How the Internet and E-Commerce Are Hacking Protectionism

This first appeared in Zocalo

Consider two distinct worlds only a few miles from each other. One world is that of Jennifer and Nicole, recently featured in The New York Times, who have worked all their lives at the Carrier air conditioner factory in Indianapolis and eagerly expect President Trump to impose tariffs on air conditioners to prevent their factory from moving to Mexico. The other world is that of Travis, who lives 150 miles away in Elkhart, Indiana, and started his online business at $3,500 and today sells motorbike gear to 131 countries and derives 41 percent of his revenue from exports riding on free trade.

Which is the world you want to live in? One where low-skilled, disillusioned factory workers call for protectionist barriers? Or one where entrepreneurs—using their ingenuity, state of the art technology, and the open market access that American trade negotiators have secured over the past eight decades—sell to customers across the planet, and grow their businesses, hire new people, and realize their full potential?

If you choose the latter world, that’s great. But we will need a new roadmap to navigate it.

The image of globalization, imprinted on many minds, is of American factories fleeing to Mexico or China. But here’s what globalization really is: voluntary, mutually consenting exchange of goods and services between a buyer in one country and a seller in another country.

More important, here is what globalization is becoming: cross-border sales of goods and services among small businesses—like Travis’s motorbike gear venture—that are selling online, and foreign buyers who are finding them there. Why would we want to shut down such globalization?

E-commerce is breaking what seemed to be an “iron law” of international economics: that exporting was possible only for large companies. Today, while fewer than 5 percent of U.S. companies export, 97 percent of U.S. eBay sellers do. In a new survey of more than 3,000 developing country companies, my firm Nextrade Group finds that half of small online sellers export (while only 20 percent of small offline sellers do), and that more than 60 percent of online sellers export to two or more markets (as opposed to offline sellers, who tend to export to only one market).

Companies today are born global because they are born digital. Which makes this a historic time. We are at the verge of creating a global equivalent of a medieval town square where small sellers and buyers come together to transact. It is a market where anyone can sell to anyone, anywhere, anytime.

While e-commerce enables developing countries to leapfrog to the 21st century’s technology-powered world economy, countries like the United States are particularly well-placed to benefit. We already have the connectivity, logistics, online services from payments to finance to cutting-edge IT services, intellectual property, and people with wide-spread digital skills, which developing economies lack.

But we are not optimizing this opportunity. If we were, we would be celebrating free trade and open markets as enablers of our small businesses and online entrepreneurs, not bashing them as enemies of our factory workers whose time has passed. McKinsey Global Institute—which uses dozens of indicators to create an index of digital assets, usages, and workers—finds that the United States is using only 18 percent of its full digital potential; Europe is at just 12 percent. In a survey I recently conducted, U.S. middle market companies graded themselves C- on digital readiness. And more than 50 percent of developing country small businesses rate as poor or very poor in a number of areas in their economies needed for e-commerce to work, such as digital regulations, e-commerce logistics, access to online finance, and their own capacity for cross-border e-commerce.

Policymakers who aspire to empower small businesses to thrive in the global online marketplace need to think outside the box. To name five ways how:

Microloans for micro businesses. Export credit agencies have traditionally provided trade credit insurance and guaranteed exporters’ working capital loans issued by banks. E-commerce presents a new challenge: Micro and small online sellers often need much smaller and faster working capital loans than banks are able to issue. At the same time, FinTech and online lending companies are on a tear, literally making up for lack of bank lending for small business. Online lenders offer a huge opportunity for export credit agencies like Export-Import Bank to guarantee diversified portfolios of microloans for export-driven online sellers, thus lowering their cost of capital.

Export promotion for online sellers. Getting online is one thing; successfully exporting online is another matter. Cross-border e-commerce requires keen know-how about export promotion that smaller countries and even government agencies (like the export-promoting Commerce Department) don’t have—such as how to create an international multi-channel shopper strategy or build savvy online advertisement strategies for different markets.

So who knows how to promote e-commerce exports? Global e-commerce platforms do, and they have a keen interest in cultivating new e-commerce users. One innovative model for e-commerce capacity-building is a social impact bond, whereby private foundations, social impact investors, and commerce platforms make the initial investment in promoting exports and get compensated at a premium by the government and development agencies if the project meets certain pre-established metrics that governments value, such as the number of e-commerce-related jobs created, or the amount of new exports. Social impact bonds have been used to cure malaria and save rhinos. So why not to promote e-commerce?

Customs procedures for small business. Customs regimes in many countries are still tailored to the needs of traditional traders and large companies, rather than to small businesses with limited compliance capabilities. Study after study show that complex customs requirements are a top concern for small exporters and importers in the U.S. and worldwide. The silver bullet for getting rid of these barriers and fueling small business trade is raising de minimis levels—the value of shipment below which goods enter duty- and tax-free. High de minimis creates free trade for small business. In a major service to small foreign businesses selling to U.S. consumers, and to U.S. consumers and companies buying from abroad, the United States raised its de minimis to a very respectable $800 per shipment in 2016. However, de minimis is in many countries laughably low, such as $15 in Canada and $150 in the European Union.
One solution is to launch negotiations on de minimis among a “coalition of the willing.” In such an agreement, each member government might commit to ratcheting up the de minimis level over a period of five to seven years to, say, $1,000, in exchange for a similar commitment from the other members. In other words, each member government would give a little market access at the lower rungs of trade in order to gain a lot more market access in return, just as in a tariff reduction schedule in a trade agreement.

Digital regulations. My new survey shows that even small online merchants often struggle with digital regulations when seeking to export. For example, in the United States, small financial services companies report suffering from stringent consumer data privacy and protection rules in foreign markets, and from uncertain legal liability for internet intermediaries for user content on their sites. In a survey of Latin American companies, I found that one-third of online sellers viewed uncertain legal liability rules as “very significant” obstacles, while one-quarter were negatively impacted by foreign data localization and data privacy rules.

This is an area where the United States has gold standard rules, and needs to drive trading partners to adopt measures that are interoperable with ours. The Trans-Pacific Partnership was just that vehicle, and its killer, the Trump Administration, has to come up with a new and better one. A pilot could be run with the United Kingdom, whose officials have stressed digital trade as a path to competitiveness.

Trade adjustment. The giant question mark in tomorrow’s economy is adaptability of labor—whether workers like Nicole and Jennifer could be retrained to take advantage of the seemingly limitless possibilities opened by the global online marketplace.

The answer to this question is not at all clear. Existing tools—such as the Trade Adjustment Assistance that helped retrain more than 230,000 workers impacted by trade over the past decade—will not be enough. The policy question should rather be how to equip tomorrow’s workers to thrive in the global digital economy, one where the pace of change is very fast and competition is ubiquitous. One place to look is at Singapore’s model of active retraining of workers. Another solution: create public-private partnerships between the government and the resented “tech elite” companies such as Facebook to deploy corporate PR and social responsibility dollars to fuel the retooling and rehiring of digital-era workers, in exchange for lower payroll taxes.

Globalization as we’ve known it is coming to a close. It’s time to stop chasing its ghosts—and to start crafting creative policies to empower workers and businesses so that they can leverage the 21st century tools for growth: e-commerce and open markets.


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Nextrade Group Announces New, Actionable Ecommerce Development Survey and Index

By Kati Suominen, Founder and CEO

Ecommerce is reshaping the patterns, players, and possibilities of international trade. It is opening new trade opportunities for companies of all sizes and across sectors. However, numerous challenges need to be overcome for digitization to translate into trade and growth gains especially in developing countries, such as poor Internet connectivity, populations’ limited digital skills, logistics and market access bottlenecks, and policy and regulatory issues such as data privacy rules that limit access to customer data and its transfer, incomplete intellectual property frameworks, and legal liabilities for Internet intermediaries of contents such as user reviews on their portals.

However, lack of systematic and actionable data complicates developing countries as well as international aid agencies’ ability to design and prioritize policy solution to these challenges. There is still relatively little data and mostly only anecdotal evidence about the obstacles companies face when engaging in ecommerce in any given country. This limits developing countries and international aid agencies’ ability to fuel digital trade – to prioritize policy choices and investments in digitization and ecommerce.

A new Nextrade Group survey and report starts filling this gap. Covering 15 developing economies (Argentina, Brazil, Chile, Colombia, Mexico, Uruguay, Pakistan, Bangladesh, India, Philippines, Kenya, Nigeria, South Africa, and Ghana) and 3,500 merchants and ecommerce ecosystem companies (ecommerce and payment platforms, shippers, banks, IT firms, etc.), the survey provides nuanced and actionable policy insight for governments to unlock their ecommerce economies and tailor interventions to meet the needs of different types of firms, such as small vs large, exporters vs. non-exporters, and online sellers vs. offline sellers.

The study also creates a new Ecommerce Development Index that enables tracking private sector views on ecommerce development in countries worldwide, and encouraging countries to engage in races to the top. The key findings include:

  • In every size category, companies with online sales are much likelier to export than companies that do not have online sales. While fewer than 20 percent of small offline sellers export, about 50 percent of small online sellers do, and while offline exporters tend to export to only one market, over 60 percent of online sellers export to two or more markets.
  • Online sellers are also more geographically diversified: some 63 percent of online sellers export to two or more markets, while only a third of offline sellers do, whereas surveyed companies that neither buy nor sell online typically export to only one foreign market. Companies with online sales also derive a larger share of their revenues from exports than companies that do not buy or sell online. Similarly, companies that sell online are also likelier to be faster-growing—they have 10 percent or higher annual revenue growth—than companies that grow slowly (at less than 10 percent per annum), controlling for company size.
  • Small companies tend to be considerably more affected by these various potential barriers to ecommerce than large companies in every country, with access to finance and ecommerce logistics posing particularly steep challenges for small businesses. Midsize and large companies, meanwhile, wrestle most with logistics and digital and other regulations. The gaps are significant between small and large companies: for example, some 60 percent of surveyed small companies rate areas of ecommerce enabling environment 5/10 or below, while only a third of large companies do. These differences are echoed in responses to questions about cross-border ecommerce.
  • Perceived challenges to ecommerce vary very significantly across and within countries; every country has its idiosyncratic challenges, which means that policy recommendations and interventions need to be tailored to each country. For example, in some countries such as Bangladesh, online payments are a leading problem to ecommerce; in others such as Argentina and Kenya, cross-border logistics and customs procedures are the most challenging. In still other countries, such as Brazil, ecommerce and digital regulations and the overall regulatory environment complicate ecommerce. In Nigeria, access to finance issues and logistics dominate the list of problems. In Pakistan, the high cost of broadband and lack of Internet connectivity are reported to hamper ecommerce.
  • Driving ecommerce development requires actionable insight into specific bottlenecks. When asked about specific challenges within these broader categories, developing country merchants see such challenges as total cost of delivery, legal liability rules, and customs procedures for ecommerce imports as key challenges in cross-border ecommerce. Ecosystem companies meanwhile also see logistics as a bottleneck – but also highlight a range of digital regulations as challenging for cross-border ecommerce.
  • Companies believe that undoing barriers to ecommerce would result in significant revenue and growth gains. If their top-3 perceived challenges to ecommerce were removed, developing country companies believe they would score annual revenue gains of 34 percent in their domestic markets and 30 percent in international markets. Small companies report gains of 37 percent domestically and 34 percent internationally.
  • Companies that have yet to start selling online worry about complexities in exporting using ecommerce and uncertainties related to the return on investment. Companies in Latin America highlight logistics as a challenge, while companies in Africa mention small size of the market as an obstacle.
  • Brazil, India, Mexico, and Colombia come out on top in the survey; Ghana, South Africa, Bangladesh and Pakistan score lowest. The rankings are similar also in an ecommerce inclusiveness index developed in the study. They are also quite correlated with countries’ level of development. Brazil and India also overperform on the index when compared to their level of development, while LDCs underperform. However, also Brazil and India have a great deal of work ahead – their average scoring was far from a perfect 10 – in both, merchants rated the enabling environment for ecommerce at 7.

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Nextrade Publishes a New Report on Digital Trade in Latin America  

By Kati Suominen, Founder and CEO

The Internet roared to the scene in Latin America and the Caribbean (LAC) and it is transforming the way Latin Americans interact, shop, bank, and spend their time. The Internet is changing regional consumption patterns, the landscape of regional companies, and the region’s economic prospects. Disruptive digital technologies riding on the web — cloud-based services, e-commerce, 3D printing, Internet of Things, and so on — are empowering LAC companies of all sizes to cut costs, improve customer service, and create brand new products and services. The region is also home to innovative digital companies run by intrepid entrepreneurs, some of whom have accessed significant investments from Silicon Valley and grown into some of the world’s leading online businesses.

The Internet, in short, has opened tremendous new opportunities for LAC economies to become more productive, expand opportunities for entrepreneurship, and drive inclusive economic growth.

However, there is little data and mostly only anecdotal evidence on the power of the Internet on trade in the LAC region. Data on the barriers to digital trade in the region is still lacking, and a as are fresh ideas on policies to unlock digital trade. This curtails regional policymakers’ ability to make informed policy choices. The purpose of this report is to start filling these knowledge gaps and drive digital trade in Latin America.

The purpose of this Nextrade report for the Inter-American Development Bank is to start filling these knowledge gaps and unlock the next generation of digital trade in Latin America. We pioneer in mapping out the state and future of digital trade in the LAC region, analyze the impediments to the expansion of the region’s digital trade, and put forth policy recommendations for undoing the barriers to this new, exciting area of international trade. We also analyze the patterns in the geographic expansion of digital businesses and platforms across Latin America.

Digital Trade is  Big Deal for LAC Companies

While the results are tentative and based on a limited sample that is already quite heavy user of the web, there are interesting conclusions:

  • The Internet has become a very important feature in LAC companies’ daily operations. The bulk of companies surveyed here use the Internet for internal communications, advertising, market research, and ordering products and services. Even companies in traditionally analog sectors such as manufacturing and agriculture are leveraging online sales and purchasing capabilities.

  • The Internet is a hugely important growth lever for LAC companies surveyed here: it improves companies’ interaction with customers, ability to expand markets for their products and services, and enter new markets, among other benefits. The vast majority of companies would incur a productivity loss of 15 percent or greater if the Internet were taken away.

  • Compared to the broader market of “brick-and-mortar” companies, of which only a small fraction exports or imports, a very high share of the online companies surveyed here sell and buy online across borders. Online presence also appears to have earned LAC companies new foreign clients they did not have before selling online.

  • It appears that for many South American online sellers, cross-border online sales are geared to the intra-regional market, whereas Mexican companies transact with the United States. The EU is also a significant market for LAC companies, and China features prominently as a supplier.

  • LAC companies are upbeat about their future in foreign sales. Average forecast growth is 200 percent in 2016-18, while the median company forecasts growth rates of 40 percent during the period. Several companies engage in trade within the intra-regional market and consider LAC to be an important market in years ahead.

Challenges to Digital Trade in LAC

In the digital era where transactions are made online, companies need a digital enabling environment to thrive. This includes Internet connectivity, well-functioning online payments, work forces with technological skills, regulations conducive to digital trade and entrepreneurship, and so on.

  • Most LAC economies trail countries at similar levels of development in mobile subscription rates, firms’ technology absorption capacities, business-to-business and business-to-consumer Internet use, and in the political and regulatory environment for information and communications industries. The region still has significant “e-frictions” compared to advanced nations.

  • Of companies that already sell and buy goods and services to and from foreign markets, 50 percent find market access barriers as a “very significant” obstacle to their digital trade, while over 40 percent find the same for poor logistics in other markets and about a third percent for online payments and intermediary legal liability. Companies in business services and education sectors find data localization practices as burdensome, while business services and IT companies struggle with legal liability issues. Notably, these various barriers obstruct small companies much more than large ones.

  • LAC companies report average gains of 65 percent of revenue growth from international sales and 50 percent from domestic sales if these obstacles to selling online and cross-border were removed. Companies that are intensive digital traders – that derive over 50 percent of their online sales revenue from foreign markets – report gains of 51 percent in the home market and 90 percent in the foreign market is these obstacles were removed.

  • While some of the challenges to digital trade are external, many are internal. LAC companies surveyed for this study find it challenging to succeed online. Companies report finding talent, securing employee and management buy-in, and gaining the knowledge on how to leverage the Internet as important challenges to increasing online revenues. This reflects the region’s still limited ICT skills levels. Consumers meanwhile are concerned about online fraud and ability to deal with shipping costs of items ordered from overseas.

Trade policies need to be tailored to digital trade

In terms of specific measures, three set of policies can be highlighted for the regional economies to accelerate digital trade:

  • Remove market access and regulatory barriers to digital trade

  • Enhance LAC’s digital fitness

  • Adjust export promotion and credit to meet the needs of online sellers

Given that the private sector is closest to the problems to digital trade and solutions to it, optimizing the enabling environment for digital trade cannot be done by government fiat, but via informed, multi-stakeholder dialogue and ideation among entrepreneurs, corporations, academics and the government.

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Silver Bullet to Fire Up Small Business Exports: Plurilateral Agreement on De Minimis

By Kati Suominen

For governments seeking to harness the promise of ecommerce to catalyze entrepreneurship, small business exports, and job-creation in their economies, unburdening small online sellers from arcane customs procedures and duties should be a top priority. The quick-fix is to raise de minimis levels – the maximum value of an import that is exempt from customs duties, taxes, and formal customs procedures. High de minimis is pure free trade for small business.

Yet despite countless econometric studies on the benefits of higher de minimis rates on implementing economies, de minimis levels have remained remarkably low around the world – because de minimis is about two difficult policy issues, taxes and imports. Governments continue seeing higher de minimis as leading to loss of tax revenue and political backlash from domestic retailers fearful of foreign competition.

This new report I wrote turns this lousy equation around: a plurilateral agreement on de minimis among a coalition of countries that want to free their small business exporters from frictions in their key export markets.

Continue reading

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How The Global Fund For Ecommerce Is Helping Entrepreneurs In Developing Countries Enter The Digital Era

This article first appeared at:

Ecommerce has emerged as a powerful driver of economic growth, inclusive trade and job-creation worldwide. Yet while research shows ecommerce dramatically increases the odds for small businesses to stay in business, export and grow, most businesses around the world have yet to use this tools of 21st century trade — especially in developing countries. A new initiative, the Global Fund for Ecommerce, could play a critical role in bringing developing country entrepreneurs into the digital era.

As global trade digitizes, the thorniest challenge remains the scant adoption and use of ecommerce capabilities and online payment tools, particularly in the developing world. Only 9 percent of small companies and 16 percent of midsize companies in low-income countries sell online, according to the World Bank, while adoption is only 35 percent for midsize companies in upper-middle income countries. Even fewer merchants have adopted online payments required for transacting with overseas shoppers, with a recent MasterCard study of four advanced and emerging economies showing that while 90 percent of merchants had a website, only 20 percent were set up to accept payments online.

Of course, some of the low adoption is due to macro factors, such as expensive broadband connectivity. Yet research shows that the main elements obstructing companies from leveraging ecommerce are their lack of e-skills and ecommerce capabilities, such as marketing abroad. The main reason for merchants’ sparse adoption of online payments is not — as usually believed — low consumer adoption, but the perceived cost of online payments and lack of ability to set up online payment systems.

What merchants in developing countries need is greater awareness of why — and how — to adopt ecommerce. Trade capacity-building needs an upgrade for the digital era. In addition to standard trade issues such as meeting foreign product standards, participation in cross-border ecommerce requires merchants to have a range of new capabilities, such as:

  • Identifying best-fit foreign markets and customers in the cyberspace
  • Marketing via social media and geotargeted ads
  • Leveraging plug-ins for tasks such as data analytics on customers
  • Creating a multichannel shopper strategy
  • Using online payment systems used by overseas customers
  • Partnering with foreign ecommerce platforms
  • Calculating the total cost of delivery
  • Understand ecommerce fulfillment process

Governments, merchants and ecommerce companies all share an interest in expanding merchants’ use of ecommerce. Yet trade capacity-building as we know it won’t suffice. Public sector support tends to be ad hoc, and export promotion agencies are unlikely to have the best technical knowhow. The best trainers of merchants are either other merchants who have used ecommerce successfully, or ecommerce platforms like eBay or payment platforms like PayPal that have not only the right expertise — but also a keen corporate interest cultivating new ecommerce users. However, they are as yet not organized to systematically train merchants.

The best way boost ecommerce adoption rates around the world would be a Global Fund for Ecommerce, a public-private partnership that could incentivize ecommerce platforms, payment providers and other commerce companies to train merchants in developing countries on ways to apply ecommerce and the associated technologies. The Fund fuels the new Aid for eTrade initiativeI’m launching with the United Nations.

Through the initiative, developing country governments and industry associations would systematically identify groups of merchants that want to learn to leverage ecommerce and understand their specific needs. The fund would respond by creating a custom capacity-building program with the right team of trainers.

Providing capacity-building is not new to platforms. An excellent example is the capacity-building project that B2B ecommerce platform TradeKey launched with support from the Deauville Partnership, World Bank and International Trade Center to help merchants in Tunisia, Morocco and Jordan to reach international buyers. eBay’s Seller Center helps guide aspiring eBay sellers, while eBay University offers low-cost personal instructors in U.S. and Canada for companies to learn to sell online — an approach that could work worldwide.

A particularly useful business model for the Global Fund for Ecommerce is a social impact bond, whereby private foundations and social impact investors make the initial investment and get compensated by donor governments and development agencies if certain metrics are hit. This model incentivizes private investors to invest in high-impact projects to support ecommerce development — and upon success, secure both financial and social return.

This model ensures iterative improvement. All parties have an interest in analyzing each project’s impact rigorously, and improving the next time. Everyone wins: merchants get more sales, governments get more exports, investors get a return, donors get impact, and ecommerce platforms get more clients in hard-to-reach markets.

Naysayers may say that ecommerce companies would provide training without outside subsidies to get more clients. This however has not happened even in big markets — some nudge, organization and seed funding are required for ecommerce capacity-building to take off.

Ecommerce and online payments are historic tools of trade and development: they enable entrepreneurs to get into business and access world markets at a lower cost than ever before. Yet for business owners not steeped in technology, these tools can initially be intimidating. Until now, there hasn’t been a coherent vision on ways to take merchants to the ecommerce era. A Global Fund for Ecommerce would be a key way toward that goal.

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Next Big Roadblock To Trade — Congested Cities

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As corporations have built giant global supply chains around the world, governments have done their share, reducing tariffs and other trade barriers impeding market access of goods and services. Although the implementation of the WTO’s historic Trade Facilitation Agreement (TFA) will significantly help undo bottlenecks at national borders — promising to free up more than $1 trillion in global GDP — a growing challenge in the movement of trade remains: cities.

Trade is boon for economic growth and development, but many obstacles complicate moving trade, adding to costs and dampening its benefits. In Latin America, importers of products spend 190 hours in border procedures and handling paperwork costing $793 per shipment, according to the World Bank’s 2016 Doing Business index, as opposed to 36 hours and $257 in the logistics wunderkind Singapore.

World Economic Forum research shows that if every country improved border administration and transport and communications infrastructure even halfway to Singapore’s level, world trade would increase by 15 percent and world GDP increase by 5 percent.

The TFA does help unlock these gains. However, it won’t help where trade now flows: cities. As the world urbanizes — in 2030, the world’s top 750 cities will make up 61 percent of global economic activity, up from 57 percent today — and as door-to-delivery ecommerce expands, trade facilitation will need to move to cities.

Already, urban congestions costs billions. According to Texas A&M’s renowned urban mobility scorecard, the congestion “invoice” for the cost of time and fuel in American cities was 6.9 billion hours and 3.1 billion gallons of fuel in 2014, for a total cost of $160 billion — four times 1982 figure. Trucks accounted for $28 billion of the cost, not including any value for the goods being transported.

The problem spans the globe. In the TomTom index of urban logistics, Istanbul, Mexico City, Rio, and Moscow are most congested; 10 of 30 worst congested urban areas area in China.

Congestion is increasing last-mile delivery charges — to the point where the fixed cost of shipping a low-value shipment absorbs all foreseeable profits, risking to freeze trade in smaller shipments, whether by microentrepreneurs or ecommerce giants like Nike. As megacities become key nodes in global supply chains, importing raw materials and inputs and exporting final products, congestion also hurts cities’ economic competitiveness and appeal to foreign direct investors.

Business-to-consumer (B2C) ecommerce, which makes up only a tenth of global ecommerce, is expected to increase more than four-fold to $1 trillion in 2020. China will lead much of the trend, becoming the largest cross-border B2C market by 2020, with $245 billion in ecommerce imports. In India, ecommerce is expected to rise 15-fold by 2030.

One solution is to get next to the end consumer — Amazon, Walmart and other retailers and property developers are building large-scale, highly efficient warehouses near urban centers in China, India, the U.S. and Europe. However, last-mile delivery will still need to get done. The cheapest alternative, emerging market postal systems, are neither reliable nor fast..

The 2015 Global City Teams Challenge Expo shows that cities around the world are getting smarter — using new technologies to improve transport, healthcare, education, disaster management, and so on. But very little attention is paid to the movement of exports and imports through cities. Now is the time: cities are where the rubber is hitting the road for trade facilitation.

Ensuring that trade of the future flows not only across borders, but also through cities, requires a set of solutions:

  1. The international trade community has a great opportunity to partner with urban economists to decongest cities for world commerce. Multilateral development banks’ lending strategies to facilitate trade have long focused on modernizing customs and upgrading road, air, port and rail infrastructures. The next frontier of these investments is cities.
  1. Trade facilitation experts and city planners should encourage 3D printing as the premier decongester and decarbonizer. 3D printing will enable congested cities overcome the physical constraints to the movement of goods. Everything from industrial parts to toys, clothes and food can now arrive to the buyer, as designs in the cloud are printed right on site, with no physical movement taking place.
  1. Smart city analytics should be applied to address the urban logistics challenge. Innovative companies can use Big Data analytics to rationalize deliveries; intelligent traffic systems can direct flows; new types of vehicles (nimble and green) and shared delivery services (Uber delivery) can be used for urban freight. To connect all key players, cities can draw on the example of the Port of Hamburg, where Internet of Things applications enable the coordination of every aspect — ships, port authority, trucks, drawbridges, etc. —to efficiently move 9 billion containers annually.

As the world digitizes and urbanizes, facilitating trade requires entirely new approaches. For the international trade community to fuel corporate supply chains and unlock opportunities for small businesses to engage in ecommerce, trade facilitation in cities must get to the top of the list.

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Growth Capital Gap Vital to Debate on Trade Finance Gap

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As governments around the world look to small and mid-size enterprises (SMEs) as engines of growth, trade and job creation, a thorny challenge stands in the way: hundreds of billions of dollars of pent-up demand for trade finance.

This financing can be used as export working capital that enables a company to purchase labor and inputs to fulfill a specific export order. Or it can be used as supply chain financing that helps the company get paid faster for its export shipment than its foreign buyer wants to pay, and thus get cash flow needed to process the next order.

While critical for SME trade, such transactional financing is not enough to fuel globalizing SMEs. Debates on the trade finance gap—and on export promotion and trade and development—need to focus on the growth capital gap. Growth capital is equity and longer-term debt financing that is not aimed at any one trade transaction, but rather at expanding a company’s production and sales capabilities.

International trade has been sluggish since the‎ global economic slowdown hit in 2008. World trade grew an average of 3 percent between 2010 and 2015, after 6 percent annual growth between 1983 and 2008. Demand for trade finance is growing fast. According to the International Chamber of Commerce, 63 percent of banks around the world said trade finance activity is growing, 61 percent increased their capacities to meet customer demand for trade finance and 72 percent experienced an increase in trade finance fee income. Requests most frequently came from SMEs, which are both more numerous and cash-strapped than large companies; however, banks rejected about half of all SME requests, as opposed to 21 percent for large corporations.

These findings are indicative of a global trade finance gap, nowestimated at $1.4 trillion, $693 billion of which is in developing Asia, including India and China. The gap exists also in advanced economies: In surveys in the U.S., Europe and the OECD region, SMEs unfailingly see a lack of finance as the top obstacle for them to trade across borders.

The dramatic 12 percent drop in world trade in 2009 is tied directly to an outright collapse of trade finance as banks retrenched.Empirical work reveals a virtuous cycle: Access to credit significantly increases odds for companies to be able to export, which significantly increases companies’ odds to secure credit.

Yet discussions on trade finance are incomplete. Growth capital is emerging as a key determinant of companies’ international competitiveness.

One key reason is the “shrinking” of the exporter: The cloud, e-commerce and 3D printing, among other technologies, are enabling even the smallest businesses to reach international customers and scale across markets. In fact, tech companies are often “born global,” international at startup. EBay’s data shows that many of the companies selling and exporting on eBay are microenterprises: one-person businesses that, once on eBay, become micro-multinationals by virtue of being discovered by global online shoppers.

This means that today’s typical globalizing company is smaller and younger than ever before. Digital businesses are less likely to have collateral assets and thus hard-pressed to qualify for a bank loan, especially as regulatory pressures are forcing banks to focus on large- and middle-market companies. These companies may access non-bank financing, for example, working capital loans from online lenders such as PayPal’s new working capital product to purchase the labor and supplies they need to fulfill any one domestic or export order.

However, if the company observes strong demand for its products or services and wants to seize it—either speed up the generation of new international sales (such as by expanding its sales team) or add capacity to meet a surge in international demand quickly (such as by hiring more operations people or buying new equipment)—it needs more financial firepower. This typically means it needs access to growth capital.

True, governments and celebrators of Silicon Valley have long recognized the need for growth capital—whether venture capital, private equity or long-term debt—for fueling small businesses. The European Union, for example, is seeing to incentivize venture capital in “scale-ups,” companies beyond the riskier startup phase. However, few in the policy world have made the connection between the growth capital and competitiveness in international trade.

Among better examples, the Asian Development Bank has recently found that Asian SMEs sorely lack growth capital to fuel their growth and global competitiveness. Canada’s Export Development Canada has offered an Equity Program that targets born global companies and later-stage SMEs intent on growing through exports. U.S. Small Business Administration has quietly grown its international trade loan program that helps SMEs tap up to $5 million for export-related production expansions; however, the loan still needs to be made by a bank.

Targeting globalizing companies makes great sense for investors. They are time and again shown to be an asset class that outperformsthe broader market by key metrics: productivity, revenue growth, skill-levels, wages and financial stability. This is because it is the best companies that become exporters to begin with, and they become better by scaling through trade. Globalizing companies are, in short, a proxy for high performance—i.e., strong return on investment.

Investors can bolster globalizing companies’ outperformance, both through capital and advice. For example, in Peru, companies that received VC funding reported that their investors also helped professionalize the business, access key networks and gain savvy strategic and operational support. In other words, the combination of capital and seasoned advice can turbocharge an already outperforming company.

Matching investors to globalizing companies is a win-win-win for companies, investors and governments looking for export-led growth. It also obviates a paradox: Namely that companies that lack access to the types of useful skills investors offer are less likely to seek private equity or venture capital in the first place.

Yet such matches do not happen automatically: VC funding is accessible to a small fraction of companies that raise capital. Companies fare better with angels: In the first half of 2015, 20 percent of those seeking angel investments were successful, about the same level as in the previous three years.

This is where public policy could make a difference. Without subsidizing exporters outright and violating the subsidy rules of the World Trade Organization—or engaging in the typically misguided practice of “picking winners”—governments and multilateral development banks can work growth capital into trade finance debates in a number of ways: by measuring globalizing companies’ access to growth capital, analyzing the impact of growth capital on international trade, helping lower investors’ per-deal search and transactions costs for promising globalizing companies and possibly provide co-financing or risk mitigation instruments to incentivize investments in these companies. U.S. SBA’s small business investment company program, which offers low-cost debt to fund managers to invest in small businesses, could incentivize funds to target globalizing companies.

For the many companies that now go global early in their life cycles, access to larger capital injections from non-bank sources lends a competitive edge. Left unserved, these companies are forced to leave money on the table in the form of foregone export sales.

Policymakers and development practitioners concerned with export promotion need to pay as much attention to growth capital for globalizing companies—call it “equity for exporters”—as on transactional trade finance.

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Kati Suominen: 3 Ways To Navigate The Ambiguity Of Growth

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Amid global economic uncertainty, here are three levers for topline growth.

Not a day goes by without news about a slowdown in the world economy. Yet paradoxically, a recent Pricewaterhouse survey revealed that while 70 percent of global executives said it is more difficult to find profitable growth opportunities now than 10 years ago, 74 percent also said there are more profitable growth opportunities now a decade ago.

In other words, people on the frontlines of the world economy – executives in leading companies – know opportunities exist, but can’t see them. Growth is like a needle in a haystack.

Fortunately, amid the fog are three clear opportunities, opened by what is called the 4th Industrial Revolution and what I call Globalization 4.0:

1. Embrace the digital revolution.

Digitization is revolutionizing the economics of global production and trade. Digitization unlocks for companies new efficiencies, markets and innovations — without necessarily upsetting companies’ core business. Often, it makes it better:

These efficiency gains are far from fully harnessed even in advanced economies, with McKinsey finding that the U.S. economy is only realizing 18 percent of its digital potential. Some of the largest sectors — healthcare, construction, manufacturing — face the biggest gaps.

We found that U.S. middle market companies are only marginally satisfied with their own digitization practices, in a new study sponsored by Magento and co-authored by Nextrade Group and theNational Center for the Middle Market. These companies — a key engine of economic growth and job creation, with $10 million to $1 billion in revenue — gave themselves a “Digital Grade Point Average” of 2.8 on a scale of 0-4. That’s the equivalent of a C+.

In Europe, while almost all companies have broadband Internet access, according to the World Bank, only 19 percent use the Cloud, 15 percent have online sales, and 4 percent use RFID technology.

These low numbers imply tremendous opportunity: the coming embrace of digitization is poised to generate hundreds of billions of dollars in efficiency gains.

2. Go Mobile with Emerging Market Millennials

The second growth lever is mobile — specifically, the nexus of mobiles, Millennials and emerging markets.

Today, 98 percent of people in advanced economies own a mobile phone, as do 80 percent in the developing world, according to World Bank. However, just 31 percent of people in developing countries use their mobile phones to get online, versus 80 percent in advanced economies.

This is changing, with the number of smartphone users expected to more than double by 2020 to 6.1 billion. Thanks to phone upgrades and cheapening 4G subscriptions, most smartphone users will hold the Internet in their hand — before they ever have used a PC. Mobile-wielding netizens globalize globalization. Sales channels leading straight to the shopper’s handheld mean that companies can sell to anyone, anywhere, anytime.

Meanwhile, 85 percent of world’s workforce will be Millennials by 2025. Socialized by B2C social media, ecommerce and the sharing economy into mobile purchases, Millennials will also make B2B searches online. Already, Millennials account for nearly half of all B2B purchases, and 42 percent of searches for B2B purchases come from mobile phones — a three-fold increase from 2012.

As smartphones proliferate, B2B companies have great opportunities to translate Millennials in new markets into sales.

3. Drive for Better Policy

The Internet may seem ubiquitous, but we are still in the early days of achieving its full potential — something that savvy public policy and public-private partnerships can help unlock.

One area is digital protectionism — countries censoring websites, blocking the flow of cross-border data flows or mandating that foreign companies set up servers in-country for market access. These policies cost up to 2 percent of national GDP – for the country imposing the restrictions.

Narrowing digital divides would also spur growth. Only 46 percent of people globally use the Internet, and most of them are in advanced economies. Emerging markets still significantly trail advanced economies in Internet connectivity and technologies riding on the Web — as do rural areas behind urban centers, the old behind the young and women behind men.

‎Bridging certain “digital disconnects” could yield giant gains:

  • Harmonizing mobile spectrum in Asia could save the region $1 trillion each year.
  • Making the many national online payment platforms interoperable would boost cross-border online sales by billions.
  • Establishing regional Internet exchange points in Latin America would save the region 33 percent in cross-border data transit costs.

The long-term growth of companies and countries alike is largely determined not only by the amount of labor and capital, but also total factor productivity (TFP) — magic pixie dust that includes human capital, technology, good institutions, rule of law and other such hard-to-measure variables. At some point, labor and capital hit diminishing returns. Indeed, today’s concerns about secular stagnation owe partly to the fact that capital investments have run their course in China and other emerging markets.

‎TFP, meanwhile, is limitless. With determination and imagination, executives can take advantage of new technologies and better policies to draw out more TFP — and keep expanding topline growth. Global growth will follow.

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Silver bullet for helping small businesses trade: Plurilateral agreement on de minimis

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On February 11, 2016, the US Senate passed the Trade Facilitation and Trade Enforcement Act of 2015, which, among other things, raises the threshold for de minimis – the maximum value of an import that is exempt from customs duties and complicated rules of origin – from $200 to $800. This move should help especially for micro- and small businesses and individuals that use ecommerce to import single shipments and small parcels. It is now time to raise these levels internationally to further spur US trade, through a plurilateral agreement on de minimis.

The new US de minimis level, long championed by trade associations, express shippers, and others in the international trade community, will deliver economic gains. The Peterson Institute has estimated that the net payoff of an increase in the de minimis threshold to $800 would be $17 million annually, taking into account the cost savings at each stage of the delivery chain, minus the revenue that is not collected by customs on shipments in the $200-$800 range. Concretely, the study calculates that it affects 3.8 million shipments handled by express shipment firms. The gains are probably even greater now – the study was published in 2011.

The new law can stimulate new trade that has been altogether “frozen” because of difficulties for exporters and importers in meeting what can be very complex trade rules for shipments above $200. The legislation helps especially the “little guy” – small businesses and individuals who, by using ecommerce, are increasingly engaged in export and import activities with overseas buyers and sellers, yet who lack the capacities to comply with complex trade rules.

The legislation also formalizes the so-called “informal entry” regime, where incoming shipments below $2,500 can benefit from expedited customs clearance, do not need a surety bond, and have reduced paperwork requirements and fees (the $25 minimum merchandise processing fee is lowered to $2 for entries filed electronically).

These policies cut time and paperwork across players in the trade supply chain – importers, express shippers, postal services – and free up resources for identifying serious threats, from terrorism to counterfeit merchandise, illegal drugs, and unsafe food products. Customs security is still a priority: full manifest detail and pre-arrival information is required for all shipments, regardless of declared value.

Now more needs to be done, globally.

Most countries have very low de minimis values. China’s de minimis is $15, Mexico’s $50, India’s $170, and European Union’s about $150 (150 Euro). The level is absurd in some countries – for example, the Philippine de minimis is 48 cents. There are two reasons behind these low numbers: governments’ reluctance to forego revenue from import duties; and protectionist lobbying by domestic retailers. Yet it is the country’s consumers who typically get hurt, facing markups due to the very duties and taxes charged at the border.

Raising de minimis levels would unlock new trade that would outweigh the revenue losses. In a study of 12 Asia-Pacific Economic Cooperation (APEC) economies (Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Vietnam), raising the de minimis to just $200 would generate gains of $5.4 billion a year, equivalent to some $12 billion for all 21 APEC members. The gains would be multiple if the de minimis was raised higher, say, to $1,000.

A way to unlock these gains is to negotiate a plurilateral agreement on de minimis with key US trading partners. As multilateral trade talks among the 164 WTO members remain clogged, plurilateralism is emerging, alongside regional trade agreements like the Trans-Pacific Partnership agreement, as a key means for countries to negotiate trade agreements. Several WTO members are engaged in plurilateral talks in key sectors – the main one being the Trade in Services Agreement (TiSA) currently negotiated among 50 WTO members that cover 70 percent of the world’s services economy.

To be impactful, the de minimis plurilateral should aim to raise the members’ thresholds to $1,000. After all, if $800 was fixed as the target, the United States would not have any bargaining chips. The deal could be started by some of the most important US trading partners – such as the European Union, Canada and Mexico.

The de minimis plurilateral would be formed among a “coalition of the willing” that assumes the rights and obligations of the agreement. Non-members would not benefit from the higher de minimis the members apply to each other. However, just like the Information Technology Agreement (ITA) that was reached in 1996 among 29 Asia-Pacific economies, including the United States, and that has since expanded to cover 81 nations, the de minimis plurilateral should be open for outsiders to join.

To accommodate the prospective member countries’ different starting points and political concerns, the plurilateral on de minimis could, as with many trade deals, have customized schedules for countries to work toward the $1,000 threshold.

In developing countries, the deal could be introduced as a pilot supported by development banks and donors who help compensate the developing country governments for any foregone customs revenue during the pilot, and assess their net gains after the pilot.

The plurilateral on de minimis would expand opportunities for small businesses and consumers to sell and buy products across borders, accelerate customs clearance, and boost US small business exports. It would also be great foreign aid policy with a special carrot: acceding developing countries would be able to enjoy greater market access for their small business exporters in the advanced economies that are members.

If governments are serious about helping small business export, and companies and consumers access a wide variety of products to lower cost, a plurilateral on de minimis is just about the silver bullet.

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How Can We Revitalize America’s Global Competitiveness?

Today I had the honor to speak on a panel “Power Play: How Can We Revitalize America’s Global Competitiveness?” at the Pacific Council’s members’ weekend. It was a terrific debate – below are my opening remarks and some conclusions:

U.S. competitiveness is a big topic, with several possible definitions – each of which may lead one to somewhat different conclusions. To kick our conversation off, I would like to offer three comments:

First, while there might be reasons to worry about our competitiveness, there are many reasons to celebrate. Consider that:

  • Our corporations are the most productive and resilient in the world
  • Our tech companies are global trendsetters that not only have revolutionized industries, but also created entirely new ones
  • We have figured out the technology to tap into new energy sources that reduce our energy costs
  • We are home to 27 of the 30 universities that produce the most-cited scientific research

We also do exceedingly well in indices that can be seen as proxies of our competitiveness:

In other words, there are many parts of America that work.

Second, if we adopt the definition of competitiveness as the extent to which our companies compete successfully in the global economy, we are well-placed for two reasons:

The first reason is that the global economy of the 21st century is a digital economy. It is an economy where goods and services are digital and bought and sold on digital platforms, with transactions concluded with digital payments. It is an economy where companies that leverage technologies riding on the Internet, such as 3D printing, ecommerce, Big Data, and virtual wallets dramatically reduce the costs for companies to make, market, and move products and services.

The United States is set up for this economy: we have the technologies and our companies and consumers are adopting them. We have the capital and market to scale technologies. Contrast this to Europe: Europe has gone from digital leader to laggard, not least because it is not yet a single digital market. While physical goods travel freely across borders in the EU, digital goods and services still do not. For example, in the U.S., Netflix can stream content just as easily in Alabama as in Alaska; in EU, Netflix is blocked from streaming online content in any of the 28 EU nations without country-specific licensing deals.

EU’s being fragmented into different digital markets I would imagine stifles investment in tech companies. It is not accident that Google, Facebook, Twitter, Uber, and many others grew up in the United States, a single digital market, or that Alibaba took off in China, similarly a single digital market. It is also no accident that 54 percent of online services in Europe are provided by American companies.

The next frontier in our digitization is ensuring that our originally “non-digital” companies – companies in manufacturing, food and beverage, financial services, retail, and so on – adopt and use digital technologies.

The second reason why I feel optimistic about our ability to compete is our trade policy is also setting us up to compete. Like many others, I was concerned about the statements of candidate Obama on the campaign trail in 2008, when he talked about the need to renegotiate NAFTA, hit the pause button on trade negotiations, and focus on trade enforcement.

Positively, our trade policy has become very forward-looking and strategic. TPP was just concluded, opening vaster access to the Japanese market, and once TTIP gets done, we have carved new market access in countries making over half of world trade. We will also have set the de facto multilateral trade rules for the 21st century. The Trade in Services Agreement (TiSA) talks that we are leading and that encompass 50 nations will bolster these gains further in services, the high-growth sector of our economy. Our trade policy has also been very strategic, forcing BRICs to choose between market access in the liberalizing coalition of willing we lead, or the status quo.

In a tennis analogy, in our trade policy, we are taking ball on the rise, and playing smarter than any other nation.

Of course, trade deals we lead like TPP and TiSA are also helping other member economies succeed and gain competitiveness. Just like we do, Japan, Vietnam, and Australia will all gain from TPP, as will 8 other members (and so in fact do other trading partners due to the growth gains in the TPP countries, which boost their overall demand). This is good news: when one stops looking at the world economy as a mercantilist zero-sum game and sees the connections between our and other nations’ prosperity, our trading partners’ growth and prosperity is hugely positive to us.

The third comment is the “however”. What, then, worries me?

First, I worry about creeping regulations and taxes – that one day, after many reactionary moves as in financial regulations after the financial crisis, we wake up and find ourselves having sapped the vigor of our innovation economy and the quintessential American opportunity to make it big here. The debate here must be about smart regulation, not black-and white no regulation vs. lots of regulation.

Second, education is and is not a source of concern. Education is investment in human capital, a driver of total factor productivity and growth, and typically also of incomes of individuals. In other words, quality K-12 education fuels our upward mobility. At the same time, we want to be mindful of keeping investing in our higher education and the best and the brightest, the captains of industry. It is also always useful to talk about STEM – but we should not lose sight of the bigger picture that tech and math are not everything. Even if we get STEM right, we still need 21st century workers – and they are not only statisticians or engineers, but also savvy negotiators, strategic thinkers, great designers, and good collaborators with sound judgement and poise and flair to persuade.

Steve Jobs stressed that Apple products had not only technology but also humanities and liberal arts in them. The best tech companies do not turn on tech alone. Computers  meanwhile, handle many things we do need to get right in the 21st century – math, logic, and shifting through massive amounts of data – I only wish I could scan thousands of journal articles within seconds! But computers are and will be pre-schoolers in the softer tasks that winning in the emerging economy requires. We need STEM, but we need a lot more: measuring the ROI of our K-12, fueling our higher ed to ensure the best ones can truly soar, and educating for the manifold types of roles workers play in the 21st century knowledge economy.

Third source of worry for me is our leadership in the world economy. In the aftermath of the financial crisis, there was a great deal of talk about “American decline” and about the idea that BRICs and other emerging economies would be the locomotives of the global economy. I was so frustrated that I wrote an entire book called Peerless and Periled: The Paradox of America’s Leadership in the World Economic Order (Stanford University Press, 2012), where I argued that emerging markets had structural and institutional defects that would make them run out of steam at some point – and that they were not able to exercise the kind of global, benevolent leadership we have exercised all these years.

Rather, I argued, it is our economy that must power the world economy, and it is out leadership in global trade, finance, and macroeconomic issues – and certainly in other areas as well – that is critical in years to come, in order for us and the world economy to prosper and grow.  I worry that at some point we stop seeing the critical role of American leadership in the world, how peerless it is, and without which how periled our futures can be.

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