Except for 2016, it was almost taken for granted that free trade is good for everyone. That was before then United States President Donald Trump started the tariff war on Chinese imports, which his successor President Joe Biden turbocharged with even more sanctions against individuals, companies, and countries.
The International Monetary Fund (IMF) estimates 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 were hurting domestic jobs. Trade lifts all boats, but the benefits of trade are not necessarily shared equally in any domestic economy. Instead of trying to bring back manufacturing onshore, the US may be better off focusing on developing domestic comparative advantage in tradable services. The US 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 (SMEs). 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.
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 to 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.
What digital trade documentation can do is upgrade the physical infrastructure for trade and payments, improve monitoring and security, and ensure that 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, e-commerce would have to work seamlessly and robustly with e-payments to provide e-transactions.
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, while 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 nontariff barriers requires every economy, company, and individual to build more resilient supply chains, as well as monitor trade, investments, and payments with little effort. Digital trade infrastructure and documentation is no longer a luxury but a strategic necessity.
The IMF has estimated that increasing fragmentation of the 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, and that social and governance practices will help address planetary safety concerns, then we should build the digital documentation infrastructure needed to lock in trading nations into partnerships, rather than have them fighting and disrupting each other. Asia News Network
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Andrew Sheng is former chair of the Hong Kong Securities and Futures Commission.
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The Philippine Daily Inquirer is a member of the Asia News Network, an alliance of 22 media titles in the region.