By Steven Beck, Head of the Trade and Supply Chain Finance Program, Asian Development Bank (ADB)
Globalization and the system of international trade have many critics these days. Although global trade has delivered unrivaled prosperity to us, some argue that it does more harm than good, is bad for the environment, and its fruits are unevenly spread. Certainly, the Global Financial Crisis (GFC), the COVID-19 pandemic and Russia’s invasion of Ukraine highlight some of the shortcomings that have led to trade restrictions, new subsidies and shortened supply chains.
It is undeniable that recent economic and political events, compounded by the climate crisis, are exposing weaknesses in the global trading system. But that should be the impetus to improve it, not abandon it. Improving global trade and supply chains means making them more resilient to the changing fortunes of geopolitics and economic shocks while simultaneously molding them inclusively into vehicles for a greener and more equitable future.
While the complicated and interlinked global trading system remains a work in progress that requires close scrutiny, it is by far the best hope for future growth and prosperity, especially in developing countries. If the pandemic and other shocks have exposed weaknesses, they have also highlighted how ripe the system is for the changes that would benefit all.
What is needed is a major review of the global trading system.
First, it is high time for trade to be dragged into the modern age from the antiquated, paper-based system used for hundreds of years. This is a critically important and meaningful step that can and should be taken on a global scale. The existing system, enshrined in law in many countries, must become digital.
Digitalizing trade, primarily replacing paper documents such as bills of lading with electronic ones, would deliver global GDP (gross domestic product) growth and drive productivity. Digitalizing global trade would mean lower costs and make trade easier to manage, opening the space to new players. Smaller companies will find it easier to trade internationally. The transparency and data capture associated with digitalization can help reduce financing gaps for smaller companies and promote universal environmental and labor standards in global supply chains.
A fully digital global trading system will deliver significant efficiency gains and lead to better resiliency and transparency in global supply chains. The data generated would allow for better monitoring of global supply chains so that issues such as climate change and carbon tracking along with proper labor standards (safety and eliminating human slavery in supply chains, for example) could be tracked even in the smallest suppliers. Financial crime would be easier to detect due to the greater transparency that digitalization delivers.
The Asian Development Bank (ADB) was a founding member of the International Chamber of Commerce (ICC) Digital Standards Initiative (DSI)1, bringing exporters, shipping, ports, customs, logistics and importers together to agree on electronic document standards. These will replace the up to 35 paper documents currently needed for international trade. We’re aiming to get this done by the end of 2026.
A vital step in digitalizing trade is for countries to harmonize their legal systems2 to eliminate the current practice of multiple paper documents accompanying each shipment. Replacing paper with data would be transformative, but it won’t happen without governments aligning laws to recognize electronic documents for trade. To that end, the United Nations Commission on International Trade Law (UNCITRAL) has developed the Model Law on Electronic Transferable Records3 for countries to adopt or to which they could align their existing laws. The ADB has been a strong advocate, including at the G20 (Group of 20), for countries to create this enabling environment for trade digitalization.
Second, at such a critical time in the global climate crisis, we need to mainstream green trade. McKinsey & Company has estimated that more than 80 percent of greenhouse-gas emissions and 90 percent of the adverse impacts on air, land, water and biodiversity are connected to trade and supply chains.
It is imperative that we carefully analyze these networks to track, report and address carbon levels in supply chains. Barcode and QR (quick-response) code technology4 can help align climate and sustainability standards, as well as collect and transmit data about such standards.
The International Financial Reporting Standards (IFRS) integrate climate reporting into company financial reporting across 176 jurisdictions. The ADB is working with IFRS and GS1 (a standard designed to improve supply-chain information management) to template into bar and QR codes the impending carbon reporting standard for products around the world. Together, these partners will facilitate tracking and reporting carbon emissions throughout extended global supply chains. This will include addressing the complex challenge of Scope 3 emissions tracking.
If we don’t develop green trade and supply chains, we won’t achieve our climate goals.
Third, greater transparency in trade can also spread equitable access to finance and drive greater inclusion in the global trading system. A relatively new variation of financing called “deep-tier supply chain finance”5 leverages the tracking records and connections of big buyers to channel finance to the smallest links in supply chains. Those links are the small and medium-sized companies that provide most of the jobs in Asia’s developing countries and serve as the backbone of most economies around the world.
Risks have increased, prompting financial institutions to reduce support for trade, with small businesses and emerging markets being hit hardest. Local-currency values have fallen—in some cases, dramatically. Together with higher interest rates, this makes servicing hard-currency debt more difficult and much more expensive. The economic stress is evident in dwindling foreign-exchange reserves. In many developing economies, these reserves are being battered by lower remittances as overseas workers shy away from sending money through official channels as local-currency values decrease.
High prices for fuel, food and other global commodities are straining currency reserves further, especially in countries that rely heavily on imports. Inflation rates in commodities and other goods reduce the real value of what country and counterparty limits exist to support trade. Perhaps the most worrying factor is the specter of a global recession, which would likely cut demand even further for exports produced in emerging markets.
The global trade finance-funding gap may have already widened to more than $2 trillion6. That growing gap strangles the potential for trade to deliver human and economic development, create jobs and boost growth. ADB will release its latest Trade Finance Gaps Growth and Jobs Survey7 in September 2023.
Multilateral development banks, such as the ADB, have elevated their support for trade with more guarantees and loans8. This also helps draw in more private-sector participants by attaching their strong credit ratings to deals that otherwise would not get done. ADB’s Trade and Supply Chain Finance Program9 guaranteed and financed more than $7.7 billion through more than 10,000 transactions in 2022, more than half of which were mobilized from the private sector.
But support from multilateral institutions is, at best, only a tiny stopgap measure for global trade and supply chains.
In the past half-century, trade has lifted billions of people out of poverty and is responsible for improving living standards and prosperity in many countries. Recent turbulence should be a bright red warning light that a serious overhaul is required to address global trade and supply-chain weaknesses. This opportunity to increase resilience will be wasted, though, if it does not also encompass the need to make the global trading system greener and more inclusive, given the fragility of our environment and the need to ensure everyone benefits.
The time is ripe for governments and the private sector to address global trade and supply-chain shortcomings. We have the solutions; we just need to implement them. Throwing the baby out with the bathwater is not the answer.
References
1 International Chamber of Commerce (ICC)/Digital Standards Initiative: “The ICC Digital Standards Initiative: We are establishing a globally harmonised digital trade environment.”
2 Asian Development Bank (ADB): “Digitalizing Trade in Asia Needs Legislative Reform,” October 2021.
3 United Nations/United Nations Commission On International Trade Law: UNCITRAL Model Law on Electronic Transferable Records, July 13, 2017.
4 Asian Development Bank (ADB): “How Standardized Bar Codes Can Make Supply Chains More Transparent,” Steven Beck.
5 Asian Development Bank (ADB): “Deep-Tier Supply Chain Finance,” September 2022.
6 Asian Development Bank (ADB): “Toward Inclusive Access to Trade Finance: Lessons from the Trade Finance Gaps, Growth, and Jobs Survey,” August 2022.
7 Asian Development Bank (ADB): “2021 Trade Finance Gaps, Growth, and Jobs Survey,” October 2021.
8 Asian Development Bank (ADB): “Trade and Supply Chain Finance Program (TSCFP): TSCFP works to make global trade and supply chains green, resilient, inclusive, transparent, and socially responsible.”
9 Ibid.