With e-commerce reaching staggering heights, the narrative of digital trade is often celebrated for its exponential potential to elevate businesses, large and small, to global platforms, and for driving a services-led economic revolution. The $2.41 trillion digital economy underscores the critical role of data flows in international trade.

However, this very backbone of digital trade — the free flow of data — now carries with it an intrinsic risk, transforming every business into a potential node of vulnerability. The cyber theft of intellectual property and personal data is emerging not just as a commercial hazard but as an acute national security threat. The 2017 WannaCry ransomware attack, which paralyzed over 200,000 computers across 150 countries, and the NotPetya attack, which caused unprecedented disruption to supply chains and major businesses like Maersk, highlight the critical need for countries to strengthen their defenses.

Policy development in the digital trade domain is witnessing unprecedented complexity. The European Union’s General Data Protection Regulation (GDPR) marked a significant policy shift, setting new global standards for data protection and influencing digital trade practices worldwide. Similarly, India’s draft e-commerce policy and the United States’ proactive measures through the Cybersecurity and Infrastructure Security Agency (CISA) reflect diverse, national strategic approaches to navigating digital trade regulation and cybersecurity.

One of the most contentious issues in the realm of digital trade is data localization, which states that data on a nation’s citizens or residents should be collected, processed, and stored inside the nation’s boundaries. This requirement stipulates that the data should also be accessible to that country’s government, ostensibly for regulatory and security purposes.

Russia’s 2015 data localization mandate epitomizes the practice of data localization. It requires that Russian citizens’ personal data be stored domestically, pushing international firms to migrate their servers to comply or face sanctions. This move, paralleled by China’s Personal Information Protection Law, underscores a tightening grip over digital sovereignty, aiming to shield data from foreign espionage while asserting control over digital realms.

Similarly, India’s evolving policy reflects a balancing act between boosting local data processing and guarding against foreign surveillance and digital colonization, a concern echoed by Vietnam’s 2019 cybersecurity law. These laws have sparked international debate over their implications on global digital trade, raising alarms about heightened operational costs, the emergence of trade barriers, and the potential stifling of the digital economy’s growth.

Data localization policies, while aiming to safeguard data and enhance national security, risk undermining the trust foundational to digital trade. Such policies burden multinational corporations, especially tech companies, which rely on the global flow of data to drive innovation. Additionally, these policies may result in a fragmented approach to data storage and security, making it more challenging to maintain a unified cybersecurity defense.

Against this backdrop of regulatory challenges, the private sector emerges as a pivotal force in shaping the future of digital trade. Tech giants and startups alike prioritize growth and innovation, with companies like Amazon and Google revolutionizing global commerce through their platforms. However, their operations raise questions about data privacy, market dominance, and cybersecurity. The Apple vs. FBI conflict over iPhone encryption illustrates the tension between private-sector innovation and government security concerns, highlighting the complexities of balancing privacy with national security.

Responding to these complexities, the United States-Mexico-Canada Agreement (USMCA) introduced a digital trade chapter. By limiting member states’ capacity to enforce data localization, the USMCA proposes a model that aims to balance the economic benefits of free data flows with security concerns. However, it includes exceptions for legitimate public policy objectives, providing a flexible framework that can adapt to varying national security needs.

Nevertheless, the dynamic nature of technology and cybersecurity means that the agreement will need continuous updates to remain relevant. Moreover, its impact is inherently limited to North America and might not directly influence countries with different digital trade and security postures, such as China and the EU. The challenge lies not just in crafting regulations that can adapt to the rapid pace of technological change but also in achieving an international consensus that respects the diverse security and economic interests of different nations.

In response to these challenges, Japan has championed the notion of Data Free Flow with Trust (DFFT) on the international stage. DFFT aims to establish a set of common rules that enable the free flow of data across borders while ensuring robust privacy and security protections. One of its focus areas is making national data governance systems interoperable, rather than identical, recognizing that trust is a fundamental component of the digital economy.

Beyond DFFT, there are other international efforts aimed at harmonizing digital trade regulations while addressing security concerns. The World Trade Organization (WTO) continues to hold dialogues that seek to address issues related to digital trade. Similarly, the Digital Economy Partnership Agreement (DEPA) between Singapore, Chile, and New Zealand represents an attempt to develop a modern digital trade agreement that covers digital identity, data flows, and personal data protection, among other areas.

As digital trade becomes a pillar of the global economy, nations worldwide have adopted diverse policy approaches to secure their digital spaces while fostering economic growth. The national responses reflect a spectrum of strategies, from stringent data localization to liberalized data flow frameworks, each presenting unique challenges and trade-offs.

To strengthen our digital defenses, countries must come together around a common framework that goes beyond just national policies. This approach needs to be rooted in strong international cooperation, ensuring that data not only moves freely but also securely, adhering to international standards like those set by the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC). It’s about building a collective commitment to protect our digital infrastructures.

Additionally, the private sector’s critical role cannot be emphasized enough. Businesses must prioritize cybersecurity, integrating it thoroughly within their operations and leadership structures. This includes appointing seasoned executives such as Chief Information Security Officers (CISOs) to top roles and cultivating a cybersecurity-aware culture across all levels of the organization. This culture should empower employees to use advanced digital tools securely.

As we navigate the evolving landscape of digital trade, nations and corporations must strive for a balanced approach that respects both the economic potential and the security imperatives of our interconnected world. International cooperation and adherence to global standards are crucial in forging a unified strategy that protects against cyber threats while facilitating free data flows.

The private sector must prioritize cybersecurity, embedding it within their strategic and operational frameworks, and cultivating a culture of security awareness among all employees. Only through such a comprehensive and harmonized approach can we ensure that digital trade continues to be a driver of economic prosperity without compromising national security. This path requires ongoing vigilance, adaptability, and collaboration across borders to effectively meet the challenges posed by technological advancements and the global nature of cyber threats.

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Industrial policy has enjoyed a major return to popularity in the United States, with the introduction of the Inflation Reduction Act and the CHIPS and Science Act in August 2022, driven by the need to expedite the clean energy transition and mitigate geostrategic concerns by reducing dependence on China.

The subsidies linked to domestic content requirements in these statutes have shifted sourcing patterns, while restrictions on the exports of advanced microchips to Chinese firms have directly affected trade. The World Bank’s October 2023 East Asia Update measures how these laws have reduced Chinese and ASEAN exports to the United States and increased those from Mexico and Canada.

The direct impact of US industrial policy extends beyond its borders by providing preferential treatment to FTA partners and discriminating against others. It may also have spillover effects by contributing to an already growing appetite for similar policies in East Asia and around the world, particularly Europe. This tit-for-tat policy game could apply to subsidies and other instruments of protection as countries try to compete on an increasingly uneven playing field.

To some, these developments signal the end of the export-led model in spearheading growth. While trade growth in East Asia averaged over 8 per cent in the years leading up to the 2008 Global Financial Crisis, it is expected to fall to 4.4 per cent in the post-pandemic years.

While diversifying trade patterns will increase the resilience of trade flows and the sustainability of the export-led model, the two-decade steady decline in the region’s trade growth rate is a cause for concern. Supply chains are shortening and some policy-induced reshoring has taken place. But the slowdown has mainly affected goods rather than services trade. There is huge potential for growth in services trade, especially intermediate services, with digitalisation further reducing barriers.

This has led some commentators to assert that globalisation is not dead but simply transforming. Similarly, if the export-led model of old is dead or dying, then it may be superseded by one in which the composition and the pattern of trade changes, but not its role or importance. The composition will shift away from goods towards services while the pattern of trade will be determined less by efficiency and more by geopolitical factors.

Rapid growth in digital trade is related to this compositional shift towards services. Digitalisation increases the scale, scope and speed of trade and will affect assessment of the export-led model’s viability in at least three ways.

First, digital goods and services are likely to make up most future trade growth, while digitalisation will facilitate future services trade growth. Second, reported statistics on trade may underestimate the true volume of digital trade, given a host of measurement difficulties. Third, many of the barriers that inhibit goods trade in developed countries do not apply to services trade, while increasing digitisation enhances the ability of traders to circumvent protectionist barriers.

The export-led model is unlikely to die anytime soon. Though the shift towards embracing industrial policy may represent more than a transitory phenomenon in the United States, the fact that Washington’s security-driven trade policy has favoured friend-shoring and near-shoring more than reshoring implies a change in the pattern rather than the volume of trade.

Such policies have so far favoured countries which have free trade agreements (FTAs) with the United States, at the expense of China and ASEAN member states. But this could change if attempts by ASEAN countries like Indonesia and the Philippines to sign limited FTAs with the United States for critical minerals materialise.

Similarly, the rapid growth in digital trade is altering the product composition of trade, as new digital goods and services are traded and modes of delivery change. Trade statistics probably underestimate the true significance of these changes on volumes of trade, given measurement difficulties that lead to under-reporting.

The main reason why the export-led model is likely to survive, in one form or another, is the region’s long-standing commitment to free and open trade, which has facilitated massive economic transformation and social progress. The growth and spread of supply chains in the region has underpinned its economic success and is largely irreversible.

There is evidence that this commitment is still present. Recently, Malaysia decided to remove price controls and subsidies on sensitive agricultural products. The Philippines has removed the long-standing and controversial foreign equity limitation on public services, allowing 100 per cent foreign ownership in all public service sectors outside of public utilities. The ASEAN-led Regional Comprehensive Economic Partnership initiative, with its open rules of origin at a time of global pressures against liberalisation, is another indicator of the region’s commitment to openness, as is the recent launch of negotiations for the ASEAN Digital Economy Framework Agreement.

If there is a risk to the export-led model, then it is likely to come from outside. But the primary question, of whether the region’s long-standing commitment to openness will be sufficient to withstand disruption and fragmentation from a sharp escalation in geopolitical tensions, remains.

Jayant Menon is Senior Fellow at the ISEAS-Yusof Ishak Institute in Singapore.

To read the full article as it appears on East Asia Forum, click here. 

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The missing link between AI and supply chain in Biden’s executive orders

The Biden administration has paid considerable attention to both global supply chains and AI. In 2023, President Biden signed two executive orders: one regarding governance and responsibility in AI development and another to improve supply chain resilience. In June 2023, the White House released a progress report to build resilient supply chains for four critical products: semiconductors, large-capacity batteries, critical minerals and materials, and active pharmaceutical ingredients. The development of resilient supply chains is a key component of Bidenomics. For this endeavor, Biden attained $52.7 billion from Congress through the CHIPS and Science Act. Later, in October 2023, the White House released a report summarizing President Biden’s executive order on Safe, Secure, and Trustworthy AI. The order requires developers of powerful AI systems to meet certain safety standards before publicly releasing their solutions. Finally, President Biden announced in November 2023 the establishment of the new White House Council on Supply Chain Resilience to develop new capabilities to monitor existing and emerging risks and to detect and respond to supply chain disruptions in critical sectors with supply chain partners. Although these policies are promising, American policymakers have yet to address the inherent connection between AI development and supply chain resilience.

This trend is not limited to the United States. First proposed in 2021, the EU Parliament reached a provisional agreement with the Council on the EU AI Act in December 2023. The policy provides guidance for high-risk AI systems and breaks down responsibilities throughout the AI supply chain with requirements for importers, distributors, and other supply chain stakeholders.

The benefits of AI-enabled supply chain planning

AI has the potential to revolutionize supply chain operations by improving decision-making and efficiency. According to a 2022 McKinsey survey, respondents reported that the highest cost savings from AI are in supply chain management. Specifically, AI can add value to supply chain planning, including production, inventory management, and product distribution. Companies can also leverage AI-powered tools to process vast amounts of real-time data and improve the accuracy of demand forecasting. With more precise demand forecasts, AI-enabled tools can help firms optimize production and inventory plans across various locations and select the most cost-effective logistics solutions.

Early adopters of AI-enabled supply chain management have reduced logistics costs by 15 percent, improved inventory levels by 35 percent, and enhanced service levels by 65 percent. Adopting AI tools to manage manufacturing operations can be costly, but 70 percent of the respondents from a survey of CEOs of over 150 firms agreed that AI is delivering a “strong ROI.” Despite the potential of AI in supply chains, AI should not decrease employment in supply chain management. Rather, it should create new opportunities to mitigate potential risks associated with adopting new technologies.

The role of AI in mapping supply chains

AI can certainly make internal operations more efficient; this starts with achieving supply chain visibility (i.e., the ability to view and track inventory levels as goods move along the supply chain). Visibility would allow firms to respond to disruptions in real time. A 2021 survey revealed that only 2 percent of companies claimed to have visibility beyond their second-tier suppliers–those who supply materials and parts to their direct suppliers. Without strong visibility, company supply chains are susceptible to disruptions caused by issues such as natural disasters, pandemics, geopolitical issues, trade barriers, and product recalls. Therefore, firms should seek to leverage AI to enhance supply chain visibility.

Mapping the supply chain is a crucial step towards enhancing its resilience, and AI tools can provide substantial assistance in this regard. These tools can gather records like product orders, customs declarations, and freight bookings, which are often represented in various formats and languages. AI algorithms can extract relevant data from both structured and unstructured documents with high precision. AI tools can compile and synthesize this raw data, enabling a firm to map out its different supply chain tiers. For instance, Altana, an AI startup that creates dynamic maps of global supply chains, has developed a generative AI tool that utilizes both public and private data to map a company’s supply chain. This tool is complemented by a large language model (LLM)-informed assistant that responds to employees’ queries posed in plain language. Using document processing systems to capture, analyze, and share documents, such as invoices, bills of lading, and purchase orders, Altana can enhance efficiency and accuracy in logistics and improve communication among supply chain partners.

Using AI to detect changes in demand and supply

AI can also help firms gauge market demand and customer sentiment. Utilizing scanner data collected at point-of-sale locations, along with vast data from customer reviews and blog posts on social media, AI-based tools, such as Google’s Video AI can gather and analyze text, images, and videos. Google Video AI can then develop a real-time, end-to-end supply chain dashboard that can generate alerts for abnormal demand changes due to competition or product issues. The AI can even detect early signs of panic buying using large data sources. The Google Video AI dashboard can then pinpoint the underlying causes for such abnormalities.

In addition to real-time detection of demand changes, AI tools can compile and analyze data on traffic conditions at different supply chain tiers such as ports and warehouses. These tools can detect supply disruptions caused by supply and worker shortages, factory shutdowns, and shipping delays, among other issues. For instance, when ports on the West Coast faced unprecedented delays in September 2021, the US Department of Transportation developed a national transportation supply chain dashboard that tracked three key indicators of goods moving from ports to retail stores: the number of imported containers, US retail inventory levels, and the on-shelf availability of consumer goods. Tracking these indicators in real time offered the ability to detect and react to anomalous patterns as they occurred.

Using AI to design effective responses to supply chain disruption

A supply chain becomes more resilient when it can quickly detect and respond to disruptions, thereby minimizing the impact. According to the supply chain risk management literature, three capabilities are necessary to build resilience: (1) detecting a disruption quickly, (2) designing an effective solution in response to the disruption, and (3) deploying the solution swiftly. Traditionally, firms have ensured supply chain resilience by developing advanced systems to enhance detection, setting up proactive contingency plans, and conducting stress tests for rapid deployment. However, AI and Industry 4.0 technologies, such as sensors, blockchains, and data analytics, can amplify these resilience capabilities manyfold.

With the ability to detect abnormal changes in supply and demand, AI tools can help companies evaluate and compare the effectiveness of different response strategies by conducting simulations. These simulations assess the impact of each possible response on demand and supply as well as the recovery time from disruptions. By analyzing the simulated results and examining the effects of different responses on various supply chain partners, a firm can swiftly develop a well-informed strategy in response to a sudden change. Response strategies may involve modifications to product design, adjusting prices, and switching upstream suppliers. In terms of potential use cases, AI could help a government agency design a supply chain for medical countermeasures to defend against bio-attacks. Retail companies could use AI to simulate and predict the impact of implementing rationing policies in retail stores. More broadly, the goal is to evaluate alternative scenarios to ensure resilience against potential unforeseen disturbances and understand how mitigation strategies affect each part of the supply chain.

AI can help firms respond to crises, but importantly, it can also help companies strengthen supply chains before they are strained. AI can recommend changes to a company’s supply chain policies based on a multitude of factors, such as seasonality and macroeconomic trends. For instance, AI can identify the best supply chain configuration, the optimal number of suppliers (and their locations), and the most favorable terms of the supply chain contracts.

AI implications for employment and public policy

While AI holds immense potential for developing resilient supply chains, the Biden administration can coordinate with the European Union to mitigate various risks arising from AI-enabled global supply chains. Similar to how Biden has pursued responsible AI development in the United States, he should work with European regulators to ensure that the data with which LLMs are trained is sourced ethically and avoids copyright violations. Responsible AI development is key to the stability of supply chains, as AI becomes increasingly engrained in supply chain management.

Even with the help of American and European regulators, firms must manage certain risks through human involvement. AI-enabled supply chains will transform the role of supply chain professionals, eliminating jobs in clerical and data entry, but they will also create new jobs. The data used to train AI and AI-produced insights can be biased. Hence, humans must identify the most relevant data on which to train LLMs and ensure adherence to ethical guidelines. AI also does not always comprehend the contexts and nuances of global supply chains; humans must interpret and examine the appropriateness of AI-generated recommendations. Thus, new personnel, including research scientists, chatbot developers, AI ethics, and bias analysts, are necessary to develop resilient supply chains. Additionally, to manage increasingly complex supply chain operations amidst exceedingly complex geopolitical issues, the role of supply chain managers has never been more critical.

AI promises to disrupt industries, including justice, retail, marketing, transportation, media, and biosciences. Indeed, the World Economic Forum commented that the future of work is changing with machines and AI likely to take on an increasing share of work. The interplay between AI and supply chain management, two critical sectors, is more important than ever to create economic stability and resiliency. However, the future is not as pessimistic as Elon Musk’s claim that AI will take most jobs away–at least not in supply chain management for the foreseeable future.

Maxime C. Cohen is the Scale AI Chair Professor of Retail and Operations Management at McGill University and a Visiting Professor at Yale School of Management.

Christopher S. Tang is a UCLA distinguished professor and the Edward W Carter Chair in business administration.

To read the full article published by Georgetown Journal of International Affairs, click here. 

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These questions took center stage during a session titled, ‘The Trade System is Changing: Can It Deliver for the Future?’ held at this year’s World Trade Organization’s (WTO) Public Forum. The event, which took place on 27 September, both in person and online, was co-organized by the International Institute for Sustainable Development (IISD), the International Chamber of Commerce (ICC), and CUTS International, Geneva.

Moderator Alice Tipping, Lead for Sustainable Trade, IISD, set the stage for the conversation, outlining how the past several years have already seen a sea change in both the substance and practice of trade policy. Two examples of how the substance is changing are the discussions underway among over 80 WTO members on potential rules for digital trade, along with efforts among other WTO member groups to look at where the trading system can contribute to tackling environmental challenges such as climate change or plastic pollution.

Currently, the WTO’s rules on digital economy issues are limited. There has long been in place a moratorium on customs duties on electronic transmissions, which normally must be renewed every two years at the Organization’s ministerial conferences, and there is a work programme on e-commerce that dates back to 1998. However, the moratorium has been dogged with repeated questions over whether it should be scrapped, made permanent, or continue to be renewed on a roughly biennial basis. Discussions under the work programme have also been limited and, in some WTO bodies, infrequent. In 2017, however, a large group of WTO members launched a “joint initiative” towards negotiating binding rules on digital trade, which has advanced significantly in the years since.

While the WTO’s Committee on Trade and Environment (CTE) is an important forum for environmental issues, and multilateral negotiations on select environmental agenda items have taken place in parallel since 2001, there is a growing appetite among WTO members to have a space for more targeted work on select issues. To complement the conversations underway in the CTE, following extensive preparatory work, different WTO member groups launched ministerial statements for three “joint initiatives” – on trade and environmental sustainability, plastic pollution and environmentally sustainable plastics trade, and fossil fuel subsidy reform.

However, the practice of launching joint initiatives is controversial in Geneva circles, given that some WTO members worry that such processes could detract attention from the existing issues on the multilateral agenda that already have agreed mandates. While some of these joint initiatives envision the negotiation of new rules, others have involved sharing experiences, best practices, and ideas for cooperation. These joint initiatives involve a subset of the WTO membership.

“This is not an easy discussion,” said Tipping, noting the tension around the emergence of joint initiatives. This is why, however, “it’s important to think and to talk about what these changes might mean for international cooperation on trade policy in the coming years – both the opportunities that they present, but also the challenges that might be there that we need to acknowledge and address.”

The digital economy: eyes on process, emphasis on capacity building

The Public Forum session began with a deep dive into the digital economy and the role of the trading system, especially in light of the rapid changes seen in the digital landscape over the past few years due to the COVID-19 pandemic. With 87 WTO members now looking to clinch a binding deal on e-commerce rules next year, speakers weighed what the substance and the process of these negotiations should entail, and what implications this would have for developing country members and smaller businesses located in those economies.

Digital trade has great potential in helping address societal and environmental goals “when treated well,” said Kumar Iyer, Director General, Economics, Science, and Technology, Foreign, Commonwealth, and Development Office (FCDO), UK, but it can also hamper achieving those objectives when handled poorly. The question is “how to maximize the advantages and minimize the risks,” especially in such a vital area.

“These are not challenges that can wait. They will overtake us,” he said, explaining that existing rules could risk becoming obsolete, along with putting the WTO’s relevance into question. Bad practices in the digital sphere could also become increasingly commonplace unless WTO members find paths forward to answer the challenges and opportunities being posed by an increasingly digital economy.

Similarly, Ute John, Chair of Trade and Investment Commission, ICC, and who also works at the Mercedes Benz Group, noted that new barriers in digital trade could pose risks to companies and sectors, urging WTO members to make the moratorium on customs duties on electronic transmissions permanent. A car, for example, is now “a computer on wheels,” John noted, meaning that the scope of what an electronic transmission covers is becoming “increasingly intensive,” and introducing such customs duties could have far-reaching ramifications.

“The pandemic has accelerated the digital transition, and this affects all companies, irrespective of size, sector, or region,” John told the audience. The e-commerce negotiations currently underway among a group of WTO members should involve an “ambitious agreement” that includes data governance, such as data flows and cyber privacy. With momentum in the talks picking up, a deal at the WTO’s next ministerial conference (MC13) could be in sight, John said.

Negotiating new rules in this area, however, will be challenging for governments, especially given that this is a negotiation that is not a traditional exercise on market access, noted Ambassador Pimchanok Pitfield of Thailand, who represents the Southeast Asian nation at the WTO. This is a negotiation that involves regulatory issues and regulatory convergence, but “at the same time, compliance costs are high, especially for developing countries, so we need to take that into account.”

John also argued for the value of capacity building, noting it would benefit many companies that are part of the ICC and that are based in developing countries. This support would be important for these companies to take part in the conversation and benefit from the changes underway in the digital economy.

Capacity building would also be key for governments, the audience heard. “These are new issues” and therefore not all delegations will have the technical expertise they need, said Pitfield. “Because these are different rules, they require different skills to negotiate,” Tipping concurred, noting a new report from the TradeExperettes network that named capacity building one of the recommended “quick wins” that WTO members should consider on digital trade.

Ambassador George Mina of Australia reminded participants that the digital economy, while long a part of our daily lives, is still a comparatively nascent area in international rule making. “We have a long way to go on digital trade,” said Mina, noting that the moratorium on customs duties on electronic transmissions remains the only specific rule at the WTO on e-commerce, though some existing rules in areas such as services trade may intersect with the digital economy. The joint initiative on electronic commerce provides a platform that WTO members can build from, he said.

Trade and environment: tackling existential threats

The other major substantive theme of the session was the role of trade cooperation in tackling pressing environmental challenges, especially the climate crisis.

“Climate change is the single biggest threat facing all of our nations. It is existential in nature,” said Iyer, pointing to recent examples of flooding in Pakistan, droughts in Europe, and hurricanes in the Caribbean as cases where communities are feeling the impacts of the climate crisis in their daily lives. These extreme weather events also affect the poorest the hardest. “It is imperative for us to find solutions here. Trade is not the only lever, but it is absolutely a part of the solution set,” he said.

Examples of where the trading system could help, Iyer noted, would be a “coordinated approach to carbon leakage” and liberalizing trade in environmental goods and services, noting that the trading system will not always be “the answer to all of our targets” and should not be treated as such.

While the trading system can help in tackling threats such as climate change, it can also be a hindrance to those same objectives if not handled carefully. “We can’t let the trading system be the way that you can evade” commitments made in the UN climate talks or other international forums, said Iyer. Initiatives such as the trade and environmental sustainability structured discussions (TESSD) underway among a large group of WTO members can be a source of excellent work in this vein, he urged.

John concurred, referring also to the informal dialogue on plastic pollution and environmentally sustainable trade (IDP) underway by another group of WTO members, which has some overlapping membership with the TESSD initiative. These informal initiatives, Tipping indicated, are a space where governments are “sharing best practices on how trade can contribute,” and while some may lead to negotiations, that is not their sole purpose and may not be the ultimate outcome.

One of the big challenges, however, is the current narrative around environmental protection. Pitfield, recounting the evolution of trade and environment issues since the 1992 Rio Earth Summit, indicated that one of the big problems has been in making the benefits of these policymaking efforts evident. “It is easier if you can demonstrate the benefits of why you have to negotiate on the digital economy. The benefits are more tangible.”

Today, as extreme weather events make the impact of climate change increasingly apparent, that conversation is beginning to show real progress. But that does not mean that the road ahead will be easy. For instance, while Thailand is an advanced economy and has taken important policy steps like establishing a carbon credit market, it cannot necessarily keep the pace of larger economies like the EU. The narrative here, unlike the digital economy, can easily become negative. For example, there are concerns that the changes in economic policy laws and frameworks needed to tackle the climate crisis are “difficult, burdensome, and high cost.”

“I think we need to find a new way to present these issues,” said Pitfield, highlighting the importance of multilateral cooperation for the environment, as well as that of capacity building and access to technologies, though this does not have to entail no-cost technology transfer. It also means acknowledging that while some terms, such as the circular economy, have become common parlance in policy circles, these issues may not be as clear-cut to small and medium-sized enterprises (SMEs) in smaller economies, she said.

While the narrative around environmental issues is complex, the advances seen at the international level on cooperation in trade policy for environmental protection are showing promise, panelists noted. “There is something very positive emerging here in Geneva” on trade and environment, confirmed Mina. Thirty years ago, “Geneva was the capital for trade negotiations globally.” “Today, I would say it is a key capital for trade negotiations and a key capital for trade policy and what trade policy can bring to broader global goals,” he said.

“Cooperation doesn’t necessarily mean jumping into rule making […] and we aren’t just jumping into rule-making,” Mina emphasized. An important area where trade policy can help is addressing environmentally harmful subsidies, Mina said. This would be “one of the most urgent things we can do to help the climate” and achieve the objective of net-zero emissions.

More broadly, Mina affirmed, policymakers must across the board ensure that in times of conflict and crisis, they “keep power out of international economic relations” and keep their focus instead on cooperation on imperatives such as food security, the digital economy, and the environment.

“The fact of cooperation needs to be treated as a precious thing in a world where multilateral regimes are under enormous pressure,” said Mina. “This cooperation needs to be fostered, and governments need to be open to different avenues for achieving that.”

Crucial in this international cooperation is talking not just to like-minded governments but also to the “un-likeminded,” said Pitfield. “Cooperation will start if you open your mind as well” and are willing to engage and exchange ideas, even when a given government is not ready to become an active participant in a particular initiative or negotiation.

The importance of speaking not just with those who agree, but with those who hold different views, was reiterated by fellow panelists, as well as event organizers. Rashid Kaukab, Executive Director, CUTS International, Geneva, flagged that transparency in these processes is crucial to have meaningful engagement by all those affected, as is capacity building. “Can we get out of our comfort modes and talk to the un-likeminded?” he asked. It is worth a try, cautiously and thoughtfully, especially when we are no longer “in a static world.”

Moving ahead in groups: considering systemic and development implications

During the question-and-answer session, some participants referred to the tension inherent in pursuing new rules in areas such as e-commerce among groups of WTO members, while many crucial issues on the existing multilateral agenda for negotiations have long struggled to advance.

For instance, Buddhi Prasad Upadhyaya, Counsellor and Deputy Permanent Representative (Commerce), Permanent Mission of Nepal in Geneva, reminded the audience about how the conclusion of the Uruguay Round in 1994, which set up the WTO, left some gaps to be addressed during negotiations further down the line, such as on agriculture.

“If we only focus on a few areas for developing new rules, by ignoring other aspects [of rules where urgent gaps exist] and also without taking into account the capacity constraints of some members, how can we ensure that the WTO will deliver in an equitable and just manner?” he asked.

Others asked about the systemic implications of subsets of the WTO’s membership moving ahead to craft rules and hold conversations on certain issue areas that do not currently have multilaterally agreed mandates, and doing so without the consensus of the full membership.

“Would you accept…that there is real, genuine, legitimate concern about the systemic consequences for the WTO of groups of members going off and embarking on negotiations that are basically ‘well let’s just do it and work out the legalities later,’ when there are pressing outstanding issues” that are extremely important, asked Jane Kelsey, Emeritus Professor, University of Auckland’s Faculty of Law.

Kelsey further noted that the 1998 work programme on e-commerce does not mandate negotiations and goes beyond the moratorium on customs duties on electronic transmissions. She also flagged that the WTO’s Marrakesh Agreement refers to how members should go about adopting new rules and amending existing rules, and to the need for consensus from the Organization’s full membership.

At the same time, “it is important for all countries here to have the opportunity to do agenda setting,” from the smallest economies through to the medium-sized ones and beyond, Mina noted. “We’re not going to do that if we require absolute consensus at the start of any idea that is ultimately going to form the basis of a rule-making project,” he said, warning that this approach could have “systemic consequences of its own” in “completely stopping rule-making.”

“I completely agree with the comment from Nepal about the gap that was left over in the Uruguay Round on agriculture and the urgent need for us to get back to the table on that subject,” he added.

Under the WTO’s services rules, negotiating bilaterally and plurilaterally is foreseen and common, Pitfield added, referring to her own experiences as a services negotiator. This has bearings also on the services-related conversations involving digital trade. Furthermore, “I also want to distinguish between the discussion on the process and the outcome. The outcome, in the WTO, should be, in principle, MFN,” said Pitfield, referring to the principle of most-favored-nation treatment under the Organization’s rules.

Sofia Baliño is Senior Manager of Communications and Engagement at IISD.

To read the original policy brief, please click here.

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That is why we must approach digital trade policy with thoughtfulness and wisdom so that we pursue growth that is inclusive, fair, sustainable, and advances the quality of life of human beings.
 
Trade policy sits at the intersection of domestic and foreign policy, so the policies we develop must be calibrated with our broader agenda.  But we have seen over time that trade policy becomes unsustainably fragile whenever it becomes detached from the issues facing ordinary working people. 
 
At USTR, we are putting workers at the center of our trade policy – and thinking about how our work will impact their day-to-day lives.  And second, we are creating durable trade policies that work in concert with our domestic economic and foreign policies.  This is key to building broad-based support for our work among all of our stakeholders – and creates the foundation required for steadfast U.S. leadership in the global economy.
 
What does this mean for digital trade?
 
It is important to recognize that there is no bright line separating digital trade from the digital economy – or the “traditional” economy for that matter.  Nearly every aspect of our economy has been digitized to some degree.  Our efforts to formulate and pursue digital trade policies should, therefore, begin with a high level of ambition to be holistic and inclusive.
 
Despite their expansiveness, there is not an agreed definition of “digital economy” or “digital trade.” 
 
But the general consensus seems to coalesce around the notion that the digital economy comprises economic activity generated by the marriage of an ever-greater, distributed computing power, and ever-faster transmission networks. 
 
This includes:

1. Infrastructure: fixed and mobile telecommunications networks, including 5G, and large-scale data centers;
2. Platforms: these are the services, based on cloud computing, that allow suppliers to interact with consumers and businesses globally; and
3. Applications: both tools that end-users need – for example, word-processing, inventory management, and accounting software, as well as direct-to-consumer products, such as e-books, videos, and games.

There are a few key topics that arise whenever we talk about the digital economy, including:

• A high degree of mobility, and how technology reduces the relevance of borders;
• Concerns about data, including privacy and security;
• How governments balance accountability, freedom, innovation, and growth;
• The concentration of power and how that affects the interests of small- and medium-sized businesses; and
• Energy and resource needs in the context of sustainability.
   

Around the world, we see different responses across governments to similar digital challenges.  Embedded in those responses are varying societal and political values, including authoritarian instincts that are deeply incompatible with our tenets and principles.
 
I mentioned earlier that USTR wants to develop durable trade policies.  But with technology and our digital economy constantly evolving, achieving durability requires us to prioritize flexible policies that can adapt to changing circumstances. 
 
We’ve seen what happens when trade agreements and trade policy become outdated and fail to address modern challenges.  By maintaining flexibility in our digital trade policies, we can ensure they remain resilient and long-lasting.
 
I also believe that our approach to digital trade policy must be grounded in how it affects our people and our workers.
 
We must remember that people and workers are wage earners, as well as consumers.  They are more than page views, clicks, and subjects of surveillance.  They are content creators, gig workers, innovators and inventors, and small business entrepreneurs.
 
This means they have rights that must be protected – both by government policy and through arrangements with other governments.
 
On the other side of the equation, we must also recognize that our technology companies are not just innovators and service providers.  They are also forces changing the nature of our lived experiences and our society.  It is not hyperbole to say that these companies have the power to affect the lives of people and the direction of our civilization’s development.
 
That power requires responsibility and accountability.  And these stakeholders have responsibilities in shaping the digital economy.
 
Cybersecurity is an illustration of this challenge.  Companies and individuals both benefit from digital technologies – but the data they store and process puts both them and their consumers at significant risk of attack by criminal and state actors, often from abroad. 
 
Companies may face a prisoner’s dilemma – will they invest in cybersecurity protection if their competitors gain a price advantage by not making that investment?  How can governments and businesses work together to address this pernicious threat? These goals are not just about national security, but global security.
 
While these are important ideas – corporate accountability in our tech sector, protecting the rights of consumers – we must acknowledge there is a trust gap and ask whether we have adequately designed digital trade rules to meet the needs of ordinary people. 
 
We must overcome the trust gap, particularly for workers and consumers – and recognize that the digital economy should also address sustainability concerns.
 
As we think about digital trade policy, we are asking big and consequential questions at USTR that will guide our approach, including:

• How do we ensure that our digital trade agenda supports our broader national security interests, for example with respect to physical infrastructure, cybersecurity, and reliable semiconductor supplies?
• How do we ensure our digital trade agenda works hand-in-hand with our other domestic and foreign policies, while maintaining flexibility for future challenges?
• How can we work with our allies on issues like artificial intelligence in a way that safeguards economic security for workers while protecting democracies against external threats?
• How can we balance the right of governments to regulate in the public interest, with the need for rules that guard against behavior that discriminates against American workers and businesses?

There are no easy answers to these questions.  But if our starting point is a desire to put people at the center for our policies – as it has been for our entire trade agenda since I was sworn in – then the outcomes we reach can be more inclusive and responsive to their needs.
 
The imagination of our artists and story tellers have often illustrated our hopes and anxieties about technology and where it will lead us.
 
Recently, I re-watched the Pixar film “WALL-E.”  It tells the story of a rusty robot named WALL-E who cleans up trash alone on an environmentally devastated and uninhabitable earth. He encounters a modern robot named EVA, sent from a faraway spaceship where humans have taken refuge.  Her mission is to look for signs of life on earth.
 
The movie features relevant themes about the threats our way of life poses to sustainability, the displacement of workers and future of work, and a struggle of wills between technology – in the form of robots and AI – and humanity. 
 
But it is ultimately a tremendously hopeful story about love, inclusiveness, and resilience. 
 
People are rightfully concerned about the future of technology and how it will impact their lives and livelihoods.  But there is a lot that we can and should do to address those anxieties, to guide the development of the digital transformation in a positive direction.
 
Governments and policymakers cannot lose sight of the needs of our people and our collective humanity.  And we therefore must approach our work on digital trade with thoughtfulness, deliberation, and care.
 
It is particularly important that our approach includes students, like the ones here today, because you represent the most technologically sophisticated generation in history.  And I suspect that you will be the ones with the most open and creative minds that we will need to address many of the policy questions that we face. 
 
The challenges around digital trade policy will not be solved overnight; it begins with conversations like this. 
 
So, let’s dive in.
 
Thank you.

To read the Ambassador’s full remarks, please click here.

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Over the past year, consumers had no option but to go online to shop for groceries, conduct banking, or pursue education. They will undoubtedly maintain much of their reliance on digital services and―at long last―leapfrog to levels of digital adoption in commerce and payments with more advanced omnichannel models, bringing the region to the levels of China or developed countries in the West.

Investors are recognizing Southeast Asia’s value as one of the last digital economy opportunities in the world―and the further growth potential that lies ahead. Each week seems to bring a new headline showing the region’s digital vibrancy, including Singapore-based ride-hailing company Grab’s proposed IPO this year for a valuation of nearly $40 billion, Indonesia’s newly formed tech giant GoTo, and an expected IPO for Singapore’s online classified marketplace operator Carousell. 

The coronavirus introduced an unanticipated and massive digital adoption spurt. Our research done in partnership with Google and Temasek, and based on Kantar data from Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, showed that over a third of consumers are new to digital platforms, and over 90% say they intend to continue using those platforms after the pandemic.

The numbers tell an impressive story: 40 million new Internet users were added in 2020; 400 million, or 70% of the region’s population, are now online. The Internet economy remains resilient at US$100 billion gross merchandise value (GMV) per year, even with the global slowdown.

And as more consumers and SMEs come online, and with a continuously supportive ecosystem and regulatory environment, the size of the digital economy could be as large as $300 billion, a significant scaling opportunity, despite an environment made challenging by COVID and market fragmentation.

Digital consumers have already gone through the hard steps of digital adoption: learning how to set up digital payments, shop online, order food, and so on. Continuing to use those services is easy, and for many, it simply will be much more convenient to shop online.

Shoppers are buying more groceries online, and they’re not going back. As intracity travel resumes, so will ride hailing. And the surge in users of digital streaming is likely to continue: More than half of the surveyed users say they intend to continue their video and music subscriptions indefinitely. Yet that prediction comes with a caution for providers of streaming services. Users have also indicated a likelihood to unsubscribe once the trial period ends. 

Education and groceries benefited most from the influx of new digital consumers. For example, 55% of users of online education services were new to the services in 2020. In grocery e-commerce, 47% of consumers were new. Meanwhile, 34% of survey respondents in the region said they used food delivery services more now than they had before the pandemic.

However, some of the biggest opportunities exist in the budding digital financial services sector, which spans payments, remittance, insurance, investing, and lending.

Payments are steadily moving online. Based on Kantar research, the average number of cash transactions dropped by 11% during COVID-19, with more merchants shifting online out of necessity. Because of the rise in digital activity, we’ve increased our 2025 global online transaction value estimates from $1 trillion to $1.2 trillion. With rates in 2020 reaching the levels we anticipated for 2025, Southeast Asia achieved five years of consumer adoption in a single year.

Adoption of digital remittances doubled as regulators and employers went online to pay migrant workers electronically, and then helped them transfer funds to their families. Convenience and lower prices will likely sustain behavioral change, with up to 40% of total remittance value expected to be transacted online by 2025.

In insurance, purchases moved online as traditional channels were disrupted during COVID-19. Life and health insurance received an online boost as consumers became more risk-conscious in the pandemic. Microinsurance gained traction and now offers significant potential for serving underinsured segments. According to our research, traditional products don’t sell well online. That means established insurers that rely heavily on agents and bancassurance will need to digitalize their channel mix quickly and adapt new products for the digital channel. With such advances in place, the insurance subsector could grow 31% by 2025.

Southeast Asian consumers are also more comfortable with investing online. There are three primary competitors in online investment: pure-play fintechs (e.g., robo-advisers), consumer tech platforms, and established wealth management companies. Each of these players has sufficient room to address a different customer segment with distinct value propositions. One such fintech firm, Endowus, increased its clients by 20 times and its assets under advice by seven times in the year following its October 2019 public launch. Big players are also paying attention to this space: Grab acquired the startup Bento in February 2020.

Interestingly, the only sector that stalled in 2020 was digital lending, mostly owing to concerns about credit quality amid the pandemic. Yet the long-term opportunity remains bright, given the large number of individuals and companies without access to credit in Southeast Asia, favorable regulators, and continued innovation in credit scoring algorithms. We expect digital lending to be a $92 billion business across the region by 2025.

The rising consumer activity across sectors will generate further capital investments, attract more talent, and drive continued significant growth over the decade ahead. Southeast Asia’s digital economy will finally take its place on the global stage, an unexpected side effect of COVID-19.

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The pandemic highlighted the importance of trade and foreign trade logistics. In March 2020, COVID-19 transformed daily life as we knew it. Yet, trade has primarily withstood the disruptions caused by international transportation restrictions and social distancing policies. It has even grown substantially in some areas, such as e-commerce and online trade, for instance. According to an Amazon report, its international net sales increased by 28.3 percent between the first half of 2019 and the same period in 2020.  

By shining the spotlight on the opportunities brought by digital transformation, the pandemic has put customs authorities and their response capacities to the test. The urgent need to clear the critical goods needed to respond to the health emergency while keeping regular trade flows moving forced authorities to transition to digital customs systems almost overnight.  

Even before the pandemic hit, LAC was lagging North America, Europe, and Asia in implementing the commitments it had taken on under the World Trade Organization’s Trade Facilitation Agreement, according to 2019 data. Therefore, the region needs to create efficiencies in its international trade logistics.  

LAC’s economic recovery depends mainly on how its foreign trade logistics perform, which rests on the appropriate physical and digital infrastructure and related transportation services.  

Innovating and transforming customs administration through technology  

In response to these challenges, the new IDB publication Logistics in Latin America and the Caribbean: Opportunities, Challenges, and Lines of Action discusses some of the technologies that the region’s countries could implement to innovate and transform their customs administration.  

The optimization, automation, and digitization of customs and border processes are among the areas that new technologies address. These factors are the cornerstones of modernization and lay the groundwork for generating the high-quality data needed to implement robust and effective risk management systems. 

For example, the ability of customs to obtain, process, and analyze large amounts of quality data is key to strengthen regional value chains and make them agile and secure. Automation also requires other innovative components, such as electronic signatures and authentication mechanisms for internal and external users.  

Another ingredient in the recipe for effective and efficient customs is the traceability of goods. New technologies like radio frequency identification systems (RFID), the Internet of Things (IoT), geolocation tools, electronic seals for container and trailer doors, and OCR license plate readers make it possible to track cargo, vehicles, and the people driving them.  

These systems can be deployed at critical points such as production centers, bonded warehouses, and road corridors that connect land border crossings, seaports, and airports. One example is the system developed in Brazil to track and trace cargo vehicles, packaging, and products by integrating this data with electronic tax documents. Likewise, physical traceability can be accompanied by digitally documented data from each transaction. 

The data that customs authorities capture has immense value for customs and border risk management by digitizing and associating them with freight and transportation documents (cargo manifests, bills of lading, customs declaration data, and electronic invoices). Once the data is captured, artificial intelligence, machine learning, and big data tools allow the processing and analysis of large volumes of information to identify patterns and potentially risky or fraudulent operations.  

Coordinated Border Management based on the use of new technologies 

For the benefit of supply chains and foreign trade logistics, it is also essential that the use of new technologies is carried out in the context of Coordinated Border Management between customs and other authorities involved in border processes. 

This coordination is streamlined with interoperability between authorities and economic operators through Single Windows for Foreign Trade (SWs) or Port Community Systems to reduce times and costs for operators and increase control capacities. For example, the adoption of a SW system in Costa Rica is associated with a 1.4 percentage-point increase in the exports of companies that used the system compared to those that did not. 

There is also an opportunity to promote and strengthen regional value chains through interoperability initiatives between customs systems and other border entities. These include the Central American Digital Trade Platform (PDCC) and the CADENA application, which uses blockchain to facilitate  data exchange from companies whose reliability has been certified, such as authorized economic operators.  

Finally, these components would not be effective without functional infrastructure at the entry and exit points of goods at land borders, seaports, and airports. Likewise, the effect would not be the same if the infrastructure did not include advanced technological entry, exit, inspection, and monitoring systems. The Mexican customs authority’s Customs Technological Integration Project (PITA) is an example of a comprehensive technology-based border infrastructure intervention. The customs authorities of Nicaragua, Costa Rica, and Panamá are following suit and implementing border crossing reform processes that cover border facilities and include the use of cutting-edge technologies, with support from the IDB.  

IDB support for the modernization of customs and border management 

Through the Trade and Investment Division of the Integration and Trade Sector of the IDB, we support an innovative agenda of projects to modernize customs and border management in LAC. Two examples of these are the digital transformation and automation projects for the customs authorities of Colombia and Peru, including smart traceability plans for cargo and vehicles. We are also providing support for regional initiatives involving the use of blockchain to exchange data between eight customs offices in LAC and the application of artificial intelligence to improve customs risk management in several countries, among other projects. 

LAC countries should embrace the availability of new technologies, the fast-track innovation induced by the pandemic, and the support of international organizations, such as the IDB, to expedite the digital transformation of their customs administrations. 

Sandra Corcuera-Santamaría is a customs and trade specialist at the Inter-American Development Bank in Washington DC since 2006. She is responsible for several national and regional projects for customs modernization and coordinated border management, and trade facilitation initiatives, including the coordination of the Authorized Economic Operator Program in Latin America and the Caribbean. Prior to her career at the IDB, Sandra spent six years in the Economic and Commercial Office of the Spanish Embassy in Washington, and was a project coordinator at the consulting firm EuropeanDevelopment Projects in Brussels, Belgium. Sandra has a Master in Public Administration from the University of Leuven, Belgium and a Bachelor of Political Science from the Complutense University of Madrid, Spain.

To read the full commentary from the Inter-American Development Bank (IADB), please click here. 

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The new focus on competitiveness has been prompted by a confluence of factors: a global pandemic that highlighted supply chains and the importance of domestic manufacturing; a digital revolution that has emphasized the importance of digital inclusion, training and infrastructure; and the technological competitiveness of a risen China.

One of the few issues on which Congress and the administration appear to agree is the importance of maintaining American leadership in critical technologies as part of an expanded vision of national security. Bipartisan support has evolved in favor of an industrial policy for a limited number of key technologies, such as semiconductors, 5G, the ORAN alliance (open radio access network) and others essential to maintaining American innovation and technological leadership. 

The Senate has adopted the United States Innovation and Competition Act of 2021 (USICA). Passed with strong bipartisan support — 68 to 32 — USICA provides $250 billion to support research and development work, the development of key technologies, K-12 and graduate education, and more than $50 billion to support the semiconductor industry. Also with bipartisan support, the House has passed two bills adding significant funding for research at the National Science Foundation and Department of Energy.  

Yet, while the administration and Congress have taken some important steps in the right direction, more are needed.   

The pandemic drove home that America’s future is digital. But with more people on the web than any other country, China has aspirations to be the global internet leader, remaking cyberspace in its own image. China’s Digital Silk Road ($200 billion and growing) has become an increasingly important part of its larger Belt and Road Initiative (BRI). When China sells its equipment to middle-income and developing countries, their governments receive the tools to censor and control the internet while leaving their networks vulnerable to Chinese government cyber theft and interference. The Digital Silk Road also gives China a sufficiently dominant market share in many markets to set the technical standards to favor Chinese products over all others.

During the G7 summit in Cornwall, President Biden and other allied leaders announced a global infrastructure plan to counter the Chinese initiative. The program, which the White House calls the “Build Back Better World (B3W),” has the right ambitions but is not sufficient to the task.  

Under the Trump administration, a number of agencies were merged to form the International Development Finance Corporation (DFC). However, with lending power capped at $60 billion, the DFC’s funding is small compared with China’s BRI. The Senate-passed USICA would raise the lending limit to $100 billion, still far short of BRI funding and global infrastructure needs, estimated by the World Bank at $18 trillion.

To present a realistic alternative to China, the United States should launch a “Digital Marshall Plan” to do for the development of telecommunications, the internet and cutting-edge technology what the original Marshall Plan did to rebuild a war-torn world. The G7 leaders should work together, and alongside the World Bank, to create a robust, well-funded challenge to China’s Digital Silk Road. Congress must play its part, too.  

Will Congress rise to the challenge? Bipartisan action in the Senate and the House looks promising. But much more needs to be done. If these bills emerge as legislation, Congress will need to authorize the funding and resist the urge to water down everything. History points to times when the Congress has acted decisively. In the 1980s, for example, Japan posed a similar set of economic challenges to the United States and Congress responded. The Omnibus Trade and Competitiveness Act of 1988 set the nation on a competitive path with a national economic strategy. 

Today’s Congress has just begun. Now, the House must pass its own version of USICA, most feasibly by combining a number of Science Committee bills with a House companion to the Endless Frontier Act. It should add provisions to address critical competitiveness concerns such as China’s near monopoly of rare earth elements used in domestic and national security-related electronics.  

Once that work is complete, Congress must dedicate sufficient resources to the endeavor to ensure that the United States and its allies can offer developing countries a Digital Marshall Plan grounded in democratic values of openness, transparency and accountability. 

Orit Frenkel is co-founder and CEO of the American Leadership Initiative and former director for trade in high-technology products at the Office of the U.S. Trade Representative.   

Kent Hughes is former director of the Program on America and the Global Economy at the Woodrow Wilson Center and a former associate deputy secretary at the Commerce Department.

Jennifer A. Hillman is a senior fellow for trade and international political economy at the Council on Foreign Relations and a professor of practice at the Georgetown University Law Center.

To read the full commentary, please click here.

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The pandemic highlighted the importance of trade and foreign trade logistics. In March 2020, COVID-19 transformed daily life as we knew it. Yet, trade has primarily withstood the disruptions caused by international transportation restrictions and social distancing policies. It has even grown substantially in some areas, such as e-commerce and online trade, for instance. According to an Amazon report, its international net sales increased by 28.3 percent between the first half of 2019 and the same period in 2020.  

By shining the spotlight on the opportunities brought by digital transformation, the pandemic has put customs authorities and their response capacities to the test. The urgent need to clear the critical goods needed to respond to the health emergency while keeping regular trade flows moving forced authorities to transition to digital customs systems almost overnight.  

Even before the pandemic hit, LAC was lagging North America, Europe, and Asia in implementing the commitments it had taken on under the World Trade Organization’s Trade Facilitation Agreement, according to 2019 data. Therefore, the region needs to create efficiencies in its international trade logistics.  

LAC’s economic recovery depends mainly on how its foreign trade logistics perform, which rests on the appropriate physical and digital infrastructure and related transportation services.  

Innovating and transforming customs administration through technology  

In response to these challenges, the new IDB publication Logistics in Latin America and the Caribbean: Opportunities, Challenges, and Lines of Action discusses some of the technologies that the region’s countries could implement to innovate and transform their customs administration.  

The optimization, automation, and digitization of customs and border processes are among the areas that new technologies address. These factors are the cornerstones of modernization and lay the groundwork for generating the high-quality data needed to implement robust and effective risk management systems. 

For example, the ability of customs to obtain, process, and analyze large amounts of quality data is key to strengthen regional value chains and make them agile and secure. Automation also requires other innovative components, such as electronic signatures and authentication mechanisms for internal and external users.  

Another ingredient in the recipe for effective and efficient customs is the traceability of goods. New technologies like radio frequency identification systems (RFID), the Internet of Things (IoT), geolocation tools, electronic seals for container and trailer doors, and OCR license plate readers make it possible to track cargo, vehicles, and the people driving them.  

These systems can be deployed at critical points such as production centers, bonded warehouses, and road corridors that connect land border crossings, seaports, and airports. One example is the system developed in Brazil to track and trace cargo vehicles, packaging, and products by integrating this data with electronic tax documents. Likewise, physical traceability can be accompanied by digitally documented data from each transaction. 

The data that customs authorities capture has immense value for customs and border risk management by digitizing and associating them with freight and transportation documents (cargo manifests, bills of lading, customs declaration data, and electronic invoices). Once the data is captured, artificial intelligence, machine learning, and big data tools allow the processing and analysis of large volumes of information to identify patterns and potentially risky or fraudulent operations.  

Coordinated Border Management based on the use of new technologies 

For the benefit of supply chains and foreign trade logistics, it is also essential that the use of new technologies is carried out in the context of Coordinated Border Management between customs and other authorities involved in border processes. 

This coordination is streamlined with interoperability between authorities and economic operators through Single Windows for Foreign Trade (SWs) or Port Community Systems to reduce times and costs for operators and increase control capacities. For example, the adoption of a SW system in Costa Rica is associated with a 1.4 percentage-point increase in the exports of companies that used the system compared to those that did not. 

There is also an opportunity to promote and strengthen regional value chains through interoperability initiatives between customs systems and other border entities. These include the Central American Digital Trade Platform (PDCC) and the CADENA application, which uses blockchain to facilitate  data exchange from companies whose reliability has been certified, such as authorized economic operators.  

Finally, these components would not be effective without functional infrastructure at the entry and exit points of goods at land borders, seaports, and airports. Likewise, the effect would not be the same if the infrastructure did not include advanced technological entry, exit, inspection, and monitoring systems. The Mexican customs authority’s Customs Technological Integration Project (PITA) is an example of a comprehensive technology-based border infrastructure intervention. The customs authorities of Nicaragua, Costa Rica, and Panamá are following suit and implementing border crossing reform processes that cover border facilities and include the use of cutting-edge technologies, with support from the IDB.  

IDB support for the modernization of customs and border management 

Through the Trade and Investment Division of the Integration and Trade Sector of the IDB, we support an innovative agenda of projects to modernize customs and border management in LAC. Two examples of these are the digital transformation and automation projects for the customs authorities of Colombia and Peru, including smart traceability plans for cargo and vehicles. We are also providing support for regional initiatives involving the use of blockchain to exchange data between eight customs offices in LAC and the application of artificial intelligence to improve customs risk management in several countries, among other projects. 

LAC countries should embrace the availability of new technologies, the fast-track innovation induced by the pandemic, and the support of international organizations, such as the IDB, to expedite the digital transformation of their customs administrations. 

José Martín is a consultant at the Trade and Investment Division of the Inter-American Development Bank (IDB). Previously, he was the Representative in Washington, DC, for the Ministry of Finance of Mexico and the Mexican Tax Administration Service for more than 26 years. 

Sandra Corcuera-Santamaría has been a customs and trade specialist at the Inter-American Development Bank in Washington DC since 2006. She is responsible for several national and regional customs modernisation and coordinated border management projects and trade facilitation initiatives, including the coordination of the Authorised Economic Operator Programme in Latin America and the Caribbean.

To read the original commentary from the Inter-American Development Bank, please visit here

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