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Supply chains orchestrate the flow of goods and services, but today they are also about the flow of paper. Paper and its electronic equivalent, PDF, dominate trade and cross-border processes, often when digital substitutes would increase efficiency, speeds, security and sustainability.
Unsurprisingly, the digital transformation of trade and trade finance has been a long-standing objective for industry practitioners.
In recent months, the industry has seen several positive developments: the private sector is driving innovation, multilateral organisations are publishing new guidelines, and governments are considering digital-friendly legislation.
Despite this progress, adoption rates for the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) – a key measure that would legitimise the use of data – remain low, with only seven jurisdictions adopting the latter.
In addition, the trade finance sector faces significant challenges in 2023 stemming from current macroeconomic trends, the ongoing Russia-Ukraine conflict, and the pressing need to continue with environment, social, and governance (ESG) initiatives.
Against this backdrop, Trade Finance Global (TFG) spoke with Pamela Mar, managing director at the ICC Digital Standards Initiative, to explore the key themes driving trade digitisation and their potential impact on trade and trade finance in 2023.
Continuing the progress from 2022
While 2022 was an exciting year for trade digitalisation initiatives on aggregate, there was no single ground-breaking event in the space.
“What distinguished 2022 was that, more than ever, digital trade was in the headlines and was in the front lines of policy debates. ” Mar said. “It was being discussed as something implementable from a digital trade platform point of view.”
This has helped create tangible progress in the space, which will only continue to accelerate as more and more key stakeholders join in.
However, as this progress continues, the critical priorities for industry digitalisation advocates will shift, and the industry needs to be prepared to adjust course accordingly.
Mar added, “Yes, the regulatory environment is important, but the real question that we should be asking is what we are going to do after the regulation is in place to ensure that businesses implement the digital tools to change how things are done on the ground.”
Stepping stones to digital trade
As is widely understood, the first important step in the move towards trade digitalisation is the continued push for clear regulatory environments and policy changes, including the ratification of the MLETR by more countries.
Mar believes that progress cannot happen without a clear regulatory environment. But she sees great progress coming out of places like UK, France, Thailand, and Germany. This advancement in digitisation means that the industry needs to capitalise on the momentum.
After regulation, the next step is to focus on implementation and capacity building.
Widespread digitalisation will require businesses to be equipped with the tools and capabilities to operate in a digital environment. This includes ensuring that they have adequate hardware and cybersecurity protocols and employees with the requisite skills.
Many businesses may need external support to reach a technological competency where they are comfortable committing to digital-first processes.
The third step is to ensure that there is a harmonised set of standards and taxonomy.
While this includes ensuring that vital trade documents – such as certificates of origin, warehouse receipts, and customs certificates – are consistent across applications, it also involves ensuring that these agreed-upon standards are actually implemented and used in practice.
Mar said, “We have already seen some companies – especially multinationals – develop their own digital systems and networks. The key for those companies will be encouraging them to allign their proprietary solutions with internationally accepted digital standard.”
If successful, this will help lower the barriers to entry for firms that have yet to begin digitalising since adopting a universal standard is more straightforward than developing their own.
The role of Legal Entity Identifiers
Legal Entity Identifiers (LEIs) are another novel digital tool that can help small and medium enterprises (SMEs), in particular, break down the entry barriers they face.
LEIs can play a critical role in digitalising supply chains by providing a unique identifier for businesses to connect all their data together in a single verifiable source. Having a single, standardised identifier reduces the cost of onboarding and verifying business credentials.
“LEIs are perhaps not receiving the visibility they deserve,” Mar said. “It is the single best tool that is interoperable across countries and which can be secured as a business identity.
Governments should support SMEs in acquiring LEIs, and banks should consider providing them to potential SME customers in anticipation of future business.
LEIs are a vital node in the digitalisation of supply chains and an essential tool for enabling efficient, secure, and reliable transactions. There could be sustainability applications as well, as they could pull together a company’s ESG data in a single verifiable package.
The LEI vision is clear: to create an ecosystem where a company’s commercial, finance and sustainability credentials could come together digitially to catalyse its growth through trade.