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ACCELERATING TRADE 4.0
Disruptive technologies are bringing a paradigm transformation to industrial and trade competitiveness. To ensure more equitable trade recovery post-pandemic, it is vital to build global consensus on digital trade frameworks and address growing protectionism.
BY DR BADRI NARAYAN GOPALAKRISHNAN & VIRAT BAHRI
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Digitisation and lower human intervention are regarded as key foundations to drive trade growth. The pandemic period was accompanied by an immensely volatile international trade environment. Lockdowns, rising cases and demand fluctuations upended the entire ecosystem of trade, be it rising freight costs, low container availability, shipping capacity, and even essential staff functions.
While the situation was changing every day, the paper-based system of trading woefully exposed how underprepared we were for this scenario. CEOs responded swiftly to manage the situation, but 75% of them admitted to be using digital for the first time, according to a McKinsey Global Survey of Executives. They had clearly woken up to the fact, however, that this would be the new normal even post the pandemic.
Disruptive technologies, which are essentially the results of path-breaking innovations, are posing a formidable challenge to established industries and promising unprecedented transformation in global trade. Several such technologies have been developed in the past few years. The impact of these innovations is often compared to the ‘next Industrial Revolution’ or ‘next Internet’, etc. While their utilisation was increasing steadily, the pandemic has led to a rapid acceleration in their adoption. This article discusses the potential impact of these technologies on the global economy and trade ecosystem, and how governments & businesses need to approach them.
CASE OF THE MISSING CONTAINERS!
With the advent of robotics, AI, blockchain, 3D printing, etc, the processes of production and consumption are changing significantly. This is a very substantial deviation from the way we have been doing things over the past few decades. It can change cost of production and efficiencies in a big way, which are more mechanical changes. But on the other hand, they can also change the way we are doing things significantly.
Global Value Chains will be structurally affected by these technologies in many different ways. Economic policies have also begun responding to these technologies. Some technologies like blockchain, IoT and cloud may provide a strong positive impetus to trade by means of increased transparency and trade
INDIA’S SCORE ON TRADE FACILITATION PARAMETERS
ACCORDING TO HINRICH FOUNDATION AND AIMA, DIGITAL TRADE IS LIKELY TO CREATE A RS. 3,331 THOUSAND CRORE ECONOMIC OPPORTUNITY FOR INDIA BY 2030
facilitation. But some others like AI, automation, robotics and 3D printing may erode trade due to elimination of comparative advantage.
As a result, policy makers will be required to make adjustments for employment & skill development. Trade agreements will have to bring in clauses for new tech. There is also a risk of greater protectionism by nations targeting hi-tech products for instance, which may be harmful for trade growth.
The theory of comparative advantage broadly explains global trade as being a result of countries focusing on activities that they can carry out more inexpensively and efficiently, due to the abundant factors available with them. Due to this reason, poorer countries with excess labour that’s cheap have traditionally focused on producing and exporting labour-intensive goods and services.
However, this situation is rapidly
120
100
80
60
40
20 100% 95.83% 88.89% 96.3%
66.67% 90.32%
0
Transparency Formalities
Institutional Arrangement & Cooperation Paperless trade Cross-border paperless trade
Trade facilitation score
Source: UN Global Survey on Digital and Sustainable Trade Facilitation, 2021
ARTIFICIAL INTELLIGENCE & MACHINE LEARNING (AI/ML):
The term “artificial intelligence” dates back to 1956 and belongs to a Stanford researcher John McCarthy, who coined the term and defined the key mission of AI as a sub-field of computer science.
Artificial intelligence (AI) is the ability of a machine or a computer program to think and learn. The concept of AI is based on the idea of building machines capable of thinking, acting, and learning like humans.
ML comprises algorithms that parse data, learn from that data, and then apply what they’ve learned to make informed decisions.
AI and robotics may lead to
• Acceleration and precision of decisionmaking. • Improved processes at lower cost and higher efficiencies, without reliance on cheap labour.
Impact on economic policies:
• Safety, Fairness, Accountability,
Transparency and Ethics. • Global leadership in AI and implications for education programs. • Future of jobs and skill development Data science also has similar advantages like AI (and a lot of overlap).
Impact on economic policies
• WTO discussions (ongoing) about tariffs on cross-border data flows. • Proposed as a source of additional tariff revenue and negotiation point for some developing countries. • May have negative effects on them due to the large presence of such cross-border flows. • May also harm other developed countries for the same reason, if reciprocated. BLOCKCHAIN
• Wiki: “A blockchain is a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.” • Blockchain is a process of recording transactions through a digital ledger.
These transactions are public and verified by multiple computers to ensure ledger accuracy. • Solves the puzzle of the combination of Distributability and Encryption. • No central authority needed for “trust”. • Cryptocurrency was its first but not last application.
3D PRINTING
• Now, screws can be 3D printed in large scale, but in future even cars may be 3D printed. • This means greater trade in raw materials and elimination of cheap labour as a comparative advantage – anyone can manufacture anything if raw materials are available! • Broadly, it may reduce trade (by 40% according to ING, 2017) – but raw material exporters may gain!
CRYPTOCURRENCY
• Dominance of global currencies for trade may fade, with the rise of cryptocurrencies • This may change the way trade evolves, avoiding many losses that may happen due to fiat currency fluctuations (e.g. losses faced by exporters to UK upon
BREXIT due to GBP’s rapid depreciation), but cryptocurrencies are not necessarily stable either (e.g. Bitcoin). • Stable coins and asset-backed cryptos are future prospects.
changing with the emergence of new technologies. Technological capital, abilities and skills are much more important now than traditional factor endowments. An example of this is 3D printing technology. This is a relatively new manufacturing technology, which enables us to literally ‘print’ a commodity whose design is available in soft copy either locally or via the web. In the nineties, an early lab-only version of this technology was called ‘Rapid Prototyping’ technology. Over time, this has expanded to commercial use for many products, including face masks in the recent past that came to light during the first wave of the COVID-19 pandemic.
Such a technology may potentially help a company in the UK export a novel design file to the US, wherein its customer can purchase it online and print the desired commodity behind that design at their 3D printer at home. But when we compare this with the traditional setting, several questions arise:
• What happens to the factory in
• Blockchain is not strictly a new technology but a novel business application of existing advanced technologies in cryptography, internet and the cloud. • Blockchain in conjunction with other new technologies can change the landscape in business. For instance, in future, you will be able to see a container in real time.
DRONES
• Applications: Unmanned inspections in several industries like mining and energy, monitoring of environment and yields in agriculture, tourism, entertainment, etc. • They can cut costs (even upto 90% labour reduction in some tasks –
McKinsey, 2018). • The effects on trade may be similar to those of automation, in terms of reduced costs and increased efficiencies. • Countries that adopt drones and related technologies for production may gain comparative advantage. OTHER IT INNOVATIONS
• Sharing economy (e.g.
Uber model for labour contracts, etc) can cut costs to the extent of substituting outsourcing (coupled with the ongoing trade wars) • Internet of Things (IoTs) often interact with other technologies explained above – can substantially cut costs, increase efficiencies and improve transparency! • Cloud services can reduce data handling and sharing costs substantially (upto 50% according to our analysis with AWS data). This can add to the competitiveness.
INDUSTRY 4.0
• Combination of all the new technologies in the shopfloor • Predictive maintenance • Digital engineering • Again, reduced failures, increased efficiencies, reduced costs ->ideal combination for greater export performance! • However, initial costs may not be trivial – capital costs to be borne by whom? • Skill availability and displaced unskilled labour need policymakers’ attention as well.
Mexico that was manufacturing this commodity before? • What happens to the transportation infrastructure that dealt with its export from Mexico to USA, and even before, the export of samples and designs from the UK to Mexico? • What happens to the US-based import houses that were in-charge of branding and selling these commodities? • Finally, what happens to the warehouse and retailer in the US that sold this commodity before?
A simple answer might be that they are all going to be gone. We have already seen some signs as to how this may happen in the future. While it seems unimaginable for us now with all the pent-up demand and supply chain disruptions with the lack of containers, the shipping container industry was in the middle of an interesting phase of some soul searching not so long ago. Container demand was witnessing a decline due to realignment of global supply chains, trade/tariff tensions,
deglobalization, near-shoring, reshoring, friend-shoring, etc.
If such a reduction in transportation growth can happen even with these quick and even transitory policy changes, such a deep long-lasting technological change can only have more profound impact. An alarming study by ING estimates that global trade is likely to shrink by one-fourth by 2060 if 3D printing expands as much as expected in the future.
One may ask, justifiably, as to what would the remaining 75% of the trade comprise? Well, we still need the ‘printer ink’, viz, raw materials like plastics, wood, metals, minerals etc. In this scenario, all raw material producers may end up becoming exporters, while others may be importers.
SEAMLESS, PAPERLESS, FACELESS
Disruptive technologies are also influencing the manner in which digital trade itself is being conducted. Cross border e-commerce, defined as the selling of goods from a website of a national store in one country to another party in a foreign country, is rapidly picking up as a catalytic force in global trade. According to
Zion Market Research, global crossborder B2C e-commerce market revenue was estimated at US$ 562.1 billion in 2018 and is predicted to reach US$ 4,195 billion by 2027, growing at a CAGR of nearly 28.4% between 2020-27.
Cross border e-commerce provides companies with a vital route to expand internationally, and OEMs can bypass long channels to reach customers directly. Amazon India has projected US$ 20 billion in exports from India by 2025, which is twice the target it set earlier. But SMEs, which are expected to be the major beneficiaries of this trade, have strong inhibitions and distrust with digital transactions (particularly with returns in cross border e-commerce being a major challenge), so a strong outreach becomes necessary with appropriate capacity building initiatives. Moreover, a lot of players may feel constrained due to lack of resources for brand promotion. Support measures by policy makers, industry bodies, etc will be crucial in helping these companies benefit.
Blockchain is expected to be a key facilitator in lowering entry barriers for trade, as well as reducing trade costs for players. It is essentially a distributed ledger technology that enables connected computers to reach an agreement over shared data. This greatly enables trust and ensures seamless traceability, and is a potential boon for developing countries in particular. Building an ecosystem of mutually recognized trustworthy digital identities at a global level could be a significant catalyst to facilitate trade through more agile supply chains and help build resilience to future crises – which would ultimately benefit small and medium-sized enterprises (SMEs) significantly, as argued in a paper by Hanna C. Norberg, TradeEconomista; Emmanuelle Ganne, World Trade Organization; Nadia Hewett, World Economic Forum. They feel that this issue
should be on high priority in RTAs and other trade agreements before various siloed approaches make a globally trusted digital identity system difficult to realize.
After India’s ratification of the Trade Facilitation Agreement of the WTO in April 2016, the country has introduced reforms focused on infrastructural upgradation, digitisation and automation. These include Direct Port Entry and Direct Port Delivery, Radio Frequency Identification system and Single Window Interface for Facilitating Trade, the Port Community System to seamlessly integrating all maritime trade-related stakeholders on a single platform and e-SANCHIT to cut down on human intervention.
DGFT provides online services of issuing Certificate of Origin and banks provide E-Bank realization certificate, based on realization of payment against exports. In 2014, RBI launched an online system named Export Data Processing & Monitoring for monitoring all export activities in India through the generation of shipping bills.
The UN Global Report on Trade Facilitation 2021 concludes that reducing trade costs is essential for enabling economies to effectively participate in regional and global value chains, and for them to continue using trade as an important engine of growth and sustainable development. But according to the ESCAP-World Bank Trade Cost Database, trade costs remain high in many regions of the world.
Implementation still varies greatly, with developed economies achieving the highest level at 81.8%, while the Pacific Islands have the lowest rate (40.1%). Implementation in Sub-Saharan Africa is 9.1%, second to the Pacific Islands. South Asia recorded the most progress, with more than 10 percentage point increase since 2019. India has taken the lead, with ambitious reforms over this period and a trade facilitation implementation rate of 90.3%. The economy scores well on all parameters except for cross border paperless trade, which refers to international trade taking place on the basis of electronic data and documents. According to ESCAP, implementation of paperless trade measures is expected to reduce international trade costs in the AsiaPacific region by 25%, saving the economies US$ 600 billion annually.
While the initiatives by India are laudable, experts feel several gaps need to be bridged, especially vis-àvis standardisation and coordination of processes across ports and awareness and acceptability of new initiatives among the users.
THE EQUITABILITY PARADOX
From the policy perspective, the digitisation of trade raises some more interesting questions. If we are not going to produce or transport much on a massive scale, how do we ensure that the economy runs and jobs grow? This may require policymakers to adjust labour supply with a long-term vision. Secondly, if cross border trade declines in this manner, where do we get our customs revenue?
The answer to the first challenge is pragmatic development of industrial and skill development plans and policies. As for the second question, there has been a proposal from developing countries to allow them to tax cross-border data transmissions, for which the WTO MC12 has concluded to continue the 24-year old moratorium that prohibits such duties.
Since 2010, e-commerce and digital trade provisions are increasingly being integrated into digital trade agreements, according to a report by WTO and World Economic Forum. For instance, the United States-Mexico-Canada Agreement (USMCA) covers a chapter on e-commerce and digital trade. Digital-only trade agreements, such as the Singapore–Australia Digital Economy Agreement (SADEA) and the Digital Economy Partnership Agreement (DEPA) between Chile, New Zealand
VALUE POTENTIAL OF INDUSTRY 4.0 IN FACTORY ECOSYSTEM
Inventory holding cost reduction 15-20% Labour productivity increase 15-30% Machine downtime reduction 30-50% Throughput increase 10-30% Forecasting accuracy improvement 85% Cost-of-quality improvement 10-20% Source: Mckinsey & Co.
and Singapore, are focused specifically on a gamut of digital trade issues. India and UAE also added a Digital Trade chapter in their trade agreement concluded earlier this year, covering areas like paperless trading, domestic electronic transactions frameworks, authentication, online consumer protection, unsolicited commercial electronic messages, personal data protection, cross-border flow of information, etc.
The WTO-WEF report further adds that 5 Gs will play a critical role in wide-scale adoption of trade tech:
• Global data transmission and liability frameworks • Global legal recognition of electronic transactions and documents • Global digital identity of persons and objects • Global interoperability of data models for trade documents and platforms • Global trade rules access and computational law
Areas which are virtually missing from trade agreements at present include connectivity, data sharing and e-signatures. Electronic transferable records, automated contracts, digital tokens, interoperability of data models, and digital identity of legal and physical persons and of physical and digital goods are getting covered in few of the recent trade agreements.
However, the world is witnessing a steady rise in digital protectionism. The Digital Policy Alert Activity Tracker lists 3,736 measures across G20, EU member nations and Switzerland between January 2020 and September 2022. Maximum measures are in data governance, followed by content moderation, competition, registration & licensing and taxation. Similarly, the OECD Digital Services Trade Restrictiveness Index 2019 shows increased tightening of the regulatory environment for trade in digitally enabled services. The share of restrictive and liberalizing measures between 2014 and 2018 was in the ratio of 80:20! This level of protectionism among the world’s leading economies shows that governments are increasingly concerned about the impact of digital trade on their economies.
According to an estimate (Wilson Centre report), a 10% increase in ‘bilateral digital connectivity’ raises goods trade by nearly 2% and trade in services by over 3%. Digitalisation is key to bringing about a more holistic recovery in trade post-COVID 19. Lack of global consensus and increasing protectionism on the other hand, threatens to restrict the benefits of digitization to a few, and widen the digital divide further. This must be avoided at all costs.
Dr Badri Narayan Gopalakrishnan, Lead Adviser & Head, Trade & Commerce, NITI Aayog and Member, Committee for Advanced Trade Research, TPCI
Mr. Virat Bahri, Deputy Director, TPCI and Editor, India Business & Trade
