27 October 2020
Inclusive growth: The digital transformation of East Asian trade
Published 20 April 2021
East Asia is leading the global e-commerce revolution, but there is considerable room for growth. Economic development, powered by digital platforms, will be strong and inclusive if countries in the region invest in digital infrastructure and human capital.
This article is part of the Hinrich Foundation sponsored Vol.13 No.2 April–June 2021 issue of the East Asia Forum Quarterly.
East Asian economies are famous for delivering growth with equity and for their export orientation, as reflected today in their participation in global and regional value chains. In a world with COVID-19 these traits will likely be accentuated.
East Asian trade will rise in importance because the scale of the region’s economic recovery is larger and faster than anywhere else. Asia was already the second most integrated regional trade network after the European Union in 2019, with regional trade at 58 per cent of total trade. East Asia’s trading system is likely to become more inclusive and sustainable as it shifts to using digital platforms. Although there is still a digital divide in the region, with less access for women, minorities and rural residents, new digital platforms are encouraging the participation of small farmers and small firms in international trade, including those owned by women, and opening opportunities for many near-poor people.
East Asia now accounts for 40 per cent of the global middle class, measured as those living on $11 to $110 per person per day in 2011 purchasing power parity (PPP) terms. Despite the set-backs caused by the COVID-19 induced global recession, China alone could have 1 billion people in the middle class in 2021, or 25 per cent of the world’s population, using forecasts prepared by the IMF and the methodology described in Kharas (2010). Since the Chinese middle class took off around 2006, China has been adding an average of 60 million people to its middle class every year. Elsewhere in the region, Indonesia, Japan, the Philippines, Thailand and South Korea all rank among the 20 countries with the largest middle-classes.
The global middle-class market is massive—over $43 trillion in 2021, measured in 2011 PPP terms. East Asia is already the largest regional middle-class market, accounting for 35 per cent of the global total. It is estimated that expenditures made by East Asian middle-class households will grow by almost 6 per cent per year over the coming decade. By 2030, the East Asian middle-class market could exceed that of Europe, North America and Latin America together.
Increasing competition to serve this new consumer market is now driving East Asian innovation. Companies are quickly adopting new digital tools that expand consumer choice and shrink the distance between the producer and consumer.
East Asia is leading the global e-commerce revolution, with Chinese tech giants like Alibaba and Tencent driving growth. Although estimates vary widely, an Asian Development Bank study looking specifically at digital platforms found that business to consumer (B2C) digital platforms (including e-commerce, online travel, advertising technology, transportation, e-services and digital media) generated US$3.8 trillion in revenue in 2019, with US$1.8 trillion of it in Asia. E-commerce alone accounted for US$1.9 trillion in revenue globally and US$1.1 trillion in the region. China has become a leader in this area, now accounting for 45 per cent of e-commerce transactions. Online sales already represent 12 per cent of total retail sales in Asia, compared with 8 per cent in Europe and North America. The digital economy is expected to add US$1 trillion to Asia’s GDP in the next 10 years.
The e-commerce movement started with domestic sales but is rapidly evolving to include cross-border transactions. Cross-border B2C e-commerce generated an estimated US$404 billion in sales in 2018, up 7 per cent from the year before. Business to business (B2B) sales account for 80 per cent of cross-border e-commerce, but B2C represents the fastest growing segment. China is the global leader here, with ownership of most of the largest online retail and auction sites. Cross-border transactions now account for 10 per cent of all e-commerce sales in China. COVID-19 has likely driven these figures even higher, as consumers have increasingly turned to online purchases with in-person retailers closed.
Despite these seemingly large numbers, there is considerable room for growth. E-shopper penetration, measured as the share of the online population that make purchases online, is below 50 per cent in Asia, much lower than other regions. The digital divide still hampers progress, as only 56 per cent of the region has access to the internet. But the region has seen dramatic growth since 2010 in this area, with notable progress in Thailand (up 44 percentage points), Brunei Darussalam (up 42 percentage points), Cambodia (up 39 percentage points) and Vietnam (up 38 percentage points). ASEAN countries are now the fastest growing internet market in the world, with 125,000 new users added every day. 94 per cent of the region is covered by a 4G network, ranging from 89 per cent coverage in rural areas to nearly 100 per cent in the cities. Thus, access is a bigger barrier to expanded digital readiness than coverage. Digital consumers represent a new market. According to McKinsey, 40 per cent of internet spending in China and 30 per cent in Indonesia represents new consumption, rather than substitutes for in-person purchases. Thus, these new e-commerce platforms are tapping into previously unmet consumer needs.
Digital platforms are fostering inclusion in two complementary ways. For consumers, they are driving down prices, adding variety of choice, and reducing the transaction costs of making purchases. At the same time, digital platforms are vastly expanding the reach and marketing prospects for micro, small and medium enterprises (MSMEs). While these benefits were previously restricted to people and firms in large metropolises, digital platforms are opening up similar opportunities for those living in lower tier cities and rural areas. This is where the majority of East Asians still live, so there is a strong likelihood that digital growth will translate into inclusive growth in the region.
There is already a trend of e-commerce platforms connecting younger and peri-urban consumers with international brands. Tmall, one of Alibaba’s cross-border e-commerce platforms, is providing preferential rates to international companies and allowing firms to sell on their platform without a license to operate in China. It reports that 29,000 brands came onto the platform in 2020, 80 per cent of which were entering the Chinese market for the first time. 45 per cent of Tmall users are from lower tier cities in China, many of them younger, tech savvier consumers. These digital platforms are connecting consumers outside of the major metropolitan areas with the rest of the region, and offering younger consumers, whose preferences are likely to dominate the market for years to come, choices from countries throughout the region.
One feature that makes cross-border purchases on digital platforms so easy is the presence of digital wallets that can be used for any product on the platform. As payment modalities become integrated, markets too can become integrated. Consider the example of AliPay. AliPay is acquiring local mobile-money startups across the region, expanding into India, Thailand, South Korea, the Philippines, Hong Kong, Malaysia, Indonesia, Pakistan and Bangladesh through its regional partners.
In addition to reducing the transaction costs for small cross-border purchases, this expansion of FinTech is dramatically expanding financial inclusion. More individuals have access to a range of financial services without the need for an account at a formal financial institution. That, in turn, connects them more tightly to the regional economy.
Inclusive economies tend to have many dynamic MSMEs. Digital platforms serve MSMEs in a number of different ways. First, they reduce financial costs. Credit card processing fees cost US small businesses an average of 2 per cent of gross sales. Alipay (1) and WeChat Pay, on the other hand, have no transaction fees on purchases made within their digital commerce platform, and a 0.1 per cent fee on outside transfers.
Second, e-commerce and FinTech players are using real time transaction and social media data to improve risk assessments and to offer loans to MSMEs. The most famous example may be Ant Financial’s ‘3-1-0’ program. Ant’s online lending model is designed to take three minutes to apply, one second for the money to be disbursed into the merchant’s account, with zero manual operations. Ant’s SME-dedicated service, Mybank, had reached 25 million SMEs by the time of its fifth anniversary in June 2020. Mybank has a particular focus on filling the financing gap for women-owned MSMEs, adding to its contribution to inclusion.
East Asian growth, powered by digital platforms, will be strong and inclusive if countries in the region invest in digital infrastructure and human capital. Governments in the region will also need to coordinate on a number of oversight and regulatory mechanisms to ensure that these new platforms are accessible and inclusive and not exploitative. ASEAN countries have formed an e-payments coalition to support the development of a regional digital payment framework. E-payment and consumer protection policies seem adequate for now, but more will need to be done to protect data privacy and strengthen cybersecurity.
(1) Alipay to charge bank transfer fee from Oct 12, China Daily, 13 September 2016
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