The global economy will emerge stronger if COVID-19 drives digitization
The health crisis should drive us to aggressively digitize global trade and supply chains so we can make the economic recovery stronger and the economy more robust.
We may be nearing the end of the beginning for the crisis caused by COVID-19. From the viewpoint of global trade and supply chains, however, the hard work starts now.
The next phase won’t be easy. A wave of non-performing loans and bankruptcies is rising, and economic bulwarks need to be strengthened. In terms of infections, the pandemic seems to be leveling off in many countries, but history and medical experts say a second wave may occur.
It now looks unlikely that this will be a short and sharp crisis followed by a quick return to normal. But if it is properly handled, the financial system can use the experience as an opportunity to enact necessary changes, and not just an exercise in crisis management.
We have a historic opportunity, an imperative, to make global trade and supply chains more secure. To do this, we need to drive digitization through all component parts of the eco-system: from exporters and suppliers to shipping, ports, customs, warehousing, finance, transport, buyers and importers. And interoperability between these component parts is required to realize seamless digital trade and supply chains.
The entire financial system has been offsetting the severe economic impact caused by shutting down of millions of businesses and sending home hundreds of millions of workers. Governments have been quick to come up with programs to aid those hit hardest. Central banks have added liquidity. Banks and their customers have adapted as best they can.
Multilateral institutions have stepped in. To keep trade moving, the program limit for support from ADB’s Trade Finance Program (TFP) was boosted by $800 million to $2.15 billion. Given the program’s ability to attract cofinancing from the private sector and the short-dated nature of trade transactions – 142 days for the TFP – it is expected to support over $5 billion in trade this year.
The trade finance market–critical to supporting the flow of trade and supply chains–has been surprisingly resilient so far.
Had this pandemic occurred even three years ago, the situation would have been much worse. In just a short time, the move toward digitization has gained pace and advanced far enough that a full-on disaster—banks not being able to function during lock down—has been avoided.of
It has been a challenge to adjust from a system that in many instances is based on hand-to-hand delivery of signed paper documents. For the most part, flexibility has prevailed, and we know of no material credit and operational risk events in traditional trade finance instruments such as letters of credit.
That is true not just for the banking system.
Beyond trade and supply chains, consider the situation in countries where entire populations have joined the digital ranks–digital identifiers, electronic banking and accounts–versus those which have been slow to adapt.
Moving the digitization agenda forward is critical to creating more robust and resilient global trade and supply chains. It will also help drive efficiency and productivity gains that will be important component parts for us to re-build the global economy.
Despite progress in recent years, the process of digitizing trade is far from finished. We need to create a harmonized digital infrastructure – standard identities, laws and technical protocols – of which digitization can really take hold through the global trade and supply chain ecosystem.
The first step should be global adoption of the Legal Entity Identifier (LEI), so that everyone agrees on a common method to easily identify the players involved. Global trade would benefit in a big way from having a single trusted global entity that could verify the identity of companies that banks finance, showing who is who, and who owns whom, and what.
The LEI is a 20-digit, alpha-numeric code based on an ISO standard developed by the International Organization for Standardization. The Global LEI Index provides open, standardized and high quality legal entity reference data. Countries without an ID system don’t need to create one. Governments can simply encourage, or require through legislation, companies to acquire LEIs. Countries that do currently have ID systems should consider mapping these to LEIs for global harmonization.
Second, the model digitization laws proposed by the United Nations Commission on International Trade Law and the International Chamber of Commerce need to be adopted globally. Global adoption of these model laws will render digital commercial documents legally enforceable. Without these laws, digitization will not advance materially. It has been coming anyway, but it needs to come faster.
Third, to drive interoperability of systems to create seamless digital trade we are working with the International Chamber of Commerce and Government of Singapore to create digital standards and protocols. This important initiative will get underway in the third quarter and will need to involve all component parts of the trade and supply chain ecosystem: buyers and sellers, ports, customs, shipping, logistics and finance.
Going forward, close coordination will be key. Now that we are beginning to see the scale of the problems we face, the entire trade and supply chain ecosystem needs to up its digital game.
If we are driven by this crisis to aggressively digitize global trade and supply chains we can make the economic recovery stronger and the future economy more robust.