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Asian hub

Integration, interoperability, inclusion: igniting the e-commerce boom in Asia

Published 2 October 2023 in Asian hub • 8 min read

Asian governments should converge trade rules and improve the ease of doing digital business across borders so more enterprises can benefit from the ecommerce boom, says Kati Suominen. 

 Asia is in the midst of a historic e-commerce boom. Online transactions of goods and services grew rapidly during COVID-19 lockdowns and continue to grow. Record numbers of Asian businesses are now selling online, reaching customers across borders. Perhaps unsurprisingly, China remains the region’s largest business-to-consumer e-commerce market, making up about a third of global online retail sales in goods. But Southeast Asian e-commerce has been growing at a blistering 24% year on year in 2020-23 and, in 2022, the Philippines, Indonesia, and Vietnam ranked among the fastest-growing e-commerce markets in the world.  

Despite these impressive growth rates, Asian governments still have much work ahead of them to translate the region’s swift adoption of e-commerce into inclusive digital trade opportunities for more local firms, especially small businesses. This will require a deeper integration of markets, the implementation of international commitments on trade and data, and the improved cross-border interoperability of digital payments and platforms.  

Integration through trade agreements 

Governments in the region have long sought to facilitate regional e-commerce through broad-brush arrangements such as the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN), alongside more advanced free trade agreements that unite regional economies with international partners to promote digital trade – for example, the US-Japan Digital Trade Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The adoption of the policies and practices in these agreements are conducive to digital trade infrastructural needs, from e-payment laws and export promotion programs to financing for online small and medium-sized enterprises. They have, therefore, all bolstered the e-commerce surge. 

Yet despite the many digital trade agreements in force, Asian businesses continue to struggle with diverse national digital trade policy frameworks. According to Nextrade Group research for the US Agency for International Development, (USAID), more than one-third of Southeast Asian sellers say they are struggling with the region’s fragmented digital regulatory landscape. The complexity of overlapping or contradictory national data privacy laws, consumer protection rules, and other regulations can be daunting enough in one market, let alone across multiple markets. Firms also worry about potential data localization – where local authorities require data to be stored in the country – undermining cross-border e-commerce. This practice hampers the hundreds of thousands of small online seller-exporters that use data about their foreign customers and operations to improve their products and services and want to leverage global cloud providers to store and process their data where most affordable and convenient. 

These obstacles and concerns point to the clear need for an alignment of the regional policy agenda to promote digital trade. In short, there needs to be further interoperability across national digital regulations in particular to facilitate greater compliance among smaller firms. More regional signatories to the CPTPP and other trade agreements with binding e-commerce rules, for example, could help to foster this convergence and lock each participating economy into standardized rules for digital trade. The intention of ASEAN economies to negotiate a Digital Economy Framework Agreement (DEFA) is a potential positive step towards more robust and binding rules that promote e-commerce, promote digital interoperability, and create a more level playing field. 

data
“Firms also worry about potential data localization – where local authorities require data to be stored in the country – undermining cross-border e-commerce.”

 

Easing border and payment blockages 

In many countries, customs and other border agencies continue to be a vexing bottleneck to trade. Today, with millions of parcels and packages ordered online, countries’ customs are struggling to meet the objectives of securing and facilitating trade while collecting revenue. Customs authorities also have an increasing policy obligation to become “smarter”, or more digitized. Many customs around the world, led by Asian economies including South Korea, Singapore, Japan, and China, have turned to blockchain and artificial intelligence to improve the reliability of data and documentation. These smart customs solutions need to be adopted and financed across the region and paired with paperless trade policies. 

Asia’s prolific innovation in payment systems is yet to be matched by payment system interoperability: different national payment systems often still can’t understand or work with each other. About one-third of firms in the region report losing online export sales because they are unable to accept payments from foreign customers, according to Nextrade research.4 High cross-border logistics costs, the increasing complexity and geoeconomic fragmentation of business-to-business logistics, and the persistence of requirements for paper-based trade and payment documentation continue to present significant challenges to the e-commerce boom. 

Efforts to promote the cross-border interoperability of payments and logistics, therefore, must be extended across the region. Encouragingly, robust bilateral and multiparty real-time payment interoperability pilot projects already exist. These initiatives and the ongoing adoption of ISO 20022, a global standard for data interchange between financial institutions, aim to streamline communications between national payment systems. Project Dunbar, a platform that collates knowledge about digital currencies from central banks, commercial banks, and technology partners, could also accelerate cheaper and more efficient cross-border payments and pave the way for similar, beneficial initiatives. 

The digitization of the proliferating free trade zones (FTZs) can also help. China has been one of the pioneers of FTZs to drive value-added services and create clusters of specialized e-commerce suppliers. The Dalian FTZ, for example, created an automotive sector, attracting Chinese and foreign heavyweights such as Chery, Volkswagen, and Dongfeng-Nissan as investors, who at the same time helped to test and streamline customs, payments, and other critical e-commerce infrastructure. The Dalian FTZ is now developing the Dalian Digital Valley Park, an example of logistics clusters that provide working capital to attract SME e-commerce retailers and help them weather supply chain crunches. 

In trade logistics, blockchain and other technologies can be put to use at a greater scale to promote traceability and interoperability in logistics value chains and lower the cost and duration of shipments and green trade transactions. In addition, previous market access barriers such as tariffs need to be addressed for trade to flow. 

Let the data flow 

Asian firms engaging in digital trade need more fluid access to data on their operations and customers, and the ability to store, process, and analyze that data cost-effectively. However, there is much work to be done here. The US Trade Representative’s 2022 and 2023 reports on foreign trade barriers highlight obstacles to data transfers in several Asian countries such as Indonesia, China, and Vietnam, the latter of which is a signatory to the CPTPP that bans data localization. 

online export
“Online seller-exporters are more likely than offline sellers to export to multiple ASEAN economies and markets outside of the region, according to our research.”

For example, China’s Data Security Law, Personal Information Protection Law, Cybersecurity Law, and National Security Law restrict cross-border data transfers that would be considered routine – and fundamental to business activity – in many other jurisdictions. This restrictive framework imposes local data storage and processing requirements on companies that collect “important data,” which Western and other officials have described as an overly broad and vaguely defined term.  

Businesses worry that such restrictions could impact not just companies in “critical information infrastructure sectors,” but also those that operate in other sectors that inadvertently run afoul of the uncertain geopolitics. Given the wide range of business activities that are dependent on cross-border data transfers, these developments have generated serious concerns among foreign governments and services suppliers. 

ASEAN’s Model Contractual Clauses for Cross Border Data Flows is a step in the right direction to promote orderly data transfers. Asian economies should also consider joining the APEC Cross-Border Privacy Rules System (CBPR), and the newer, expanded Global CBPR, if they aren’t already members, which strike a more careful balance between the objectives of data accessibility with data security and privacy. The Data Free Flow with Trust (DFFT) initiative, championed by Japan in its chairmanship of the G7 this year, looks like an important addition too. Policy efforts to support the broad-based use of privacy-enhancing technologies such as encryption and confidential computing technologies would further complement existing policies and even possibly pre-empt the development of draconian national-level privacy and transfer laws. 

Primed for further e-growth 

Businesses across Asia are increasingly realizing that the opportunities of the future lie inextricably with e-commerce. In ASEAN countries, two-thirds of micro and small firms use the online shopping platform Shopee, our research shows. About half use rival app Lazada, and more than a quarter of them use Amazon. Mid-sized and larger firms widely use global marketplaces such as Amazon and Alibaba, as well as direct-to-consumer platforms such as Shopify.  

Crucially, more than 60% of micro-enterprises that sell on global online marketplaces now export, with half of them getting into the export business because of e-commerce. Online seller-exporters are more likely than offline sellers to export to multiple ASEAN economies and markets outside of the region, according to our research.  

This surge in business-to-consumer e-commerce is paralleled by the strong growth of cross-border business-to-business digital trade, as sellers seek to create “omnichannel” experiences for purchasing managers. Digitally deliverable B2B services exports have risen by around 16% per annum over the last 15 years in the ASEAN region alone, far exceeding the five percent annual growth rate seen globally, according to Nextrade analysis based on WTO data. 5 

The deeper integration of markets, the implementation of digital trade commitments, and the improved interoperability of payments and logistics services will help Asian online businesses dramatically expand their sales in the coming years. By integrating small firms, remote sellers, and a growing army of tech creatives into these new markets, policymakers can enable more inclusive trade – and produce ever greater gains from the sweep of digital commerce.

Authors

Kati Suominen

Kati Suominen

Founder and CEO of Nextrade Group

Kati Suominen is a Research Fellow at the Hinrich Foundation. She is the Founder and CEO of Nextrade Group and serves as an adjunct fellow at the Center for Strategic and International Studies (CSIS) and Adjunct Professor at UCLA Anderson School of Management. She is also the creator and convener of the new Africa Tech for Trade Alliance with the US government’s Prosper Africa initiative and 20 leading technology companies to promote Africa’s trade through technology. 

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