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Digitalizing Trade and Meeting Today’s Big-Ticket Growth Challenges

Power of Ideas
Digitalizing Trade, and Meeting Today’s Big Ticket Growth Challenges

Four billion pieces of paper—equivalent to around 400,000 trees—facilitate the movement of products and services through global supply chains, which in turn enable everyone to eat, work, move about, and live their lives. These purchase orders, invoices, bills of lading, and customs documents (among others) ensure the clear, safe, and large-scale flow of goods and services among the many parties involved. Except that the process remains very analog, despite the great advances in technology. Digital trade is about turning this paper trail into datasets that can be machine read, automated, and shared. It is about transforming a process that could take a cumulative 12 to 15 days to be executed flawlessly in 48 to 72 hours.

Not surprisingly, digital trade is good for growth. Shippers estimate that switching to electronic bills of lading (eBL) alone would save US$6.5 billion in costs right away. Removing these frictions could boost trade by an additional $30–40 billion. And, digitizing basic trade processes correlates with increased exports and export diversification, especially for developing countries.

Digital trade enables a process that currently takes 12–15 days to be executed flawlessly in 48–72 hours.

There is a big caveat: Globalization and world trade have, over the past 40 years, produced immense growth but also two massive global challenges: a widening wealth and economic opportunity gap, as well as a deepening climate problem.

The good news is that digitalizing trade could drastically improve our ability to make headway on both of these challenges by empowering small- and medium-sized enterprises (SMEs) to diversify internationally, get financed, and move towards sustainability.

SMEs account for the majority of jobs—over 90 percent in some countries—and are a major source of women’s employment in leadership roles. And yet, SMEs are underrepresented in exports and in global supply chains, largely due to information asymmetries or complexity of cross-border processes. Trade digitalization helps. Measures such as customs single windows or authorized economic operators show direct correlation with SMEs increasing exports and job creation.

In other words, a digital trade environment, with its transparent rules and standards and equitable access, levels the playing field so SMEs can compete.

Lack of financial access is the other big barrier stymying SME growth. The World Bank estimates that 40 percent of SMEs in developing countries have unmet financing needs totaling $5.2 trillion. Here, initial work on digitalizing trade documents at the International Chamber of Commerce Digital Standards Initiative offers hope at reducing the financing cost to serve.

Put simply, a dataset derived from digitalizing seven key trade processes could address a significant portion of a bank’s data needs for a typical trade finance transaction. Paired with the use of digital identity, use of this dataset could alleviate the need for a bank to mount its own effort to ascertain this same information, thereby lowering the cost of financing.

In other words, digital trade turns out to hit the sweet spot of growth strategies today: loved by big business for its ability to increase speed, lower cost, and make trade easier, while also empowering small business by solving two big conundrums, namely access and finance. As such, it addresses both the wealth and gender gaps, while giving companies resources and capabilities crucial to climate action.

Digital trade is not new—Singapore’s electronic trade single window dates back to 1989—but with less than 5 percent of global trade deploying eBLs, not to mention the other 40 key trade documents, it is clear that we could, and should, be moving much faster.

This is where digital standards fill a key gap: harmonized standards for data are essential for data flow across borders, trade platforms, networks, and proprietary company systems. Technology allows us to send enormous amounts of data at great speed and scope, but only data that is interoperable by design, can be automatically plugged and played.

Standards harmonization, or at least interoperability, is the secret sauce to digitalizing trade at scale and opening up all the possibilities outlined above. For sure, it is not an easy process, but we sometimes forget that it is not like the weather; it is completely 100 percent controlled by humans. So the answer is actually within our own hands, relying on our own willingness to collaborate, to risk stepping away from business as usual and begin addressing our sustainability and inclusion problems one supply chain at a time.