Digitalization is disrupting global trade – here’s how AI can help customs and businesses to respond

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Sebastian Klotz, Manager, Tax and Legal Technology Team, PwC Switzerland, Steve Barr, Global Director, Industry Digital Strategy, Microsoft, Jimena Sotelo, Lead, TradeTech, World Economic Forum

• nternational trade is growing, but flows are also changing and regulation is becoming more complex.
• Technology for trade – TradeTech – can help businesses and customs authorities to cope, but this digital transformation presents both challenges and opportunities. For example, increased transparency may raise data protection concerns, but could also improve supply chain visibility.
• A recent publication by PwC Switzerland and Microsoft outlines how businesses must upskill their customs and supply chain employees, integrate these functions with other business processes and continue to upgrade their technology to benefit from the digitalization of customs authorities.

Global trade has evolved remarkably in recent decades. Not only has the volume of cross-border trade grown significantly, the nature of it has also changed considerably as e-commerce has developed.

For customs authorities around the world, these developments pose new challenges such as how to cope with a larger number of relatively small and low-value shipments arriving at borders at an increasing rate. Some countries have increased their de minimis, which is the customs value threshold below which imported goods are exempt from customs duties and/or taxes – but not all.

Technology can help both businesses and customs authorities adjust to these new patterns of trade, driving efficiency gains in supply chains and logistics, as well as in customs duties and tax collection. Using TradeTech – technology for trade – in this way will cut red tape and processing times at borders.

The growing volume of international trade, 1950 – 2022Image: World Trade Organisation

Increased pressure for digitalization in trade

In the last 10 years alone, the volume of cross-border trade increased by around 25%. And although there was a downturn during the COVID pandemic, world trade is picking up again and is expected to more than double in 2024. Of course, annual growth rates also vary both over time and across countries. Geopolitical events can change trade patterns, meaning customs authorities may face sudden but temporary surges in trade flows that they have to process.

The world has also seen the rise of online shopping over the past decade. Retail e-commerce sales almost quadrupled between 2014 and 2021 and are predicted to grow by another 56% by 2026. This has changed the size as well as the frequency of shipments, as a larger number of smaller shipments now go through customs more often. Between 2013 and 2021, the number of shipments worldwide more than quadrupled and is expected to grow by another roughly 60% by 2027.

And as international trade continues to change, its regulation is becoming more complex. As countries enter into new trade agreements to negotiate preferential market access for goods produced within their territories, the landscape gets more complicated.

The rules of origin – used to decide if a region-specific good (champagne, for example) should be considered “original” and so eligible for 0% customs duty – vary between agreements. A country can also have different trade agreements with several parties. As these rules overlap, the resulting “spaghetti bowl” creates confusion for businesses.

Trade regulation is also becoming more interconnected with domestic policies. New sustainability measures such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), for example, target production processes that take place within the export market but are enforced at the border before entering the import market.

So, international trade has increased, its patterns have changed and its regulation has become more complex. For customs authorities, digitalization is the only way forward.

The promise of AI for customs tax revenue

Modern technology could have an unprecedented, positive impact for traders, customs authorities and tax organisations.

Modern technology tools could help traders with compliance, for instance artificial intelligence (AI) could be used to trace and estimate carbon emissions across production cycles and help comply with EU CBAM.

It can also help assess whether the traceability of a product meets the rules of origin to qualify for preferential market access under a particular trade agreement. This could even happen without the trader having to prove how and where a good was produced – relieving these companies of a significant burden.

AI could also be used to complete government forms or goods descriptions as part of the Harmonized System code classification – the standard language used globally to classify goods at customs. Such paperwork can be quite confusing, for small businesses in particular, but an AI assistant could benefit both traders and customs or tax authorities by reducing errors and limiting delays to the transfer of goods.

Technology, and AI in particular, could also be used by humans to help process and analyse data in a faster but also more meaningful way, for instance when it comes to preventing fraud. Many of the invoices that businesses receive come from traders that they work with regularly and trust – these could be processed automatically by AI.

The same AI tools could also identify anomalies in any other invoices. This could boost customs investigation success rates by enabling them to focus on already-identified “suspect” invoices rather than performing random checks of businesses’ paperwork.

Redesigning trade processes

More than 130 customs authorities globally have already started to develop or even fully implemented automated customs systems. Now, AI-based big data analysis, robotics, drones and other disruptive technologies are on the rise. The adoption of advanced digital technologies can also facilitate integration with other parts of the tax administration organization, as well as other government departments nationally and even internationally.

Businesses are also being encouraged to directly link their systems to customs authorities in the EU and South American trade bloc Mercosur, for example, to reduce the burden of inspection at the border. This is a paradigm shift from a transaction-based approach – in which customs authorities selectively inspect products at the border – to a systems-based approach – in which the information systems of the businesses that produce or trade these products can be inspected before or after importation.

Some governments are also experimenting with regulatory sandboxes so that new technology can be tested. For example, the United Arab Emirates has started work on a regulatory sandbox for TradeTech to balance the need for innovation with the necessity of protecting consumers, maintaining market integrity and ensuring compliance with existing trade regulations.

Taking action to boost global trade

The accelerating digitalization of customs processes may result in a number of challenges, but also opportunities, for businesses. Transparency is an obvious example. As customs authorities are able to access more information on businesses’ supply chains, data protection may become a concern.

On the flipside, enhanced supply chain visibility will facilitate real-time tracing and tracking of shipments, avoid stock piling, and reducing unnecessary intermediation and costs. This could lead to efficiency gains.

To ensure that the opportunities of digital customs outweigh the challenges, businesses should not only invest in integrating processes and implementing advanced technologies, but also in their people. Talent with strong analytical and problem-solving skills, as well as the ability to collaborate cross-functionally with a technology-savvy mindset, will be crucial in helping both businesses and customs authorities take advantage of TradeTech.

Of course, neither customs nor business can do all of this alone. Public private partnership is the key to more efficient, sustainable and inclusive trade. This should include developing impartial digital infrastructure for trusted exchange of trade data and collaboration.

All of these strategies will help businesses and customs organizations around the world to fully embrace the digitalization of the global trade ecosystem. As such, TradeTech can be used to create more efficient, inclusive and sustainable global trade, benefitting businesses as well as international trade flows.