By the 1990s, much of the world’s manufacturing had converted to “lean production” management systems, pioneered in Japan, which sharply reduced the need to carry inventory due to its decentralized, just-in-time approach to components.

 

In 1989, outsourcing was formally identified as a business strategy, though some companies had been using foreign suppliers for decades. “The model for most of the 20th century was a large integrated company that can ‘own, manage, and directly control’ its assets,” according to research from North Carolina State University.7 Increasingly, in the 1990s, large companies under competitive pressure turned their focus on their core businesses and contracted out other functions to third parties. With the advent of the internet, the outsourcing business model took root in global business services in the late 1990s.

 

Throughout these cycles of innovation, essentials such as contracts and finance have also provided necessary underpinnings to global supply chains.

 

“Many of the procurement and purchasing best practices that are considered cutting edge today were in fact developed thousands of years ago,” according to a history provided by SourceSuite, an e-procurement company.8 Among them: contracts, legal obligations, the certification of contractors, liability insurance, and the development of material quality standards. The Romans used many of these, particularly in the context of supplying military forays overseas.

 

In terms of finance, “maritime insurance is the oldest form of insurance by centuries,” according to Priceonomics, though “instead of paying a fee to insure their cargo, merchants funded their voyages with loans that also served as insurance.”9 In other trade finance advances, a Florentine coin became the standard currency for international trade in Europe in the 13th century. And imperial trading companies are credited with the growth of stock exchanges in Europe, to finance overseas operations.

 

The letter of credit dates to at least the 12th century, although it first took the form of a written promise between a powerful or wealthy individual and a merchant – more like what is called open account trading today. Bank backing only later became an essential component of letters of credit, as they became fixtures of international trade.10 Now, turning full-circle, there has been a rapid transition from bank-backed letters of credit to open account trading since the 1990s, according to SWIFT.11 Increasingly, some large buyers and banks also provide supply chain financing, loaning money based on accounts receivable.

 

Free Trade Opens the Global Supply Chain

 

The rise of free trade also freed companies to be more flexible. “Global supply chains arose and flourished in an era of falling tariffs,” according to Sage Business Researcher. “Multinationals responded to these governmental commitments to lower trade barriers by picking the cheapest places for specific functions, or sometimes ones where operations could be done fastest.”12

 

In recent years, however, “the political currents on trade have been flowing in the opposite direction,” Sage said, citing flat participation in global supply chains since 2011. However, other causes may also be at play, Sage said. Some companies may have finished the project of globalizing their processes or begun to consider priorities other than cost cutting. The upshot is that international supply chains are believed to be shortening since the Great Recession, after years of becoming more global and more complex.

 

For the coming decade, a question posed in the Financial Times is whether near-term protectionism will be trumped by the dramatic fall in computational and communications costs and the proliferation of digital technologies, which have tended to accelerate global interconnectedness.13 Others point to services markets such as health care, which may be poised to expand a next wave of global supply chains.

 

The

Takeaway:

Progress has been remarkable since the first simple international supply chains emerged a few centuries ago. As the Institute of Supply Chain Management said, “Nowadays it’s pretty impossible to imagine just how tough a typical working day might have been in the early stages of supply chain management.”14 Today, advancing technology and management innovations enable vast, complex global networks, but continuously shifting business imperatives and international trade dynamics mean the history of the global supply chain is still being written.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “Global Value Chains Shed New Light on Trade,” Brookings Institution; https://www.brookings.edu/blog/order-from-chaos/2017/07/10/global-value-chains-shed-new-light-on-trade/
2. Measuring and Analyzing the Impact of GVCs on Economic Development, World Trade Organization et al; https://www.wto.org/english/res_e/booksp_e/gvcs_report_2017.pdf
3. “Will Tariffs Shrink Global Production Networks?” Sage Business Researcher; http://businessresearcher.sagepub.com/sbr-1946-106997-2893762/20180625/supply-chains-and-protectionism
4. “A Brief History of Supply Chains,” The Globalist; https://www.theglobalist.com/a-brief-history-of-supply-chains/
5. “The Evolution and History of Supply Chain Management,” Cerasis; https://cerasis.com/2015/01/23/history-of-supply-chain-management/
6. “The Evolution and History of Supply Chain Management,” Cerasis; https://cerasis.com/2015/01/23/history-of-supply-chain-management/
7. “A Brief History of Outsourcing,” North Carolina State University; https://scm.ncsu.edu/scm-articles/article/a-brief-history-of-outsourcing
8. “A History of Procurement: Supply Chain through the Ages,” SourceSuite; http://www.sourcesuite.com/procurement-learning/purchasing-articles/A-History-of-Procurement-Supply-Chain-through-the-Ages.jsp
9. “How Maritime Insurance Built Ancient Rome,” Priceonomics; https://priceonomics.com/how-maritime-insurance-built-ancient-rome/
10. “Letters of Credit: A Primer,” Maryland Law Review; https://core.ac.uk/download/pdf/56358001.pdf
11. “Shift from Letters of Credit to Open Account Using Electronic Supply Chain Management Tools,” Society for Worldwide Interbank Financial Telecommunication; https://www.treasurystrategies.com/wp-content/uploads/ElectreonicSupplyChain09.pdf
12. “Will Tariffs Shrink Global Production Networks?” Sage Business Researcher; http://businessresearcher.sagepub.com/sbr-1946-106997-2893762/20180625/supply-chains-and-protectionism
13. “Death of Globalization is Greatly Exaggerated,” Financial Times; https://www.ft.com/content/5126a5c6-5e97-11e8-9334-2218e7146b04
14. “Supply Chain Timeline,” Institute of Supply Chain Management; https://www.ioscm.com/blog/supply-chain-timeline/

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