It’s probably not a surprise that a lot of the rules in international trade are based on English ‘law merchant’. England, after all, was the pre-eminent global naval power for centuries. What might be more surprising is that those laws, as they stand, require trade banks to courier around 4 billion documents around the world each year.
Why do they do that? Because some of the documents they handle – like a ship’s bill of lading – give title to the goods but only when the document is in paper form. Under current English law, if something is not physically tangible, you can’t possess it. That’s why a paper bill of lading has value and an e-bill of lading is on shakier ground.
There have been calls to change this for many years and it looks as though it will now finally happen – partly thanks to the harsh light that Covid lockdowns shone on the existing practices. The UK’s Electronic Trade Documents Bill is expected to come into force before the end of 2022.
And that’s not the only major legal shift. The G7 agreed to collaborate on electronic transferable records in April 2021. The International Chamber of Commerce (ICC) described that decision as “momentous”.
What the G7 greenlit is backing the Model Law on Electronic Transferable Records (MLETR), which was adopted by the United Nation Commission on International Trade Law in July 2017 but slow to take off. As of the end 2021, just seven jurisdictions were on board.
The MLETR is agnostic as to technology; can include information from any industry standard (which often means more information than a paper document); treats e-documents as equivalent to transferable documents or instruments; and is recognised across borders.
When the G7 ministers described their decision in a statement, they said: “Paper-based transactions, which still dominate international trade, are a source of cost, delay, inefficiency, fraud, error and environmental impact.”
That neat summary may have low-balled the problems. The change in law that will allow e-documentation, says Chris Southworth, the secretary general of the ICC, UK, “is commercially, far and away the most transformative change in trade by a long distance. What it allows us to do is sweep away all paper and bring in technology and innovation at scale.”
Digitising global trade holds a lot of promise simply because the sector is so vast. The biggest freight ships can carry 24,000 containers, each of which requires its own paper documentation that has to be couriered through many hands. UNCTAD says that around 750 million containers were moved at ports worldwide in 2017.
The costs – and potential for mistakes – associated with that are one of the main reasons for the $3.5bn (£2.81bn) ‘trade gap’ – the trade finance that isn’t available to SMEs – both in the UK and in emerging markets – because they can’t afford to use the existing system.
The All-Party Parliamentary Group on Trade says that more than half of SME applications for trade finance are rejected and that less than 8% of SMEs use traditional forms of trade finance. It says that “mostly manual” bureaucracy at banks means that it can cost £60,000 to onboard an SME. It sees lowering the cost of finance and bringing more SMEs into the trading system “as an imperative … in the context of month-on-month exports falling since Q1 2019”.
Research from Coriolis Technologies says UK trade fell by around 18% in value terms between December 2020 and the end of February 2021 and the number of exporters, their revenues and their turnovers have been falling since Q4 2019 by between 5% and 25%. Larger businesses have been doing better – partly because they are better able to take bureaucratic hurdles. Those hurdles are both a function of Brexit, but also of the stricter rules on, among other things, anti-money laundering, brought in after the 2008 financial crisis.
Removing sand from trade gears, then, can only help – something that the new law looks set to do. “The EU is the most sophisticated customs union in the world,” says Southworth. “Goods can flow with ease, but less than 1% of trade documents are currently in digital form.”
But smoother processes are not always welcome. What about the potential for job losses as machines take over tasks currently done by people, such as checking trade documents at banks?
“The reality is that it’s already hard to find good document checkers,” says Alex Gray, head of trade and transaction banking at the London Institute of Banking & Finance. “Digital processes will enable trade finance professionals to focus on the judgement calls that machines can’t make and leave the routine work to the computers. It’s a real win for the industry.”
Perhaps the biggest challenge to fully digital trade, though, is that not all economies are equally ready. “The world is a diverse place, with diverse capabilities. Half the world doesn’t have internet access,” says Southworth.
“In some parts of the world the cost of trade is higher than its value. It’s super, super important that we help governments talk through the policies and changes that are needed,” says Southworth. “The risk for everyone is that we have a fracturing of global trading.”
To try to ensure that doesn’t happen, the ICC is working on a Digital Standards Initiative for a “globally harmonised trade environment”. The DSI is mapping every country in terms of its stage of digital readiness and its digital capabilities and laws, and offers practical support. The board includes the Asian Development Bank, the World Trade Organization and the World Customs Organization.
However, even countries that should be able to move quickly still face challenges. “Trade is a very old activity, everyone is comfortable with the systems already in place, so digitisation is also about behaviour change,” says Southworth.
Still, allowing e-documentation is a historic shift in international trade and one that, done right, should be transformative.