Blair Bugge and Matt Jeavon, Deloitte
Reducing friction is a central objective at international borders around the world. There are two primary sources of that friction in the global trade ecosystem: custom duties and non-tariff barriers to trade. The most friction by volume lies in the latter, where we see a large number of regulatory requirements resulting in, what can be, onerous documentary and physical checks at the borders. One of the primary reasons behind the friction is the lack of ‘interoperability’ of supporting systems.
Interoperability is complex, and best understood by looking at it in terms of three distinct areas: technical, legal and data.
Technical interoperability speaks to how systems are connected or integrated, for example an end-to-end API.
Legal interoperability are policies recognising digital representation of what used to be physical documents between the two countries.
Data interoperability is systems or actors using the same data model across their trades and documents. For example, the Digital Container Shipping Association (DCSA), an industry group of carriers, has come together to determine a common data model for the electronic bill of lading.
The adoption of digital standards is central to meeting the core objective of digitising trade processes and accelerating interoperability across systems. While multiple digital standards are available, for example through the ICC Digital Standards Initiative, what trade ecosystem often finds most challenging is in the operationalisation of the standards, e.g., translating them from theoretical guidance into common digital tools such as data infrastructure and APIs.
Operationalising digital standards is difficult as it’s not a pure technology innovation, for example the use of blockchain within an individual company and its customers. The drive towards interoperability requires systemic innovation, a series of interdependent innovations which require industry wide buy-in and adoption.
Buy-in and adoption is often difficult for three core reasons.
The first is mindset. Some organisations may not be innovative in their thinking, or they may fundamentally disagree that interoperability is the way forward.
The second blocker is legal interoperability. Organisations often mention that the technology and data standards can be solved, but they’re difficult to implement without the supporting policies.
And third is that actors are often aligned on the goal of digitalisation but not on the financial returns.
Of course, there are ways of tackling the various complexities of operationalising standards. One way is a push towards interoperability by design, as seen with the connection of regional Single Trade Windows (STW). For example, the Association of Southeast Asian Nations connected national STWs in the 2000s. Another view is the bilateral collaboration driven by necessity. An example is the Australian Department of Agriculture and New Zealand Ministry for Primary Industries where, because of the large volume of trade in the corridor and strict phytosanitary rules, they created interoperable phytosanitary eCertificates leveraging international standards.
The fragmented nature of the trade industry is a constant barrier to innovation. In any trade from one country to another, there may be 30+ actors involved. Not only does this increase the administrative burden for traders, but also decreases transparency and therefore integrity of the borders.
Additionally, governments face significant budget constraints, with many competing priorities and every decision under scrutiny. Evolving border security threats and changes in global trading networks are constantly creating new challenges with the position worsening even further as a direct consequence of the impact of the COVID-19 pandemic on global economies. This will only serve to exacerbate a misalignment between the demand from traders for greater use of technology and streamlined processes with Government Department’s ability to keep up with industry needs.
Digitalisation can also not move forward without ensuring the readiness and maturity of traders to be able to accept and integrate with new digital services. To be able to benefit from digital transformation, traders need to be engaged, educated, and integrated into the eco-system.
Steps towards digitalisation can be made incrementally in order to de-risk first mover barriers. Focused experimentation, to deal with a specific use case, is a way to drive collaboration across the public and private sector.
When determining an issue to tackle, organisations should start by identifying and being clear on the challenge that needs to be solved and speaking to traders or industry actors to understand what would motivate them to solve this problem through digitalisation. An example would be focusing on the bill of lading, a document, that if digital, could increase the speed of executing trade finance transactions.
Some actors may be hesitant to try new digital tools or government legislation may not be in place to support their digital document, for example those in the UK awaiting the passing of the Electronic Trade Documents bill. The best way to approach a pilot in this case would be to start with a shadow transaction, and once tests are successful, experiments can move to a live environment.
Trade needs to operate in an environment that encourages and enables innovation, allowing development of insights and new digital tools from cross-industry collaboration. With the right nudges, incentives, and government policies, it will be possible to accelerate and realise the core value of interoperability.
For further reading: http://customsclear.deloitte.com/