The Fourth Industrial Revolution: Changing Trade as We Know It

Trade as we know it will change. The reason for this is that the world is entering an era of rapid digital technological development, labelled the Fourth Industrial Revolution (4IR). However, despite the name, it is more of an evolution than a revolution, with new technologies building upon older ones. The 4IR is the convergence of evolving, mainly digital, technologies. This convergence is driving the change that has already started and that will accelerate in the years to come. Companies are building new business models, using the opportunities derived from these digital technologies and their interactions. The 4IR is set to disrupt almost every industry in every country. It will affect the full value chain – from end to end.

The 4IR will affect how companies produce goods and services and what they will produce. Based partly on interviews with Swedish industrial companies, we have identified the following five major production trends: i) automation of physical and digital processes (eventually possibly resulting in the spreading out of production where computers make the decisions), ii) a move towards mass customisation, iii) accelerated servicification, iv) increased specialisation, and v) disintegration of global value chains (GVCs) and production in ecosystems. The technologies will – in turn – affect trade in the following three ways:

1. Improve trade logistics and lower transaction costs.
2. Change the actual content of what firms trade – moving from goods to services and data.
3. Change production processes and the location of production. Technologies can lead to automation and, in turn, the possibility of dispersed, self-orchestrated production. The impact on trade is likely to be significant.

First, moving production closer to customers to serve local markets will lead to less measured trade. Second, the GVC setup will change when companies no longer produce their goods in one place. Beyond being close to customers, companies want to be close to “hubs”, i.e., centres of coopetition, innovation and collaboration. Again, this will affect the GVC set-up. Third, trade flows will change since reorganised GVCs lead to changed movements of the inputs and regional sourcing. Fourth, trade participation will change, for both for countries and firms. For countries, trade participation will change as new GVC set-ups will make the receiving countries importers of inputs and exporters of the product now produced in that same country. For companies, often SMEs, new technologies allow them to enter the supply chain and participate in production.

The technological opportunities of the 4IR will lower the threshold to enter trade, especially for SMEs. Many SMEs have already stepped over the threshold and more will follow. However, taking the step is generally more difficult for SMEs. One central reason is that the benefits of automation have to be even more certain to small companies. Uncertainty about which direction the 4IR will take is a barrier for companies entering the 4IR.

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