With all the talk of supply chain dependency on China needing to “decouple” because of supply issues being exposed by the Covid-19 pandemic, very little attention has been given to a more important global trade mega-trend. This mega-trend is the growing influence of China’s Digital Silk Road (DSR). This is an important trend to understand as the intent of the DSR is to over-lay the Belt & Road Initiative (BRI) by creating a single digital platform that seamlessly integrates all trade along the BRI.
At first glance, the DSR looks relatively benign as all global supply chain and logistics providers are working towards this seamless digital integration goal. There are significant and obvious benefits to this level of digital integration, particularly seamless data and information transfer between trading entities that would speed up trade across regional borders. Access to a central data base reduces time and backlog constraints commonly found in the current manually-driven documentation exchange such as Bill of Lading, Letters of Credit, and custom clearance.
Initiatives in Europe, such as those found in the Port of Rotterdam network, have made significant advances towards creating smart digital ecosystems beyond the current focus within the maritime sector on smart ports and shipping. The systems are building a level of integration into smart city and smart supply chain networks such that there will be seamless live data exchanges along the whole supply chain improving equipment utilisation and enhancing efficiency in transportation of goods to and from markets.
This “trade nirvana” still has a long way to go. Most countries are still demanding original certificates of origin being couriered to them when they are a printed document from the local Chamber. Bio Security Phyto’s are also original with shipments around the world being held at ports due to a “lost document” or a “delayed satchel” or even the local clerk forgetting to send it. This whole government-to-government acceptance of digital documents is direly needed. Unfortunately, current cyber security concerns are becoming an increasing stumbling block in developing appropriate API’s that would allow this seamless and protected data interchange.
Within the loosely aligned Western approach to digitization of trade and supply chain integration, this has been made more problematic with the proliferation of independent data silos in an open digital network. It is anticipated with the adoption of common data / digital standards, that the current move from EDI data exchange to API exchanges will address cyber security concerns by incorporating effective cyber security protocols trusted by all parties and progress movement towards a seamless “trade nirvana”.
When analysing the interplay between China’s BRI and DSR, it is apparent that there has been substantial progress towards this “nirvana” within the BRI trade corridors. This will ultimately change the way trade is conducted with China. Progress has been made as the DSR platform is charged with co-ordinating and facilitating digital integration of all providers that conduct trade along the BRI regional ecosystem. In simple terms, it takes the discussion away from the idea of smart ports and/or cities and looks instead to creating a digital regional trade ecosystem, with ambitions to emerge as the dominant global trade ecosystem.
One of the key differences between China’s DSR and that contemplated in the West is that the DSR is a closed software platform constructed along a single digital spine and skeleton, essentially owned and controlled by the State. This would have key data centrally stored, disseminated, and controlled by a State instrument in Beijing rather than in neutrally accessible data warehouses or cloud-based data storage.
China has been able to get this significant head-start with this closed digital trade ecosystem, not because of a centrally controlled development program, but because their domestic market is the most digitally connected of all global populations. It is this large digitally connected domestic market that has allowed scalability in the roll out of software and IT infrastructure. This scalability has made it more cost effective for BRI-participating countries to buy into the network rather than develop their own. In essence, it allows developing countries to leapfrog the digital development cycle.
This development has significant consequences for global trade, particularly for logistics and supply chain providers. It is going to disrupt the current digital developments being undertaken by the maritime sector, particularly the current trend that has created data silos within a port ecosystem. This is especially important when one considers that the merge points of the Silk Road Economic Belt and the 21st Century Maritime Silk Road are largely ports, both maritime and inland dry ports.
The core component of the strategy for the merge points is not just the development of a physical infrastructure, it also includes a digital framework. This IT infrastructure will allow China to digitally connect with countries with whom they trade, but with a requirement that this should be in a seamless and integrated exchange of data, information, and communications.
The centrality of cyber space and digitalisation to the country’s overall development goals was highlighted by Xi Jinping’s announcement at the first BRI summit in 2017, where he stated that Big Data would be integrated into the BRI through the development of a “21st century Digital Silk Road”.
The DSR not only brings advanced IT infrastructure to BRI countries, such as broadband, e-commerce hubs and smart cities, but also highlights the need for a communication interface between maritime and land-based digital platforms. The DSR will provide the mechanism at these BRI merge points for seamless data transfer through a digitally integrated logistics platform.
Strategically, China’s external geopolitical arrangements will re-align as it continues its own growth, but in a manner that will increasingly force (some might say coerce) participants into complying with China’s IT standards. The DSR is increasingly playing a central role in the development of a comprehensive package that includes policy dialogue, financial support, unimpeded trade, and people-to-people exchange. This “team China” approach consists in having all end user devices/services interface along a central/common digital infrastructure corridor that includes cloud-based platforms.
Examples of how this is emerging within the DSR is the development of the Digital Yuan. Whilst current trade is predominantly tied to the US dollar, recent trends have seen the emergence of digital currencies, such as Bitcoin, to facilitate the financial transactions across global trade boundaries by enabling financial instruments to be digitally held in an accessible central location.
This Western de-centralised payment system and approach is challenged by China through their Digital Currency Economic Plan. It is no coincidence that China is curtailing the use and growth of digital currencies within China as it builds its own digital trade platform. The objective is to remove all foreign financial systems from being linked to the US dollar and introduce a new global financial system linked to the Chinese Yuan. More importantly, the Digital Yuan will be the currency of choice along the BRI as it would be seamlessly integrated into the entire supply chain and associated trade processes, such as the blockchain single distributed ledger platform.
Those in supply chain sourcing, not just with China, but with other nations along the BRI, need to understand and appreciate that the Digital Yuan is not merely a currency but is a network that will need to be managed. There is increasing evidence that this new digital currency is not solely geared to facilitate transactions within China’s domestic e-commerce market. There has been active engagement between the banking authority in China and international partners in foreign exchange markets using blockchain’s distributed ledger technology, such as the central bank of the United Arab Emirates and the Bank of Thailand.
Over and above this Digital Yuan initiative, China is also currently addressing their need for ongoing technological advancement with regards to micro-processors and semiconductors. At present, the weakness or threat to the DSR’s ambitions is China’s reliance on Taiwan and the West for semiconductor and integrated circuitry (IC) development.
This has given the West a strategic leverage point that could be used to undermine the DSR ambitions, even to the extent as acting as a safety valve to curtail China’s economic incursion into global markets. However, the rate of technological development has slowed considerably over the last two years, with integrated circuit development slowing from a 2-year cycle to a 5-year cycle. This has given China an opportunity to change the narrative and work towards consolidating their closed digitally integrated platform through a focus microchip agility rather than being held hostage to technology development and improvement. This new focus takes the current ICT / digital strategic advantage away from the West.
These two examples reinforce the DSR’s central coordination role and addresses the rising geopolitical and economic tensions with the West.
One should remember that the BRI is a strategic pairing of ports and rail, with the DSR shaping and directing the way seamless, integrated trade takes place along the BRI. This is evident when looking at the impact that Covid-19 has had not just on shipping but also on container availability. Within the BRI network, many have looked to rail to improve product delivery times, but this still has serious limitations. For example, in China-EU trade, the current rail market only accounts for approximately 4% of total trade, while there is an average of only 12 trains per day through the 2 borders at China/Kazakhstan and Belarus/Poland. Whilst digital interventions, such as electronic Bill of Lading and Custom Clearance, have reduced time bottlenecks at these crossings, the disorganized maritime sector has created the situation that empty containers and ships are not in the places where the market needs them. The consequences are prices of sea containers that have escalated by 2 to 4 times and a shortage of empty containers and places on boats.
This disruption caused by Covid-19 has led to increased planning requirements for maritime logistics, particularly with regards access to freight trains that would enable short sea routes to be used and developed. The DSR will provide the means to integrate freight movements using ocean carriage by improving transparency and visibility in cargo movement. The net result will be improved operating efficiency and asset utilisation through just-in-time planning and connectivity between transport options.
However, this puts additional pressure on current supply chains that operate outside of the BRI and DSR. How do they design, develop, and implement a sustainable digital system that not only increases port/shipping operational efficiency, but also seamlessly integrates country-to-country trade whilst being outside the Chinese system?
Whilst logistics and supply chain management has shifted towards the digital “fourth revolution” by enabling greater cargo visibility and transparency, it comes up short when considering last- and first-mile logistics through multi-modal transport systems. This is particularly relevant when many of the current last- / first-mile considerations include China.
Exacerbating the issue is China moving to a “gateway port” structure, moving its maritime digital systems away from dealing with trans-shipment ports to focus more on gateway ports connecting with inland “hub and spokes”. These ports connect with multi-modal transport options, transforming smart port development beyond the traditional port to more of a port delivery optimisation approach.
With e-commerce shifting from FCL (Full Container Load) to LCL (Less than Container Load) freight movements, a greater level of cargo visibility, traceability, and monitoring is required. In the main, the DSR addresses the data and information gaps between participants along the supply chain, making it increasingly difficult for those trading nations outside of the BRI to opt out of the DSR.
There has been a slow realisation of this dilemma as the increasing geo-political tension between China and much of Europe and the West reaches a critical inflection point. In particular, the debate around digital trade platforms is crystalising around cybersecurity and risks associated with digital integration. Initially focussed on data standards and open vs closed systems, discussion has moved to how nations will trade with each other in an environment in which two digital trading ecosystems are emerging and competing.
This raises strategic questions, the answers to which will have cost implications for those wanting to be truly global businesses. The questions awaiting answers include: is there a choice to be made between trading within a single digital platform or a multitude of platforms, or is the adoption of both required to do business with China? Is it possible to have Application Programming Interface (API) and Electronic Data Interchange (EDI) standards that would allow differing operating data systems to securely communicate with each other? Can an open trading system based in the West achieve seamless interoperability with the closed DSR network without compromising cyber security? What are the cost implications for doing business with two digital trading ecosystems that have limited capacity in communicating with each other?
Creating digital twins may be an answer to these questions, but this comes at high financial, operational and efficiency costs.
Over the short to medium term, it is becoming increasingly evident that to trade with China will require incorporation into their DSR. This could very well turn China into a regional trade hegemon, particularly with regards to the ASEAN area, in which the US dollar financial system does not feature anymore.
Picture credits: Eurasian Research Institute