Digitalization and the Future of Trade: Empowering Least Developed Countries

Throughout history, trade has stood as a driving force propelling economic growth across the globe. Its significance is particularly pronounced for developing nations, especially the Least Developed Countries (LDCs) and Landlocked Developing Countries (LLDCs). Despite their immense potential, the LDCs’ contribution to the global trade landscape remains dishearteningly low, comprising only 0.9% of global goods exports and 0.25% of global services exports in the year 2022. Along with a lower level of participation in trade, LDCs and LLDCs face obstacles in a complex tapestry of geographical constraints, infrastructural limitations, and intricate political and governance hurdles.

Technology has been identified as a key factor in transforming LDCs, especially by introducing new and innovative technologies brought about by the fourth industrial revolution (4IR). The World Trade Organization (WTO) has found that for small and medium-sized firms (SMEs) and startups of least-developed countries (LDCs), digital trade presents more opportunities than challenges. Research by the Organization for Economic Cooperation and Development (OECD) has shown that digitalization in cross-border trade could escalate the overall trade value of Small and Medium Enterprises (SMEs) in developing countries by 4.5% and can create an equal playing field for LDCs and high-income nations. Furthermore, digitalization has been found to contribute to sustainable, inclusive, and resilient trade.  However, it is worth noting that LDCs need help from development partners and international agencies in preparing and adopting new technologies, trends, and tools to benefit from these revolutionary trade practices.

According to the World Economic Forum, various disruptive technologies will revolutionize how trade is carried out worldwide and LDCs such as Nepal can no longer remain out of the race if they want to capitalize on these new opportunities to enhance their trade growth.

 

 

Information Technology (IT) and services trade

Despite the constraints in market access due to poor physical infrastructure, supply-side deficiency, and landlocked geography, LDCs and LLDCs still have a lot of gaps in exporting services. LDCs’ services exports represented a mere 0.72% of global services trade in 2019 and only 0.25% of global services exports in 2022. For instance,  as per the World Bank, Nepal’s ICT services exports in 2022 were USD 123 million (NPR 1.61 billion), however, there is an unrealized additional potential of contributing USD 4 billion (NPR 525.41 billion) to the overall economy. A recent study by the Institute for Integrated Development Studies (IIDS) found out that Nepal’s IT services exports in 2022 reached almost USD 515 million (NPR 68 billion) accounting for 1.4% of total GDP and 5.5% of foreign exchange reserves. The study found out that there were 106 IT exporting firms, 14728 IT freelancers and 51781 IT enable services freelancers.

Blockchain and big data

Blockchain has emerged as a solution to address supply chain issues such as high costs, real-time tracking, efficiency, and reliability. Blockchain is used in the simplification of issuing Letters of Credit (LC) by banks. Similarly, the DLT (Distributed Ledger Technology) is a blockchain-enabled data-sharing system for multiple functions like real-time tracking, digital LC, and digital bill of lading. These technologies can significantly boost the trade of LLDCs, who often have high trade costs due to their landlocked geography. Big data improves manufacturing and exporting efficiency by assisting businesses in effectively timing product launches, accurately estimating demand, and optimizing logistics. Similarly, Internet of Things (IoT) devices detect movements and deviations in real-time and communicate cross-border electronic information digitally, making trade data collection more safe, efficient, quick, and affordable. Furthermore, the COVID-19 pandemic also highlighted the opportunity for digital trade and the use of blockchain in LDCs.

Machine Learning and Artificial Intelligence

Artificial Intelligence (AI) and machine learning are other technologies that can transform how we trade goods and services. AI can be utilized in enhancing global value chains, facilitating e-commerce, easing translation services, and improving trade negotiations. Similarly, robotics and machine learning can jointly aid in the packing, delivery, and tracing of goods. Preparing trade negotiation documents using AI tools such as Cognitive Trade Advisor has facilitated LDCs to negotiate with developed countries more constructively. LDCs need to gradually adopt more machine learning and AI into their trade practices to improve both the quantity and quality of trade.

Digitalization of Sanitary and Phytosanitary (SPS) documents

The Sanitary and Phytosanitary measures are certain requirements for treating or processing products for limiting the amount of pesticide residues or only allowing the use of specific additives in food items. LDCs and LLDCs face obstacles in meeting the SPS measures put up by importing countries mostly in agricultural and food items. Electronic SPS, in particular, can support the smooth exchange of documents and SPS compliance between importing and exporting nations.

International mobile payments

A seamless flow of cross-border e-commerce payments can surge the volume of trade between nations. The rise in worldwide bank account ownership to 71% in developing countries has boosted the use of mobile payment applications. Furthermore, apps such as AliPay, PayPal, and Venmo have simplified international trade transactions and presented business opportunities for Small and Medium Enterprises (SMEs) of the LDCs.

In Nepal, the number of users of mobile banking users has gone up significantly to 62.8% of the total population. Nepal recently signed a cross-border online payment agreement with India and Sri Lanka. Furthermore, FonePay, a Nepali digital payment company, has partnered with Visa, Union Pay, and AliPay to enhance cross-border transactions with neighboring countries and the wider world.

Way forward

Throughout the LDCs, there have been multiple success stories of the benefits reaped from the digitalization of trade. For example, the use of 3D printing for manufacturing in Gambia and electronic phytosanitary certificates for trading plant products in Madagascar has saved costs and time in processing and trading products.

Being an LDC country, Nepal needs to learn from these successful initiatives. Nepal can start by reducing hurdles to e-trade readiness such as eliminating prohibitions on e-payments for both imports and exports, removing obstacles in ICT-related FDI, and digitalizing border logistics infrastructure. Government organizations such as the Trade and Export Promotion Centre (TEPC) can collaborate with multilateral agencies like the International Trade Centre (ITC) and Enhanced Integrated Framework (EIF) to provide training to SMEs on using AI, IoT, and other innovative digital tools. Furthermore, Nepal might lose 2.5% to 4% on merchandise exports post-LDC graduation in 2026 which underscores the need for adapting innovative technologies and diversifying into services trade.

The 5^th UN Conference on Least Developed Countries held in March 2023 has identified significant potential to improve regional and South-South technological cooperation, particularly in sectors like green and digital trade. Furthermore, the 2023-24 Aid for Trade Programme has emphasized the promotion of a digital economy and digital connectivity. However, supportive legislative frameworks, technology transfer, global cooperation, and capacity development are prerequisites for LDCs to catch up and reap the benefits of digital trade.