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

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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.