Fixing Global Trade Finance


[22-12-2021 01:05 PM]

BY JOHN W.H. DENTON, VICTOR K. FUNG, BOB STERNFELS, MARCUS WALLENBERG

Goods and services move around the world via critical infrastructure: roads, ports, rail networks, shipping routes, and data servers. The $5.2 trillion global trade finance ecosystem that facilitates these flows is just as essential. Unfortunately, it does not always work as well as it could.

Today’s trade finance system is characterized by a complex web of decades-old manual processes and more recent “digital islands” – closed systems of trading partners that are disconnected from the global whole. New research by the International Chamber of Commerce’s Advisory Group on Trade Finance, Fung Business Intelligence, and McKinsey & Company highlights how simplifying processes and connecting and integrating these islands across networks and platforms could transform the global economy.

According to the Asian Development Bank, the global trade financing gap increased in 2020 to a record $1.7 trillion – equivalent to 10% of global goods trade, up from 8% in 2018. The shortfall is even more acute for micro, small, and medium-size enterprises (MSMEs), which accounted for 40% of rejected trade-finance applications in 2020. So, while digital networks are undoubtedly the future of trade, expanding them in their current form risks widening the gap between large, connected multinationals and the MSMEs that are central to economic growth and job creation throughout the developing world.

For example, imagine an entrepreneurial artisan in Southeast Asia whose micro-business employs four people locally. She’s digitally savvy and has found a small but valuable online market for her products on the other side of the world. But her country’s tax, credit, and customs system, including bills of lading and purchase orders, is not built to serve her small company. Her assets are below the thresholds required to pass credit-assessment tests, and all paperwork needs to be filed manually. And the destination country’s import documents are totally different from her country’s export documentation, adding more work and cost. Now imagine that something gets lost.

The smaller the business, the more difficult it is to navigate such complexity, fragmentation, and opacity. But a more digitally interconnected trade system would help MSMEs sell to countries and customer segments that they currently cannot reach.

Fixing the system is vital. By 2030, the world will need to add 600 million jobs to absorb new workforce entrants, most of them in developing countries. MSMEs, which account for about 90% of global businesses and the majority of employment, will play a huge role in meeting that demand and unlocking the potential of trade to drive economic growth. Moreover, a better trade finance system can help to ease the supply-chain bottlenecks that are slowing economic recovery and contributing to higher inflation amid the COVID-19 pandemic.

Previous efforts to improve trade finance have resulted in a proliferation of networks, digital standards, and digitization initiatives. While many of these are excellent, we need a “whole world” solution in order to close the $1.7 trillion trade-finance gap.

We propose a more systematic model that combines everything digitally, in what we call an “interoperability layer.” This would be neither a new layer of bureaucracy nor a substitute for regulation. Rather, it is a virtual construct providing a global framework for existing and future standards, protocols, and principles, with the goal of connecting all participants in the trade-finance ecosystem to both current and future networks.

This construct would be built on three main pillars: digital trade enablers, or standards facilitating the digitization of both trade finance and global trade; specific standards enabling the digitization of the trade-finance industry; and best practices for trade-finance interoperability. A single global industry entity or a consortium could govern the layer, leveraging existing schemes such as the ICC Digital Standards Initiative launched last year.

The interoperability layer would create something akin to the global ISO quality standard for the trade system, and would operate along the lines of the Internet Engineering Task Force, which develops internet standards. Establishing it will require a robust commitment from banks, governments, trade bodies, and NGOs. Pulling together now would enable players to experience tangible benefits, potentially in 2-3 years with strong governance.

For our hypothetical Southeast Asian artisan, such a systemic fix would mean every step of the trade process would be online and navigable from her laptop. Many steps, including credit referencing, would be guided and powered by artificial intelligence and tailored to her small business. Import and export systems would share a common language for data input, resulting in a more straightforward process for her, for customs officials, and for the panoply of systems operators, while making troubleshooting simple and fast.

Building interoperability is complex, but its benefits would be wide and deep. Buyers and suppliers would likely enjoy more liquidity, lower costs, less complexity, and greater access to credit and business-to-business markets. An improved and integrated trade-finance system could attract institutional investors who have so far largely stayed out. Logistics providers, many of whom still use paper, would benefit from the reduced costs and greater security and efficiency resulting from standardized trade documents. And governments and regulators would have access to more and better information to support collaboration with financial players, and potentially unlock extra financing.

Beyond this, innovations in blockchain and digitization can significantly improve the global trade finance system, and ensure that the gains extend to businesses of all sizes and consumers around the world.

Fixing trade finance is vital for a more sustainable and inclusive global economy. And, given that it is also essential to ensuring a robust post-pandemic recovery, the potential near-term returns are huge.

*project-syndicate




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