The low spark of high-friction trade
What solutions can we implement to reduce trade friction?
To acknowledge that global trade is threatened by the rise in protectionism and geopolitical fragmentation is neither provocative nor sexy. But that does not lessen the need to address these challenges.
The Covid-19 pandemic, escalating geopolitical tensions and growing concerns over security have accelerated deeper trench lines pointing towards regionalisation and balkanisation – countering decades of globalisation. Rising trade friction has resulted in over 3,000 new restrictions on trade being introduced in 2023, up three times since 2019. Many restrictions include rules for export controls, tariffs and limitations on cross-border data flows. The most recent US election outcome, if anything, may further exacerbate what is already a very fractious state of global trade.
As a result, we have started to witness a profound re-wiring of supply chain and trade routes. The Global South increasingly acts as the intermediary between the east and the west. South-South trade has experienced significant growth – up more than 50 per cent since the pandemic – and this process of fragmentation is only just beginning.
On the positive side, we are seeing constructive efforts to improve supply chain resilience, with increasing focus on reducing carbon footprints. However, fragmentation is inflationary. Against a backdrop of subdued global growth, costs are rising from less efficient flows and lower levels of productivity. Shipping costs have also surged by 300 per cent as container ships take longer routes to avoid the ongoing conflict in the Middle East.
These inefficiencies pose societal costs beyond price increases and shipping delays. The global trade finance gap – the shortfall between available financing and its actual funding needs – increased almost 50 per cent to USD2.5 trillion between 2020 and 2022. Unfortunately, most of this gap is shouldered by those least able to bear: micro, small and medium sized enterprises (MSMEs), with many of them coming from developing markets. Our research shows a more inclusive trade finance ecosystem can help lift exports across emerging markets by around 8 per cent, boosting growth and employment.
Three solutions that could make a difference
How do we get there? The B20 Trade & Investment Task Force, on which I serve as a co-chair, has recommended several solutions that could make a real difference.
A key to extending trade finance to MSMEs is greater digitisation. The current heavily paper-based system means small businesses are often disconnected from top-tier suppliers as well as trade finance providers, and banks are left struggling with cumbersome onboarding processes for the vast numbers of small businesses.
Digitising and making basic documents accessible would generate new, down-tier supply opportunities for MSMEs. Streamlining “Know Your Customer” documents could improve transparency of overall trade finance needs, while tokenisation can increase finance deeper into supply chains with greater visibility and at much reduced financing costs.
Separately, establishing global common standards can facilitate the use of these digital documents and data across borders, yet most nations have yet to adopt internationally aligned legislation providing a legal basis for digital trade documentation. Doing so would create new channels for trade to flow, and standardisation permits seamless use across jurisdictions.
Lastly, we must implement universally aligned rules that permit the safe storage and sharing of data and prevent costly localisation requirements. Digital solutions will not meet their full potential if the data they create are restricted from international use. Such restrictions at best increase costs of international commerce and at worst prevent direct trade flows, reduce innovation and increase security risks. These are ultimately passed on in the form of increased consumer costs.
Over the past half century, trade has been a key driver in powering global economic growth, improving living standards and reducing household consumption costs. Such an unparalleled era of prosperity and growth has been underpinned by a strong system of multilateral cooperation. The rise in protectionist forces is now threatening this very commitment to open and inclusive trade, with the bedrock of a rules-based global trade regime increasingly being eroded.
But there is time for us to arrest this situation. The above recommendations, amongst others, serve as a roadmap for G20 countries to foster a more frictionless trade environment. The world must adopt more sensible policy making, recognise the value of a global trade system and re-establish the basis for multilateralism.
The clock is ticking. To ignite world trade and spark the next wave of global growth, we can and must rewrite this story now.
Benjamin Hung is also a co-chair of B20’s Trade & Investment Task Force.
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