Taking a closer took: the impact of tech on trade (en)
Digital technologies are rapidly changing every aspect of our societies, and especially international trade where all these technologies are converging. From artificial intelligence (AI) and distributed ledger technology (DLT)* to 3D printing and 5G networks, emerging technologies are no longer abstract ideas but daily realities of international trade.
An article published by the World Economic Forum (WEF) in 2018 explored the potential impact of various technologies on international trade. As technology moves fast, it is time to zoom in on some of the concrete applications of digital technologies starting to gain traction, particularly trade in goods**: digital finance, digital shipping, and digital compliance. We see growing interest among tech and trade experts in exploring the role of digital technologies for each section of the value chain, the pain points they could address, and their potential challenges.
This article introduces a visual aide to clarify how digital technologies relate to the three basic components of international trade in goods***. For each of these digital layers we see a variety of new applications.
The financing and payment of international trade transactions have traditionally been a hurdle for many stakeholders, often resulting in complex structures, costly intermediaries, and lengthy processes. AI, blockchain, and digital payment systems could help build trust and speed transactions while lowering costs and barriers to entry, especially for small and medium-sized enterprises (SMEs).
On trade financing in 2017, there was a trade financing gap of $1.5 trillion, the Asian Development Bank estimates, representing 10% of global merchandise volume. This gap means many businesses didn’t have access to sufficient credit to participate in international trade, and some 75% of the affected businesses were SMEs.
With potential advantages in disintermediation, real-time review, trust-building, and transparency, blockchain has been a popular technology to deploy among international trade stakeholders, from banks to shipping companies to tech-solution providers. For example, we.trade, a platform backed by IBM and 14 major European banks, offers to provide more companies with easier access to trade financing with increased trust and transparency enabled by blockchain. Another example can be found in Malawi, where a blockchain-based system creates a verifiable and transparent audit trail to offer cheaper finance for local tea farmers who implement sustainable practices.
Artificial intelligence also plays a role in digital finance. A startup in China is using algorithms to issue millions of microloans to enable the “underbanked” access credits online quickly. Instead of asking for financial history that many in the “underbanked” populations don’t have, the algorithms analyze unique variables, such as typing speed and phone battery percentage, to predict repayment with over 90% accuracy.
Digital payments also become increasingly important, especially mobile payment options, such as M-Pesa, Paytm, and Alipay. These have already significantly lowered the bar for buyers and sellers to gain access to global e-commerce and trade, in particular SMEs in developing countries. In addition, the introduction of Central Bank Digital Currency (CBDC), the digital form of fiat money, could have a significant impact on international trade if adopted globally. It could boost financial inclusion and access to credit.
When goods move from A to B, digital technologies can play multiple roles in making shipping faster, cheaper, and more reliable. However, some technologies develop more quickly than others. Looking at recent examples, it is worth noting that blockchain-based applications are gaining traction.
For example, port operations depend on the seamless transfer of goods across various handlers. Blockchain solutions have the benefit of immutability and – if applied successfully – can reduce fraud. When everybody relies on the same database to verify the status of a transaction, ports and handlers can avoid wasting resources. Prominent examples include the Port of Rotterdam’s Deliver project in the Netherlands aimed at paperless trade, in collaboration with Samsung Digital Software and Dutch bank ABN Amro NV. Similarly, suppliers of leafy green vegetables for American retailers such as Walmart Inc. are required to upload their data to the blockchain so produce could be traced from farm to table to ensure food safety.
Looking at AI-related trends, a growing number of port-related projects across the globe target digital tracking systems that include sensors, IoT devices or automatic image-recognition software to ensure that port authorities know the movements of every single shipment by any handler at any moment. Autonomous transport technologies, such as stacking, craning and quayside loading – as well as autonomous ships – are also being tested in locations including Shanghai, Rotterdam and Hamburg.
Both blockchain and AI technologies are set to impact digital shipping in the medium term. Ongoing experimentation has already brought together various players of the logistics community in their need to adopt to the digital age. It is still early days, but it is worth watching the pioneers as some of these technologies mature.
Driven by the potential to offer reduced administrative costs, improved security, decreased clearance time, and increased trust among parties, government authorities around the world have started to test blockchain to ensure compliance across the trade ecosystem.
For example, in anticipation of Brexit, the UK and Northern Ireland anticipated a 363% increase in customs declarations on trade between itself and the European Union. The UK customs agency in 2017 conducted a blockchain pilot aimed at reducing administrative and coordination costs while automatically detecting anomalies and enabling compliant shipments to clear customs faster.
Meanwhile, the WEF is working with the Inter-American Development Bank to co-design a framework for policymakers on how to deploy blockchain in the form of a trade single window. The policy framework will be implemented in a specific pilot project in Argentina to build a neutral and trusted environment for bilateral and global interoperability of national trade single windows.
In addition to blockchain, AI is being applied to automate the product classifications more accurately, identify risks of a particular shipment based on data analysis, and streamline complex processes. For example, Korea’s Customs Service has been experimenting with using AI to help with the screening and assess the risks of items to deal with increasing e-commerce volume.
Digital technologies are constantly evolving, and can disrupt global trade as it is conducted today. New developments such as AI, blockchain and 5G raise new questions on their impact on trade. The good news is that TradeTech is in a good starting position. Trade by definition is scalable. This provides market incentives for technology development and adoption. The flip side is that there is still a long way to go in terms of technology adoption, especially between developed and developing countries. The digital divide is still growing. But the need for scale also means that there is a clear incentive to implement the political agenda of the Sustainable Development Goals. SDG 9 calls for innovations for an inclusive global trading system, including improved access by SMEs across the globe to international supply chains.
During a recent World Economic Forum event it became clear that the tech sector is already on board with trade experts seeking to push for innovations in the sector. An important caveat in this debate: TradeTech will not succeed if it is built on a disruption-only model. To increase adoption across the various businesses involved along the international trade roadmap, we need to develop trusted technologies, which properly reflect concerns including fairness, equal access, and data protection.
*In this article Distributed Ledger Technology, or DLT, is used interchangeably with blockchain, for ease of reference.
**Digital technologies have made important impacts on trade in services as well, from digital services platforms to AI-assisted language translation, but this article will focus more on trade in goods.
***The model is inspired by the UN/CEFACT International Supply Chain Reference Model of ‘Buy-Ship-Pay’ and modified for digital trade context; as the sequencing and components of international trade are complex and varied, this model is for reference only.