Infrastructure 3.0:
how new technologies will facilitate intra-Asian trade and integrationThe EIU

Imagine ships that pilot themselves, ports manned by robots and contracts that execute automatically when goods are delivered. Just as technology has enabled a transformation in shopping and delivery for consumers in recent years, new innovations in Asian infrastructure are likely to improve complicated international supply chains by cutting paperwork, reducing cost, saving time and enhancing transparency and trust. These technological improvements, combined with upgrades in physical infrastructure, have the potential to accelerate trade integration within Asia. However, significant variation in the cost and availability of underlying internet infrastructure, a key enabler of all new trade technologies, could mean countries that are not upgrading quickly enough could miss out on some of the benefits these trends will bring with potential consequences for broader economic development.

Intelligence, upgraded

There are three key areas in which technology has the potential to improve “business as usual” in supply chains: information, trust and transport. Many of the enabling technologies, such as distributed ledger technology (DLT) and artificial intelligence (AI), overlap across these three areas, bringing challenges as well as opportunities. The main questions revolve not around whether these innovations will find their way into regional supply chains, but the speed and consistency of their adoption.

Online supply chain information has been available, to some extent, for a generation. However, the rise of the Internet of Things (IoT) and exponentially higher storage and computing power mean the quantity of data is now so large that big-data analytical tools, and, increasingly, AI, are needed to make sense of it. Two-thirds of supply chain leaders already expect big-data analytics to be of critical importance by 2020.

Technological upgrades to infrastructure based on blockchain, will also make inroads. The advantages of DLT (of which blockchains and cryptocurrencies are examples) include information flows that are collaborative, rather than the one-way document exchanges of the current electronic data interchanges (EDIs), and that are more transparent and auditable, reducing fraud. In addition, DLT creates the possibility of using smart contracts that trigger events such as ownership transfer and payment, speeding up processes and cutting out intermediaries. Receipt of a delivery can trigger payment through a range of methods including letter of credits, the release of fiat currency funds in an escrow account or even direct payment using cryptocurrency tokens embedded in the contracts. Smart contracts can also mediate payments and refunds of sales taxes and customs duties.

The integration of DLT builds on longstanding efforts to digitize paper-heavy trade processes, with EDI standards dating back 30 years, as well as more recent regional efforts such as the 2016 UNESCAP Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Asia-Pacific Model E-Port Network, a 2015 Asia-Pacific Economic Cooperation initiative of 16 ports, which may soon trial blockchain technology for customs clearance in China.

Kasey Kaplan, Asia-Pacific managing director for the Blockchain in Transport Alliance, an industry standards organization, says that DLT will roll out first “in elements of the supply chain that don’t touch government regulation, such as verification and tracking.” The biggest impact may come when DLT reaches customs processes: the World Bank estimates that documentary and border compliance can together take several days on average at both export and import points, a lag that proponents of the technology are hoping to reduce or eliminate. This, however, is “going to take more time,” says Mr. Kaplan, “because policy, producers and technology are all going to need to change.”

The hard infrastructure of ports will need to incorporate automation, robotics and analytics-inspired optimizations to match the ever-rising technological savvy of supply chain players. In May 2017, the Qingdao New Qianwan Automatic Container Terminal became Asia’s first fully automated port, combining automatic quay and stacking cranes with driverless vehicles to move containers between ships and storage, cutting costs by 70 percent and improving efficiency by 30 percent. This level of automation may become the norm at major greenfield ports, such as Singapore’s giant Tuas Port, while existing ports are likely to be gradually retrofitted with partial automation, as is happening in Indonesia’s freight transport program.

Information and communications technology (ICT) ambitions and infrastructure needs

These tools will be used to reduce the cost of moving goods through the supply chain, to anticipate and minimize risks, and to better track shipments that are underway. Yet to realize the promise of these innovations, significant investment will be needed in ICT infrastructure to smooth over the sizable existing variations across the region in ICT adoption. The potential rollout of global low-orbit satellite constellations, such as the Softbank-backed OneWeb and SpaceX’s Starlink, at sea and in rural areas, could help. However, they will probably not go far enough in the near-term to enable the large-scale, high-speed connectivity that businesses require to implement big-data analysis, IoTs, AI or DLT. The Alliance for Affordable Internet (A4AI) identifies several Asian countries that are currently lagging in their infrastructure, including Kazakhstan and Bangladesh, while a number of even less-developed countries are not yet included in their analysis, such as Bhutan and Papua New Guinea, and may lag even further (see Table 9), which draws from related data collected by the International Telecommunications Union.

Table 9: Linked-in or out? Indicators of ICT adoption (per 100 people, select Asian economies), 2017

Source: World Telecommunication/ICT Indicators Database online, International Telecommunications Union. 2018.

Although the private sector typically provides the bulk of ICT investment, it is unlikely to be sufficient. Half of respondents in a survey of development banks agreed that the private sector alone will not extend affordable access to underserved areas. South Asia’s situation looks challenging: Afghanistan, Pakistan and India rank among the countries where A4AI believes private capital will lag the most in helping enable universal access—India alone accounts for 40 percent of the global investment shortfall. By contrast, private provision is likely to be sufficient elsewhere, such as in Myanmar and Philippines. This suggests that more support is needed in some Asian countries, on top of private sector investment, from development banks—around USD6 billion a year over a decade to achieve universal access, according to A4AI estimates.

A separate estimate puts annual Asia-Pacific ICT financing needs in the least-developed countries at about USD8 billion.

There are a number of factors behind this discrepancy, including overall ease of doing business and previous attention given to this sector by development institutions, which can smoothen the path for private investment. For example, McKinsey, a think tank, places India 48th out of 57 economies on dynamism of internet entrepreneurship, indicating an environment that may be discouraging the private sector’s role in enabling more basic levels of access. In a broader sense, governments generally do not put strong emphasis on developing their ICT sector, rather hoping to attract private capital to the cause—this mindset remains prevalent among multilateral development institutions as well, who fear “crowding out” private capital. This approach can work in some cases, but in environments less conducive to private enterprise involvement in the ICT sector, this can leave shortfalls.

These disparate levels of underlying infrastructure will inevitably lead to uneven adoption rates across the region. For example, although DLT-enabled trade is being widely trialed, there are still some countries in Asia that do not even utilize EDI systems yet, and many more that lack an electronic single window for customs clearance (defined as “a system that allows traders to lodge information with a single body to fulfil all import- or export-related regulatory requirements”), including China and India, although systems are under development in both countries (see Table 10).

Table 10: Adoption of EDI or electronic single window for customs clearance, select Asian economies

Source: World Bank. June 2017. Doing Business 2018.Based on World Bank Income Grouping for fiscal year 2019,the economies in low-and middle-income groups are included.

Trading up

Addressing these shortfalls in ICT uptake could serve as an important enabler not only for trade but for overall development, in line with goal nine of the UN’s Sustainable Development Goals, which recognizes the importance of internet access. Randeep Sudan, board adviser at Ecosystm, a technology consultancy, and former global adviser on digital strategy at the World Bank, believes there could be broader implications for countries that do not upgrade. “Developing countries will be required to use these technologies and invest in some of them in a major way going forward,” he says. “They cannot escape using them if they want to remain competitive.”

This is largely because the overall impact of new trade technologies will be to reduce trade friction and encourage more integrated supply chains, thereby boosting volumes. It is difficult to extrapolate the full implications, but there are estimates for some aspects. Bain & Company, a consultancy, forecasts that closing the trade finance gap using blockchain and other technologies could boost global trade by USD1.1 trillion over a decade in real terms, with Asia representing about 40 percent of the current shortfall in trade finance to be filled.In Hong Kong, China; and Indonesia, for example, imports rose by 19 percent and 37 percent, respectively, in the years after introducing an EDI or electronic single window, while exports increased by 16 percent and 18 percent. Bringing down barriers via DLT and other technologies could make it easier for smaller companies, and those in less-well-integrated parts of Asia in particular, to enter supply chains.

Not only could overall trade volumes grow, but routes could reconfigure as improvements in cost and transport time make longer-distance supply chains more viable and AI analytics uncover unanticipated suppliers. New autonomous vehicles and fast unmanned ships could also reconfigure the way logistics firms use road, rail and ocean transport. This, in turn, may result in greater-than-anticipated pressure on certain routes and ports, requiring new investment, while also leaving other assets underutilized. The same AI and big data optimization tools that will help companies in the supply chain should also help governments identify emerging infrastructure bottlenecks that need addressing. ICT upgrades could also help governments’ abilities to collect tax revenue domestically, thereby helping developing economies invest in much needed infrastructure.

Other barriers exist, among them cybersecurity and the risk that competing and incompatible standards could inhibit the widespread usage of innovations like smart contracts. Yet despite these hurdles, DLT and other trade-enabling technologies have the potential to strengthen regional integration and set the tone for an “infrastructure 3.0” revolution in Asia over the coming years. This will, however, require policy efforts to sustain investment in hard infrastructure such as ports and ICT and software like DLT, as well as to address issues around standards and security.