News Every Day | 19 April 2021, 01:55

East Asia Leads E-Commerce And The Digital Trade Revolution – Analysis

By Homi Kharas and Meagan Dooley*

East Asian trade is set to rise even further 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 with its rapid shift to digital platforms.

East Asia is leading the global e-commerce revolution. Business-to-consumer (B2C) platforms (e-commerce, online travel, advertising technology, transport, 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 regionally. China is at the front, 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 is 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 growth. China is the global leader, home to most of the largest online retail and auction sites. Cross-border transactions now account for 10 per cent of e-commerce sales in China. COVID-19 has likely driven these figures higher as consumers turn online.

There is still considerable room for growth. E-shopper penetration — the share of the online population that make purchases online — is below 50 per cent in Asia, much lower than other regions. Digital divides still hamper progress — only 56 per cent of the region has internet access. But the region has seen dramatic growth since 2010, with notable progress in Thailand (up 44 percentage points), Brunei (up 42 percentage points), Cambodia (up 39 percentage points) and Vietnam (up 38 percentage points). ASEAN countries are adding 125,000 new users every day. Around 94 per cent of the region is covered by a 4G network.

These digital consumers represent a new market. It’s estimated that 40 per cent of internet spending in China and 30 per cent in Indonesia represents new consumption, rather than substitutes for in-person purchases. E-commerce platforms are tapping into unmet consumer needs.

Digital platforms are also fostering inclusion. For consumers, they are driving down prices, adding choice, and reducing transaction costs. Simultaneously, digital platforms are expanding the reach of micro, small and medium-sized enterprises (MSMEs). Digital platforms are also opening up opportunities for those in lower-tier cities and rural areas. This is where the majority of East Asians still live, so digital growth is translating into inclusive growth.

E-commerce platforms are connecting younger and peri-urban consumers with international brands. Tmall, one of Alibaba’s platforms, is providing preferential rates to international companies and allowing firms to sell on their platform without a license to operate in China. 29,000 brands came onto the platform in 2020 and 80 per cent entered the Chinese market for the first time. Of Tmall users, 45 per cent are from lower-tier Chinese cities. These platforms are connecting consumers outside major metropolitan areas with the region, and offering younger consumers, whose preferences will dominate for years to come, choices from throughout the region.

One feature that makes cross-border purchases on digital platforms 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 more integrated. AliPay is acquiring local mobile-money startups across the region.

The growth of fintech is dramatically expanding financial inclusion. More individuals have access to a range of financial services without needing an account at a formal financial institution.

Inclusive economies tend to have more dynamic MSMEs. Digital platforms serve MSMEs in different ways. First, they reduce financial costs. Credit card fees cost US small businesses an average of 2 per cent of gross sales. Alipay and WeChat Pay, on the other hand, have no transaction fees on their digital commerce platforms 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. Ant Financial’s online lending model is designed to take three minutes to apply and one second for money to be disbursed into the merchant’s account with zero manual operations. Ant’s small and medium-scale enterprise-dedicated service Mybank reached 25 million SMEs by its fifth anniversary in 2020. Mybank also focuses on filling the financing gap for female-owned MSMEs, adding to inclusion.

Third, digital platforms provide MSMEs with a range of technical assistance and market information services that increase productivity and export revenue.

East Asian growth powered by digital platforms will be strong and inclusive if the region invests in digital infrastructure and human capital. Governments also need to coordinate on oversight and regulatory mechanisms to ensure that new platforms are accessible and not exploitative. ASEAN countries have formed an e-payments coalition to support the development of a regional digital payment framework. More will be needed through international agreement and cooperation to protect data privacy and strengthen cybersecurity.

*About the authors:

Homi Kharas is a Senior Fellow in the Center for Sustainable Development program at the Brookings Institution.
Meagan Dooley is a Senior Research Analyst in the Center for Sustainable Development program at the Brookings Institution.

Source: This article was published by East Asia Forum. An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Reinventing global trade’, Vol. 13, No. 2.