May 8, 2024
SEOUL – Until 2016, it was almost taken for granted that free trade is good for everyone. That was before Donald Trump started the tariff war on Chinese imports, which his successor Biden turbocharged with even more sanctions against individuals, companies and countries. The IMF has estimated that since 2019, the number of new sanctions imposed yearly has tripled to over 3,000. The European Union is about to impose Carbon Border taxes on imports, which will further add costs and administrative burdens on exporters to Europe.
The move toward free trade has been a catalyst for many countries to increase export incomes, reduce domestic poverty and raise jobs and living standards. The Asian supply chain and export model is testimony to how trade opening helped reforms and opened Asian economies to greater incomes, trade and investments. Globalization arose from the ability of developing countries to access advanced markets and trade with each other
Even before Trump withdrew from the Trans-Pacific Partnership in 2017, there were rumblings in the US that globalization and trade was hurting domestic jobs. Trade lifts all boats, but the benefits of trade are not necessarily shared equally in any domestic economy. As a 2024 study by Georgetown University Lab for Globalization and Shared Prosperity showed, US economic nationalist policies are based on outdated information. Imports had a positive and significant effect on US manufacturing employment overall, both before and after 2011. The US economy is much more resilient to imports from emerging markets ex-China. Instead of trying to bring back manufacturing onshore, the US may be better off focusing on developing domestic comparative advantage in tradable services.
This focus on services comes from what leading global trade guru Richard Baldwin observed about the trend in global trade — physical trade in goods and commodities seem to have peaked, whereas growth is coming from value-added services. The United States has huge advantages in the services area from superior education, health, technology and finance. Indeed, lots of jobs can come from digital services and trade by small and medium enterprises. Thus, a huge debate in World Trade Organization negotiations is about how to protect international trade for SMEs and small -sized consumer imports and exports.
What all emerging markets fear is that advanced countries like the United States and Europe are imposing more and more tariffs or non-tariff barriers on trade, including sanctions on payments after the Ukraine war. Indeed, there is Congressional disquiet that US Trade Negotiator Katherine Tai has flipped the longstanding US policy supporting digital trade, which affects the WTO talks on digital trade governance, including her apparent lack of interest in seeking more market access abroad for US trade.
Since SMEs account for about 90 percent of businesses, 40 percent of GDP in emerging markets and more than half of jobs, it is in the interest of all countries to use trade to support SMEs. Central banks are aware that there is considerable scope for reducing the cost of foreign exchange payment services for SMEs, as these can cost as much as 5-7 percent of small payments. However, what is more important is to use digital documentation in both banking and trade, including customs and logistics, to eliminate huge inefficiencies arising from obsolete paper forms and legal rules.
Many economies and countries can use digital documentation to transform global trade by enhancing efficiency, transparency and security, reducing costs for businesses and facilitating seamless global transactions. Cross-border trade is slowed down by traditional trade processes which require paper documentation and certification, adding to costs and delays in trade and payments.
Last month, a group of leading businessmen in Hong Kong wrote in the South China Morning Post urging Hong Kong to accelerate digital trade documentation. Whilst they applaud the current initiatives, the achievement of full digital trade documentation to maintain Hong Kong’s leading trade and finance position would require more effort. In Singapore, the Monetary Authority of Singapore helped to create a TradeTrust system that facilitates the secure and efficient exchange of trade-related documents by leveraging blockchain technology. This can convert paper Bills of Lading into an electronic BL (eBL) so that there is seamless monitoring of trade and payments.
What digital trade documentation can do is to upgrade the physical infrastructure for trade and payments, improve monitoring and security, and also ensure that the trade, finance and logistics personnel become skilled in digital service and literacy. The push for such digital infrastructure ensures that governments have to coordinate significantly the rules, regulations and practices (such as customs, tax and security) that block digital trade for all. In other words, eCommerce would have to work seamlessly and robustly with ePayments to provide eTransactions.
International trade and financial centers have no alternative but to use digitization to reduce administrative burdens and improve overall efficiency and security to comply with the highest international standards. After all, once the system is digitized, cheaper and more efficient trade finance can be provided for SMEs, especially by using digital tokens for collateral against financing. SMEs would be able to manage their cash flow, whilst monitoring in real time how the goods and services are being delivered on time.
In this age of rising protectionism, staying on top of the growing sanctions and complex tariff and non-tariff barriers requires every economy, company and individual to build more resilient supply chains and monitor trade, investments and payments with little effort. Digital trade infrastructure and documentation are no longer luxuries but strategic necessities.
The IMF has estimated that increasing fragmentation of global trade may cost the world up to 7 percent of GDP over the long term.
If we believe that trade is good for jobs and environmental, social and governance (ESG) practices will help address planetary safety concerns, then building the digital documentation and infrastructure will lock trading nations into partnerships, rather than fighting and disrupting each other.