The international supply chain is growing in complexity at the same time as nation states seek to improve their border compliance for imports and facilitate access to export markets for their domestic producers. The global value chain is highly dependent on smooth cross-border supply flows (tangible, intangible and data). In an uncertain world that is buffeted by rapid technological change, environmental and health crises, and political uncertainties, national policies can have significant impacts on cross border trade challenges.
- The “cost of trade” roughly doubles the landed price of goods in export markets (compared to domestic wholesale prices) with around one third of that cost related to non-tariff border costs. Nations that can reduce their cost of trade with their trading partners will confer a significant comparative advantage for their exporters and thereby improve the national balance of trade.
- At around $1.7 trillion, the trade finance gap (i.e., trade finance requested but not approved) is heavily weighted against small and medium enterprises (SMEs) and acts as one of the most significant barriers to SME participation in cross-border trade. Nations who can uplift SME participation rate in cross border trade will experience greater growth and improved balance of trade.
- At around 3 per cent of world trade volume, the value of fake / illicit goods trade is at least $600 billion and rising. The consequences include market losses for exporters of genuine goods and potential reputational damage for entire market segments. Nations who can help their exporters prove the authenticity of goods will enjoy a comparative advantage over those that do not.
- With annual carbon emissions at around 25 billion tons5 and with approximately 25 million people in forced labour6, and 400 million tons of hazardous waste produced annually7, there is a rapidly increasing consumer demand for sustainable products. Nations that can prove the sustainability of their exported goods through verifiable supply chain transparency will enjoy both higher prices for their goods and lower tariffs as importing nations start to penalize un-sustainable imports.
- With border authorities only able to inspect around 1 per cent of around 1 billion sea containers and a much smaller proportion of 100 billion parcel shipments per year, the challenge of managing border risk against illicit goods and biosecurity threats has never been greater. Nations that can leverage high integrity data about import consignments can both increase seizures and facilitate legitimate imports.
The challenges described above are quite significant. Equally, the opportunities for nations that can address these challenges more effectively than their competitors are also significant. Digitisation is a key enabler of all strategies to address these challenges. Although many nations have made significant progress in digitizing trade processes within their borders such as implementing trade single windows, there remain significant challenges in digitizing cross-border processes.
Diverse regulatory models and priorities across nations amplify the challenge. National policy making will reflect a complex mixture of market-oriented, security-oriented, rights-oriented, and domestic developmentoriented priorities. These differences lead to problems of compatibility or interoperability among nations, and fragmentation of the digital space at the global level. Any scalable solution to the digitisation of cross border trade must embrace and not conflict with diverse policy making priorities.
This paper describes a highly scalable operating model for digitisation and trust of cross border trade based on verifiable credentials, linked data, and decentralised identifiers. It provides national regulators with implementation guidance that will facilitate the following outcomes.
- Full and rapid digitisation of all exports without any dependency on trading partner readiness. This is because the framework supports the seamless blend of human readable and digital data so that exporting nations can go 100 per cent digital whilst their trading partner nations can adopt digital processes at their own pace.
- Traceability through the supply chain. By linking the export document and product labels to digital evidence created earlier in the supply chain, a linked data graph of verifiable documents can be created. Importers & consumers can follow the links to verify that what is stated on the product label is true. Importing regulators can independently and digitally verify that their compliance criteria are met.
- Automated compliance and risk. As exports are increasingly digitised, importing regulators can leverage the digital chain of trust to automate compliance assessments. This will reduce border costs for goods with strong digital credentials and improve risk targeting because border authorities can focus their efforts on imports with lower or unknown trust. Similarly, banks can automate their risk assessments and consequently lower the costs of trade finance, allowing small exporters to compete on more equal terms with their larger competitors.
The role of regulators in this model is to provide trust anchors. For example, a national trademarks office can issue digital proofs that an identified producer is indeed the owner of a trademark, allowing that producer to attach verifiable authenticity claims to their exported products.
The decentralised nature of the model means that every trade document in can be issued by a different party or authority using tools and systems of their choice. With no dependency on centralised systems, market innovators can successfully occupy a niche. Regulators act as the catalyst for market innovation within their economies.
A similar pattern is seen with the emergence of digital vaccination passports in response to the COVID pandemic. The vaccination passport is issued by a national competent authority to the person who has been vaccinated. The person carries the vaccination passport with them in both paper and digital forms, and can present it to any verifier (e.g., border, airline, or any venue) who can confirm the integrity of the document without contacting the issuer. A few different physical implementations such as International Civil Aviation Organization (ICAO), The EU Digital COVID Certificate (EUDCC), New Zealand COVID Pass (NZ COVID Pass) have emerged but all follow the same pattern. An e-passport is also an example of the same pattern, allowing the holder to prove their identity to digital readers at airport smart gates or even to a verifier with a smartphone. The message of this white paper is that any cross-border trade document can also be managed using the same decentralised digital trust architecture. Like the chip in an e-passport or the QR on a COVID vaccination record, trade documents can be digitised and verified at scale whilst still retaining compatibility with paper-based processes.
The chapters in this paper are designed to take the reader from concept to implementation. Chapter 2 explores and quantifies the current challenges and opportunities in the international supply chain in more detail, thereby providing the business case for change. Chapter 3 describes the key technology innovations that power the decentralised future using non-technical language and plentiful analogies, providing business leaders and policy makers with the confidence to support the case for change. Chapter 4 articulates implementation best practices that support the transition to successful implementation, avoiding pitfalls and mitigating risks. Chapter 5 provides several business use-cases so that all stakeholders can glimpse the future through realistic examples.
Verifiable credentials and decentralised identifiers represent an opportunity for nations to quickly go 100 per cent digital, improving both export market access and border security.
Source: UNECE