The U.K.’s Electronic Trade Documents Act of 2023 came into effect on Sep. 20–and it will send shock waves through the international trade system. At first glance, the bill looks perfunctory: It makes it legal to conduct trade using digital documents in place of physical paper. However, it’s significant, making the U.K. the first major economy to tackle a hurdle that has long made international trade a needless slog ahead of the U.S. where, in the absence of federal legislation, the choice to make trade paperless is currently left up to individual states.
Governments and businesses have long used electronic documents–but international trade has been a holdout. Trade laws require one to serve as a “holder” or have possession of essential forms like invoices, bank drafts, and bills of lading. Many of those laws date back centuries, and they haven’t recognized the holding or possessing of digital documents. With no other choice, international trade has run on paper–heaps and heaps of it. When exporting a frying pan takes a four-page customs form, it’s no shock the International Chamber of Commerce estimates that 4 billion documents move through the global trade system on any given day.
Thus, it’s hard to overstate the potential benefits of trade going digital–and experts have extolled the new legislation. The U.K.-based Centre for Digital Trade and Innovation, a project of the ICC, has projected a 75% reduction in transaction costs for U.K. businesses, with deals processing in a quarter of the time. And because English law is used in international trade more than any other law, the new bill adds fuel to the global push toward paperless trade.
Realistically though, without additional steps, the U.K.’s legislative effort won’t eliminate the additional paperwork that Brexit has created for British exporters. Additionally, most businesses around the world are either unprepared or poorly positioned to benefit from this new digital trade paradigm.
Consider what should be the simple process of identifying buyers and sellers. In order to secure the letters of credit that finance 80 to 90% of international trade, banks have to verify the identities of businesses involved in a transaction. The Legal Entity Identifier system is a global standard set up in 2014 to simplify the process. It gives businesses their own unique alphanumeric code, enabling banks to automatically verify buyers and sellers.
The problem is only 4% of U.K. businesses use LEI. In the U.S., only 277,391 businesses are registered, out of millions. So while the new law permits identification forms to exist and be shared digitally, until more businesses opt into the system, most trade will still require bankers to manually search databases for businesses by name–a tedious, time-consuming task that undercuts the efficiency and savings that digitalization can provide.
The law’s cost savings also must be harnessed intentionally before trade even becomes an option for many businesses. Small and medium enterprises are the economy’s backbone. However, the regime of trade finance favors bigger companies. One of the key findings of the 2023 global trade finance survey, published this month by the Asian Development Bank, is that directing a greater share of trade finance to SMEs is crucial for building a more resilient global economy. Trade finance institutions should use some of the savings gained from digitalization to develop scalable products and services that better cater to SMEs. This would fuel more trade while aiding post-pandemic recovery.
But to truly digitalize the trade system, its connectivity problem must be solved. A 2019 analysis by the OECD found that poor connectivity was the greatest barrier to countries engaging in digitally enabled trade. Beyond finance, every trade transaction involves a crowd of actors including transport, insurance, legal, and logistics. In recent years, it’s taken two to three months to produce and distribute among these multiple actors the roughly 27 documents required for a typical transaction. Improving connectivity can streamline that process and, crucially, unlock the potential of generative AI applications across these industries. As platforms become connected, generative AI can gather relevant information from across the system to digitally produce and distribute the documentation that facilitates trade and drives innovation.
It’s rare that a single law transforms a system as sweeping and vital as international trade. Legal frameworks that enable trade digitalization hold the promise to do just that. With some additional work, governments, banks, and technology companies can help businesses thrive and usher in a new era of global commerce.
Geraldine McBride is the CEO and co-founder of MyWave, a generative AI-powered business software company, and former President of SAP North America.
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