Trade is going consistently and irrevocably digital. This is a positive development for anyone involved in cross border commerce. Why? Trade needs disruption.
Author: Dr Alisa DiCaprio, Research Economist, Asian Development Bank Institute
Today, we can say with certainty that trade is going consistently and irrevocably digital. This is a positive development for anyone involved in cross border commerce. Why? Trade needs disruption. Traditional cross-border trade is slow, costly and opaque. It is the reason that only 10% of Small and Medium Enterprises (SME) sales are exported. It also leads to mis-invoicing, a problem in itself, but which also accounts for 83.4% of all illicit financial outflows from developing countries.
The objective of this article is to show how technology is changing trade. New processes and tools are being deployed everywhere, from private to public sector, and impact every part of the process from applying for finance to filling out a certificate of origin. After presenting the issues, we turn to consider what this means for countries in Asia and the Pacific.
Time for disruption
Trade was ready for disruption. Digital processing helps to overcome the main inefficiencies of conventional trade, currently costly in terms of both time and resources, and non- transparent, which leads to many opportunities for corruption and money laundering. This is because trading involves multiple actors, all of whom are generating various documents at different stages of the process.
An end-to-end trade transaction can involve a seller, a buyer, their banks, a logistics operator, and import and export administrations. Each of these actors maintains their own set of documents, standards and requirements. And even though the information they require overlaps among agencies, it isn’t shared, so the trader has to submit the same document multiple times.
Progress in each trade segment
Digitalization of the trade process has made impressive progress (figs 1-3). 41% of major airlines use electronic Airway Bills (eAWB). 35% of the countries in Asia and the Pacific have partially or fully implemented electronic customs systems. 38% of banks in Asia and the Pacific report at least some progress in digitalizing.
On the ground this mean that buyers and sellers are connecting online, banks are creating new front end applications, airports and seaports are using electronic shipping documents, and governments are enabling electronic documentation like eCertificates of Origin. Good, right?
Let’s consider the three main nodes in a trade transaction – official documents, financing, and logistics. These correspond to different actors– government, banks, and the private sector. Each of these actors are digitizing their corresponding processes. But inter-operability remains low to non-existent.
Adoption rates of electronic documentation have grown steadily over the past 10 years. In the example below of electronic Airway Bills (eAWB), we can see that switching to electronic documentation is not consistent across the actors that are involved. Airlines, airports and logistics operators are all advancing but at varying rates.
The progress in official documents offers some insight into why progress is slower than we might expect. Surveys show that in Asia and the Pacific, the electronic single window which would enable traders to submit documents once only on a single platform, and meet all of a counntry’s documentation requirements has made slow progress.
Only 34% of countries report full or partial implementation. But progress in electronic customs documentation is strong in the region, with 84% of countries reporting implementation. Why? Because coordination among actors creates friction. Where many different stakeholders are involved – as in single window – progress is slowest.
Banks most clearly illustrate how digitization can potentially directly impact inclusion. SMEs struggle to access trade finance (in fact, all types of finance). This difficulty is driven in part by the dense regulatory requirements banks face in verifying clients. Because SMEs have characteristics that make due diligence difficult and expensive, traditional financial institutions are more likely to reject their trade finance transactions rather than go through the due diligence process.
Digitization contributes to operational simplification that can reduce error rates, and streamline the time and cost of documentary verification. This may translate to better risk assessment and lower product costs, which will benefit SMEs.
What’s next in digital trade?
Digitization and related technologies have the potential to improve development outcomes, even where existing infrastructure appears to be a binding constraint. In fact, in some cases, a relatively weaker institutional environment can be better than one where the solutions need to be built around existing legacy systems.
There are four areas in which digitization is changing the trade process. In these areas, changes are just starting to come on-line and will continue to impact trade processing over the next five years.
- Simplifying documentation
Replacing physical documents with electronic versions streamlines time-consuming activities related to the physical movement, recoding and storing of documentation. This also increases accuracy, reduces documentary risk and the likelihood of disputes between parties.
- Transparency in risk analysis
Risk assessment is a fundamental need in trade – banks need to guard against money laundering for example. As firms move online and create digital footprints, increasingly, financial providers are able to incorporate these non-traditional sources of information to conduct risk assessment. The number of digital finance users in Asia doubled from 2011 to 2014, despite bank density remaining below the global average.
- Identity management
Efforts towards creating standard legal identities have come up with interesting solutions – India’s biometric IDs enable 1.009 million Indians to access social services for example. This has been used domestically for due diligence investigations. The use of legal entity identifiers (LEIs) has been expanding globally to 448,354 today. This is a standardized global identifier issues by a central trusted authority. It directly reduces the cost of conducting due diligence, and facilitates the collection and tracking of credit, performance and commercial dispute data.
- Trusted information exchange
The functioning of public goods depends on trust. Users need to trust that the provider – generally the government – is in fact able to consistently and fairly track and maintain ownership or eligibility. However, this is in practice difficult for governments to execute. Blockchain technology presents some interesting solutions to this problem. Projects are being explored throughout the region. However, at this time, there is limited progress beyond Proof of Concept results.
In order for trade to continue to change, there are two issues that need to be addressed at the multilateral level. First: legal liability and data security. Even as new trade solutions emerge for sharing information and making payments across borders, security and liability remain ongoing concerns.
Second, coordination and interoperability. Forward progress has been rapid, and new solutions for small and medium sized exporters are coming online at a good cadence. But there remains a lack of coordination between jurisdictions and partners on trade digitization. Trade is inherently cross-jurisdictional, without coordination the potential benefits of digitalization will not be fully recognized. This can happen on a regional basis, and there has been some movement in that direction in ASEAN and through free trade agreements.
The bottom line is that digitization offers the opportunity to address some of the most recalcitrant parts of trade. But in order for the potential to be fully realized, we need better coordination among actors and cross-jurisdictional security and liability discussions. ASEAN’s strong history of regional integration and coordination gives it an advantage which can be used to address these issues.
 Kar, D. and Spanjers, J. 2015. Illicit Flows from Developing Countries: 2004-2013. Global Financial Integrity.
 Barqui, S., Vinayak, H., and Yip, H. 2015. Digital Banking in ASEAN, McKinsey & Company