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Policy in the era of digital trade: barriers and drivers

By Iain MacLennan, VP Trade Finance, Finastra

One of the questions we will be debating at the World Trade Symposium which takes place this November in New York, will be whether policymakers can keep up with fast-moving trends and developments in the interconnected world of global trade and finance.

The big challenge for governments is that regulation and legislation often lag technological innovation, while the mission of the technology industry is to constantly drive forward with faster, more powerful solutions to address disconnected processes such as in payments and commerce.

And while there is broad acceptance at a macro level amongst bodies such as the IMF, WTO, WEF and ICC that drawing up global standards for digitized documents and processes would benefit international trade, at the same time there are three opposing but related forces that are putting on the brakes. Let’s explore each of these in turn:

  1. The first is the trend for legislators to focus on elements of trade and payments that can slow trade down, such as Know Your Customer (KYC) and anti-money laundering (AML) requirements. Legislators are passing more responsibility and ownership to financial institutions for these cumbersome but necessary processes, and this is creating additional friction. 
  1. The second is the growth of initiatives to restrict cross-border data flows. Tech-policy think tank the Information Technology and Innovation Foundation (ITIF) explored this issue in its report[1]‘Cross-Border Data Flows: Where Are the Barriers, and What Do They Cost?’It noted that 34 countries, and counting, have enacted policy restrictions that make it more expensive and time consuming to transfer data across national borders.
  1. The report states: “The practice of locking data behind geographic borders is costing the global economy billions of dollars—with the burden falling not just on trading partners, but also on the very countries that impose barriers on data.”
  1. The third force is the recent trend towards protectionism driven by countries seeking to secure more preferential deals between themselves and trading partners. By raising tariffs, a country runs the risk of retaliatory measures being taken by others, as we have seen happen recently.

The problem is that protectionism can have unintended consequences, from raising prices on imported goods for consumers and businesses to creating uncertainty about the future, which in turn can damage future buying confidence.

The European Central Bank calculates that in a hypothetical scenario[2] where the United States raises tariffs on all imports of goods by 10 percentage points, and its trading partners impose the equivalent on US exports, real economic activity in the United States could be up to 2.5% lower than the baseline in the first year alone.

Small and medium sized enterprises (SMEs) are particularly hard hit by uncertain trading conditions and policy restrictions on data. Not only are they the most exposed to the $1.5 trillion gap in global trade finance, but they tend not to have the same level of permanent expertise in-house to track the legal and regulatory trends and issues that large corporates have.

As the laws of physics show, where there are two equal opposing forces at play there can be no progress. So where will the pressure come from to unlock the global trade and payments impasse? While the ITIF is calling on governments to remove data-localization policies, promote international interoperability in privacy and data protection and encourage international organizations to focus on digital trade barriers, the reality is that change is being driven in the interim by technology innovators.

New and existing technology players are creating novel ways of trading across borders, whether that’s by making foreign exchange faster and more transparent, opening up access to supply chain finance, simplifying regulatory compliance (Regtech), or creating new ways to structure deals.

As a result, alternative organizations are finding ways to plug global trading gaps. They include corporates such as Maersk which aimed to provide trade finance to the tune of $200 million dollars by the end of 2018[3],and Amazon which is making billions of dollars’ worth of loans to merchants.New revenue sources are opening up to a multitude of non-banking organizations – and they will continue to take advantage of these opportunities.

So maybe we are asking the wrong question when we enquire whether policymakers can keep up with developments in the interconnected world of global trade and finance. Just as water flows along the lines of least resistance, so organizations are likely to find new and different routes to trade by way of technology innovation.