From as far back as 500 BC, when cargoes, merchants and pilgrims travelled the Silk Road, the ancient trading route that linked Asia and the West, trading has existed as one of the world’s oldest and most widespread social institutions. At various times, different countries and cultures – the Egyptians, Phoenicians, Greeks, Romans, Spanish, Dutch and the English – dominated trade, and routes and routines altered along with modes of transport and tastes. Today, the United States, Canada, Japan and the European Union lead the trading pack, and modern technology has transformed trading so dramatically that transactions, once years in the making, now occur in a matter of seconds.

Imagine, for instance, the laborious journey and complicated transactions that characterised the spice route in the 15th century. The Chinese collected cloves and nutmeg from the East Indies and delivered these to the Malaysian port of Malacca. Muslim merchants from India transported the goods across the Bay of Bengal to India. There, cinnamon and pepper from India were added to the shipment before it was sent to Persia, Arabia and East Africa. Navigation in the Red Sea was limited, making it difficult to get the cargo to the Mediterranean Sea. Goods were transferred onto smaller Egyptian vessels and brought to Cairo and the Nile valley, where they moved by riverboat and camel caravan to Damascus or Constantinople. From these ports, the spices were transported on Italian ships to Venice or Genoa and then across the Alpine to Germany, and by sea or pack train to France, Spain and England.

Compare this scenario to today’s alternative trading systems (ATS), in which electronic communication networks (ECN) allow lightning-fast, round-the-clock trading in stocks and bonds from anywhere on the globe. These systems are one of the strongest examples of the Internet’s power in the trading world, but modern technology has also had a hand in the speed and ease at which goods are traded today.

“About 75 percent of trade today is being driven by intermediate products and components,” says Joseph Quinlan, chief market strategist for Banc of America Capital Management in the United States and author of Global Engagement: How American Companies Really Compete in the Global Economy. “For example, when BMW sets up a plant in South Carolina to manufacture BMWs, they assemble and manufacture some components in the U.S., but also buy a lot of components from Germany or other places. This means that today supply chains don’t extend merely from New York to New Jersey, but from New York to China or New York to Mexico. How well the supply chain and logistics operate and how efficient they are can determine the level of global trade going forward.”

Going global
The scope of the trading world is bigger than ever, thanks to the Internet, dramatically increasing volumes and globalisation. These factors have led to two distinct trends: the global integration of capital markets and the growing parity of institutional and individual investors. The Internet and related technologies allow the kind of flexible access, scalability and connectivity that make global trading possible. Today, exchanges around the world are being connected, creating new trading markets that cover everything from physical commodities to bandwidth capacity to finished goods.

The democratisation of the trading world gives individual investors access to the same prices, information, knowledge and markets as institutional investors. Today, more investors are trading more products more frequently across all time zones. Of course, this means that trading must become faster, more accessible and cheaper than ever before, not to mention available 24 hours a day.

“The major impact of modern technology in the financial sector is the lower cost of cross-border transactions, allowing trades to clear more quickly. This is what drives demand,” says Quinlan. “For example, 40 percent of the French stock exchange is foreign-owned. Without the technology, without the ease of executing transactions, global trade could not take place.”

A rising concern on the global trade scene in the 21st century, particularly after the September 11 terrorist attacks in New York, has been the need for increased security of goods. Ensuring the security of cross-border trade has heavily influenced logistics costs, particularly since the United States, which imports 20 percent of the world’s goods, is requiring more transparency in cross-border trade.

“Many countries have come to realise that they have to make the increased costs in technology to enhance security or trade will be impaired, and many cannot afford that,” says Quinlan.

The Internet effect
E-commerce increasingly characterises today’s trade. Economists once predicted it would lead to a “frictionless” economy in which transaction costs essentially disappeared, barriers to entry fell, geography became irrelevant and markets cleared instantly. While not meeting those early expectations, there is growing evidence that e-commerce reduces costs and price. It allows buyers and sellers to cut out margins between producers and consumers, such as retailers and producers. It also increases international competitiveness, allowing businesses greater scope in buying and selling their products in a global market at a lower cost.

“Business to business, e-commerce has opened up a broader menu from which companies can source products. It also allows companies like Microsoft or Intel to get into the intellectual capital of a country like India for outsourcing,” notes Quinlan.

Trade is poised to become even more global in the future, as developing countries and emerging economies from Eastern and Central Europe and Latin America, amongst other places, join the market. This is only good for business, argues Quinlan. “When it comes to global trade, the more the merrier. Western companies should do everything they can to pull in and integrate these new market players.”

A near-term concern for the future of global trading is the combination of rather high U.S. unemployment with increased pressure on China to revalue its currency. China’s weak currency has flooded the U.S. market with many imports. “This could be an issue that upsets global trade flows,” predicts Quinlan.

Still, he expects the global downturn in trade to begin reversing in the second half of 2003 and to continue in 2004, prompted by greater global demand, led by the United States. Demand for goods drives trade today as much as it did in the 15th century, when Italians desired cinnamon and pepper from India. As long as there is a push to move goods around the world, the cycle will continue to thrive.

“Global trade is like a bicycle. If it doesn’t keep moving, if it is not pushed forward, it falls over. It’s all about keeping that bicycle in motion,” says Quinlan.