With all the talk of supply chain dependency on China needing to be “decoupled” because of the COVID-19 pandemic, very little attention has been given to a more important global trade mega-trend. This mega-trend is, of course, China’s Digital Silk Road (DSR). The intent of the DSR is to cover participants in the Belt and Road Initiative (BRI) by creating a single digital platform that seamlessly integrates all trade in the BRI.
At first glance, this looks relatively benign, as all supply chain and logistics providers are working towards this goal. There are significant and obvious benefits to this level of integration, particularly the seamless integration of data transfer. This would speed up trade across regional borders, as a central database reduces reliance on the current manually driven documentation, such as bills of lading, letters of credit, and customs clearance documentation.
Initiatives in Europe, such as found in the Port of Rotterdam network, have made significant advances towards creating smart digital ecosystems beyond the current focus on smart ports and shipping within the maritime sector. 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 the utilisation of equipment and enhancing efficiency in the transportation of goods to and from markets.
This trade nirvana still has a long way to go. Most countries are still demanding that original certificates of origin be couriered to them when these consist of a printed document from the local Chamber. Biosecurity phytos 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 lack of a whole government-to-government acceptance of a scanned document needs to be addressed, but current cybersecurity concerns are becoming an increasing stumbling block in developing appropriate APIs that would allow seamless and protected data interchange.
Within the loosely defined Western digital approach, 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 cybersecurity concerns by incorporating effective cybersecurity protocols trusted by all parties.
When analysing the geopolitically charged China BRI-based trading mechanism, it is apparent that the DSR platform is charged with coordinating and facilitating digital integration of all service 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 towards a digital regional trade ecosystem which sits within a global trade ecosystem.
One of the key differences between China’s DSR and 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 a significant head-start with creating a closed digital trade ecosystem, not because of a centrally controlled development programme, but because their domestic market is the most digitally connected of all populations and this large digitally connected domestic market has allowed scalability in software and IT infrastructure development. This scalability makes it cost-effective for BRI-participating countries to buy into the network.
This development has significant consequences for global trade, particularly logistics and supply chain providers. It will disrupt the current digital developments being undertaken by the maritime sector, particularly the current trend that has created data silos within the 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 result in seamless and integrated trade through improved information and communications.
The centrality of cyberspace 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 will not only bring advanced IT infrastructure to BRI countries, such as broadband, e-commerce hubs and smart cities, but will also highlight the need for a communication interface to be established between maritime and land-based digital platforms along the BRI to create digital integration.
Strategically, China’s external geopolitical arrangements will realign as it continues its own growth, but in a manner that enforces participants’ compliance 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 is to have all end-user devices/services interfacing along a central/common digital infrastructure corridor that includes cloud-based platforms.
One of the many initiatives within the DSR that merit close monitoring is the emergence 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 of global trade by enabling financial instruments to be digitally held in an accessible central location.
This Western approach has been challenged by China through their Digital Currency Economic Plan. By banning the use and growth of digital currencies within China and its digital trade platform, there is a move to fundamentally change the US-dollar-based global economic system. The net result is to introduce a new global financial system based on the Chinese yuan. More importantly, the digital yuan / renminbi will be the currency of choice along the BRI, as it would be more easily integrated with other processes, such as blockchain, for payment, customs clearance and good ownership transfer. 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 a network that will have to be managed. There is increasing evidence that this “digital currency” is not solely geared to China’s domestic market, particularly as foreign exchange using blockchain’s distributed-ledger technology has been discussed with the likes of the Central Bank of the UAE and the Bank of Thailand.
Further to the digital yuan, we see that China is currently rewriting its need for technological advancement with semi-processors and conductors. At present, a potential weakness in the DSR is China’s reliance on Taiwan and the West for semiconductor and integrated circuitry (IC) development. These technological developments brought about significant cost reductions, as each new generation of microchip integrated a larger number of transistors into the chip, improving bandwidth, latency and data volume. This gave the West a strategic advantage in that China was playing catch-up. However, this rate of technological development has slowed considerably, with analysts suggesting that new IC development would move from a two-year cycle to a five-year cycle. This gives China an opportunity to change the focus to chip agility from that of technology. This new focus takes the current ICT / digital strategic advantage away from the West.
The two examples indicate that the DSR, as a central coordination mechanism, is addressing the rising geopolitical tensions with the West by directing and giving substance to the commercial intent of cross-border projects and trade.
Remember, the BRI is a strategic pairing of ports with rail, and the technology and digital developments within the DSR will shape and direct the way there is seamless trade integration along the BRI. Take, for example, China–EU trade. The current rail market is a niche market and accounts for approximately four percent of current trade, with an average of eight to 14 trains per day through the two borders for transloading at China/Kazakhstan and Belarus/Poland. This does not allow more than 12 trains per day. Whilst digital interventions, such as electronic bill of lading and customs clearance, have reduced bottlenecks at these crossings, the disorganised maritime sector has created the situation that empty containers and ships are not in the places where the market needs them. The consequences have seen prices of sea containers escalating by a factor of two to four, and a shortage of empty containers and places on ships.
The disruption caused by COVID-19 led to increased planning requirements for maritime logistics, particularly with regard to access to freight trains that would enable short sea routes. There is a need for processes to integrate freight movements using ocean carriage. Digitalisation is seen as an answer to the challenges associated with the growing requirements for transparency and visibility in cargo movement.
However, the development of the DSR puts additional pressure on the supply chain to design, develop and implement a sustainable digital system that not only increases port/shipping operational efficiency, but also seamlessly integrates into country-to-country trade. 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.
With China moving increasingly to a gateway port structure, the DSR has moved its maritime digital systems away from dealing with trans-shipment ports to focus more on gateway ports. These strategic merge points connect with multi-modal transport options that move smart port development beyond the traditional port to more of a port delivery optimisation approach.
The size of e-commerce within China has seen a shift from FCL (full container load) to LCL (less than container load) freight movements, which requires a greater level of cargo visibility, traceability and monitoring than before. In the main, the DSR is addressing the data and information gaps between participants along the supply and logistics chain.
With the increasing geopolitical tension between China and much of Europe and the West, a crucial trade infection point has been arrived at. The digital trade platforms are crystalising around cybersecurity and the concomitant issue of achieving digital integration. Initially focused on data standards and open vs closed systems, it has moved to how we trade in an environment in which two digital trading ecosystems are emerging.
There are strategic questions that have a cost implication for those wanting to be truly global businesses. Will there be a choice between trading within a single digital platform, or a multitude of platforms that have application programming interface (API) and electronic data interchange (EDI) standards that would allow different operating data systems to communicate with each other? Can an open trading system based in the West achieve seamless interoperability with the closed DSR network without compromising cybersecurity? 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 a cost. In the short to medium term, it is becoming increasingly evident that trade with China will require incorporation into the DSR, making China the regional hegemon of the ASEAN region.
About the Author
Based in Perth, Western Australia, Andre Wheeler runs the Asia Pacific Connex consultancy. With more than 20 years’ experience in international business, he maintains a diverse network of personal contacts throughout the USA, Asia, SE Asia , Africa and the United Kingdom.
Holding a B.Science (Hons) degree and an MBA, he is currently researching the Impact of the China’s One Belt One and Digital Silk Road initiative on infrastructure, logistics and trade in the ASEAN Region. This is the topic of his next book.
Author of the book : “China’s Belt Road Initiative: The Challenge For The Middle Kingdom Through A New Logistics Paradigm”.
The Digital Transformation of Logistics: Demystifying Impacts of the Fourth Industrial Revolution.
He has also published and presented a number of papers concerning China’s Belt Road Initiative and the changing Eurasian trade paradigm.
Recognised for his contribution and participation in the development of the Western Australian government’s Asian Engagement Strategy 2019 -2030.
Andre has expertise in business development, joint venture negotiations, supply chain management, logistics, marketing and strategic planning. He can be contacted at: [email protected]