This is the fourth in a blog post series being produced under the auspices of the Centre for Commercial Law in response to the coronavirus crisis.
International trade is one of the areas that has been severely disrupted by the global COVID-19 pandemic caused by a new type of coronavirus. In an attempt to control the spread of COVID-19, countries have increasingly imposed drastic measures including lockdowns, travel restrictions, border closures, airport shut downs, precautionary restrictions at ports suspending or delaying entry for ships, persons and property on board, and trade restrictions on exporting medical supplies and food. Although the measures are primarily aimed to safeguard public health, they inevitably have had severe impacts on international trade. In response to the COVID-19 pandemic, key actors of international trade have declared their commitment to work together to minimise disruptions and establish a coordinated approach to facilitate international trade as reflected in some recent statements including Extraordinary G20 Leader’s Summit Statement and G20 Trade and Investment Ministerial Statement, joint statement by the World Trade Organisation (WTO) and the International Chamber of Commerce (ICC), and joint statement by the WTO and the World Customs Organization. Ensuring such a coordinated global response to the global COVID 19 crisis is vital in maintaining international trade and sustaining the global economy, particularly in the light of the new forecast of the WTO which indicates that the COVID-19 pandemic disruptions could result in a drop in world trade of between 13% and 32% in 2020 affecting all regions in the world with estimates of the expected recovery in 2021 depending largely on the duration of the outbreak and the effectiveness of the policy responses.
Several questions arise under this global picture in relation to understanding and mitigating the COVID-19 implications on international trade. The most basic question is how to keep international trade concerning export-import transactions (which are traditionally extensively paper-based and require paper documents to be physically exchanged among various parties in different countries) operational in so far as possible despite lockdowns, social distancing and the consequent reduced availability of courier and postal services and/or the non-availability of staff in business branches and offices.
Extent of the Paper-reliance Problem in Export-Import Practice and COVID-19 Complications
Export-import transactions have several interconnected phases involving international sales (as the underlying deal between exporting seller and importing buyer of the goods), transportation, insurance, payment and finance, and customs. In each of these phases, a huge amount of international trade paperwork is often issued which typically involves sale of goods contracts, commercial invoices, packing lists, certificates of inspection, export and import licenses, bills of lading, insurance policies, letters of credit and customs declarations. In the way that international trade traditionally operates, this paperwork is required to be exchanged in a physical format among several parties from different countries involved in one or more phases of transactions, such as exporting seller, importing buyer, freight forwarder, carrier, insurer, bank and custom authority. It is crucial not only to get the paperwork right but also to get the right paperwork physically delivered on time to the right party or parties. The Trail of Roses Project, undertaken in 2014 by A.P. Moller-Maersk, one of the world’s largest container logistics company, revealed that one single container of goods transported from Kenya to the Netherlands could require as many as 30 independent parties and 100 people, generating up to 200 exchanges of information, with a 10 day waiting period for documents to be processed in a total 34 day shipment period from the farm to the retailers and with one of the critical documents going missing and only found later amid a pile of paper 25 cm high. It is commented that the cost of handling an enormous amount of paper documents can be higher than the cost of transporting the containers. Once this process for one single shipment is multiplied by the thousands of shipments, the global picture becomes clear that millions of paper documents are being exchanged daily in international trade with an estimated cost of “$500 billion annually, an average of about 10% of the cost of each trade transaction”. In addition to time and cost, this burdensome and inefficient process, which is about 400 years old if not more, also significantly increases documentation risk and liability in trading internationally due to being too much reliant on a piece of paper which might get lost or missing or altered in one of the phases of the transaction or which might be simply inaccurate.
The COVID-19 situation has added another complexity to this extensively paper-reliant traditional export-import practice which was already far from being suitable to accommodate the requirements of today’s international trade landscape. Export-import transactions have been severely disrupted as paper documents cannot be exchanged among or presented to parties timely in a physical format because of the reduced availability of courier and postal services to deliver those documents and/or the non-availability of staff in business branches and offices to receive, check and process those documents due to the COVID-19 measures in place (see for example the situation reported for China and concerns raised in the International Chamber of Commerce (ICC) memo to governments and central banks on essential steps to safeguard trade finance operations). Delays in any one of the phases of transactions may have a range of serious knock-on effects on other phases, including precluding the payment of the price for the goods to the exporting seller under the letter of credit or preventing the importing buyer from collecting the goods upon their arrival. It may raise the possibility of a party exercising the right to terminate the underlying sale of goods contract for breach depending on the circumstances of the case. From a legal point of view, the concepts of force majeure or hardship might apply and offer legal remedies accordingly. In rarer cases, the unpredictable doctrine of frustration might be an issue. However, these legal concepts merely deal with the effects of a continuous problem of heavy-reliance on physically delivered-paper documents in international trade rather than solving the essence of the problem by supporting a fast transition to paperless trade by bringing multiple parties to transactions together on one platform to enable them to create and exchange trade documents via the platform in a digital or electronic format.
Electronic Solutions to Paper-based Export-Import Practice and Future of Digitalisation
Since the late 1990s there have been attempts from business to switch from paper to electronic format for international trade paperwork, some being successful such as the Bill Of Lading Electronic Registry Organization (Bolero), e-title™ and essDOCS platforms. There have also been some attempts, though limited, from international organisations to create a legal framework that might help facilitate such a change, like the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (2017) which has been adopted only by Bahrain thus far. Following the introduction of blockchain by cryptocurrencies, a type of distributed ledger technology (DLT), these attempts towards a paperless trade have gained a considerable pace through the development of blockchain-based solutions, like edoxOnline, TradeLens, ICC TradeFlow, Contour (formerly known as Voltron), and we.trade, aiming to achieve a more efficient and cost-effective way to trade internationally. The potential that DLT has for international trade has also been reflected in the WTO Report 2018 examining how digital technologies are transforming global commerce and in a detailed and insightful publication on the question of ‘Can Blockchain revolutionize international trade?’ published by the WTO. However, this potential has not been utilised as much as desired due to various challenges associated with the use of DLT, one of the most problematic ones being the lack of legal framework in many jurisdictions to support it, which is leaving its users with a huge risk that transactions and communication processed via digital platforms may not be deemed legally valid.
In the long-run a transition to paperless trade using digital technologies, particularly DLT, is inevitable for export-import transactions. A centuries old paper-based trade practice cannot accommodate efficient international trading in the 21st century. Technology is advanced enough to facilitate the transition, but the law is not. In response to COVID-19, the ICC has recently called on all governments in its memo to immediately remove any legal requirements for trade documentation (e.g. bills of lading, bills of exchange, promissory notes, commercial invoices) to be presented in a paper format as a temporary measure, and encouraged them to rapidly adopt legal frameworks to clarify the functional and legal equivalence of electronic and paper-based documents and to consider the adoption the UNCITRAL Model Law on Electronic Transferrable Records as a subsequent step, with a view to enabling an immediate transition to paperless trading to fully mitigate the potential implications of COVID-19 related restrictions on trade finance. Time will tell what the position of governments on this issue will be. However, amid uncertainties around the COVID-19 situation, it seems that there is one thing certain that COVID-19 disruptions to international trade will (eventually) speed up the overdue transition to paperless trade to better safeguard and maintain the global trade flow of information relating to the trade in goods.
