Air cargo and global value chains: Made for each other

Each day, semiconductors made in Japan are flown to Taiwan. There, integrated circuit manufacturers ply their trade. The fabricated circuit boards are then air-shipped to China, where they are assembled to make finished computers. Those are then rushed to end markets in the U.S., Europe, and elsewhere for distribution and sale.

Logistics symphonies such as this, part of what is known as the "Global Value Chain" (GVC), are conducted millions of times each year. The orchestras are composed of thousands of suppliers and manufacturers. According to the World Trade Organization (WTO), about $20 trillion in global trade, or 49 percent of the world total, was moved using a GVC model during 2011, the most recent year for which the group had verifiable data. That compared with 36 percent in 1995, WTO said at the time.

The GVC approach eschews the model of centralized development, production, and assembly in one country in favor of specifically defined tasks assigned to different countries, whose companies add value as the product moves through each step of the process. This enables multinational companies to source work to countries with labor forces specializing in a specific skill, such as hard-drive manufacturers in Thailand.

By leveraging each trading partner's unique strengths, the theory goes, the process can yield better quality at a competitive overall cost. That's why multinational companies favor the GVC model even though they will bear higher shipping costs and could incur some logistical and bureaucratic headaches. As time in transit is crucial to a GVC's success, many parts must be shipped by air, the only mode capable of covering long distances in short timeframes. If a GVC is properly executed, higher transport charges will be offset by the speed with which goods hurtle between far-flung locales, eliminating the need to maintain costly buffer inventory.

GVCs have been around since the 1980s, albeit under different names. Then, as now, the goods moved by air. However, there has never been a concerted effort to quantify the connection between the model and the mode. That was until the International Air Transport Association (IATA), the global airline trade group, published a study last December that, for the first time, put numbers behind air's importance in making GVCs work and how the mode's involvement elevates trade activity throughout the world.

The study, commissioned by IATA and prepared by consultancy Developing Trade Consultants, examined trade flows in developed and developing countries to create an "Air Connectivity Index," which measures the number of cargo-carrying flights between two countries. According to the report, a 1-percent rise in the index is associated with a 6.3-percent increase in global trade by value. What's more, a 1-percentage-point increase in the index is associated with a 2.9-percent rise in GVC participation, the report found.

Perhaps most important given the industry's tardy but now-vigorous efforts to introduce more digitization into its operations, the report found that every 1-percentage-point rise in a separate index that gauges improvements in digital processes was associated with a 2.3-percent rise in the value of world trade. In 2006, IATA began an initiative called "e-freight" to replace paper-document handoffs with the electronic exchange of data and messages. The following year, it laid the groundwork for an "e-air waybill," which would replace the paper air waybill with an electronic data interchange (EDI)-based digital agreement between an airline and freight forwarder. By the end of 2016, e-air waybills were expected to be deployed on 56 percent of what IATA classifies as "legally feasible" trade lanes.

IATA officials cautioned that the speed of air transport and continuing IT improvements are not the end games in expanding the role of GVCs. "Digitization is not a goal in and of itself. But when done right, it can help achieve a seamless service," said George Anjaparidze, an IATA senior economist who spearheaded the project. Even more important, IATA officials stressed, is the drive to streamline and harmonize customs clearance processes to, in the report's words, "allow air transport to capitalize on its key advantage of speed."

In a phone interview, Anjaparidze said that "it is critical that the seamlessness extends to the customs agencies" for GVCs to work effectively. Some countries—usually developed ones—have gone beyond the base requirements for improving their clearance processes, while others continue to lag, he said.

A big step in harmonization efforts occurred in late January when the United Nations Conference on Trade and Development (UNCTAD) integrated IATA's cargo-messaging standards into the UNCTAD automated system, which is used by 90 countries to support their customs procedures. The adoption of the IATA standards, known as "Cargo-XML," synchronizes the electronic communications between airlines and customs authorities in the 90 countries, the airline group said.

The partnership means that all aircargo stakeholders in the countries following the UNCTAD system "can now talk the same digital language," said Glyn Hughes, IATA's global head of cargo.

GVCs don't have the politically fueled visibility of finished-goods trade, which is a good thing for stakeholders. The typical trade dispute is fought between two countries over specific finished products. By contrast, a GVC encompasses multiple countries and a myriad of components, each of which is essential to bringing finished products to market. Because so many trading partners are involved, introducing trade friction would likely shake global commerce far more than a high-profile dispute over one or two finished commodity types, experts warn.

That GVCs have not become political footballs is also a good thing for the aircargo sector, which has sought a catalyst to drive sustained growth since the Internet and telecom buildout of the 1990s crashed at the turn of the century, taking with it a multitude of businesses that were frequent users of air. For the past 17 years, the sector has struggled to overcome various obstacles, chief among them profound changes in supply chain design and execution that reduced the demand for the intercontinental fast-cycle sourcing, manufacturing, and distribution model that could be managed only through the skies.

IATA did not create the project to tout air cargo's value in supporting GVCs, Anjaparidze said. Instead, it was an effort to "understand how trade characteristics have evolved" through the years, he said. If it is assumed that GVCs cannot work without a well-honed aircargo network, then there are worse futures the beleaguered industry can hang its hat on.