The UK Electronic Trade Documents Bill – a Gamechanger in Digitalized International Trade?
The UK Electronic Trade Documents Bill 2023 (ETDB 2023) completed its final Committee Stage in the House of Lords in February 2023 and is now with the House of Commons for final approval before going to King Charles III for Royal Assent, hopefully before the end of this year. Under the Bill, digital trade documents will be put on the same legal footing as their paper-based equivalents to give UK businesses more choice and flexibility in how they trade. Could ETDB 2023 evolve into a global governing model akin to the pre-eminent role English Law plays as the governing law for the documentation in the global bond and Sukuk market? What are the implications for Data Protection, Privacy, Credit and Investment Insurance and UK Trade Relations with OIC Member States? Mushtak Parker discusses the potential impacts of ETDB 2023 and prospects for global trade.
The imminent adoption of ETDB 2023 in the UK could not be timelier. One of the unintended consequences of the COVID-19 pandemic was the massive acceleration towards digitisation in almost all spheres of human activity, whether in e-Government, e-commerce, online banking and insurance, multimedia, data harvesting, healthcare, industry and so on.
Digitization has brought huge opportunities not only in reach, instant messaging, marketing, cost efficiencies and savings, and boosting trade and investment flows, but also for cybercriminals armed with a growing epidemic of scams, compounded by the apathy of the tech giants, who after all are the technological ‘facilitators’, albeit unintended, of online fraud and scams, and the shortcomings of regulators who are always a step or two behind the innovators and increasingly sophisticated cybercriminals.
In a world preoccupied by the sheer scale and pace of technological innovations in Artificial Intelligence, Metaverse and Blockchain, digitization and cybersecurity, especially in global trade and investment activity, must be a shared responsibility. But as Belgium-based SWIFT, the world’s leading provider of secure financial messaging services, “not all jurisdictions and regulators use the same terminology or have the same classifications when defining fraud and cybercrime. This can lead to fragmentation in an understanding of the data and statistics because they’re not always comparable.”
Technology, the World Trade Organisation (WTO) tells us, is a potentially empowering enabler of trade and investment, despite the tendency towards protectionism in times of geopolitical and economic uncertainty. As such, a defining moment will come when the UK’s Electronic Trade Documents Bill 2023 gets imminent Royal Assent and enacted in law. It will not only reduce the cost of trade transactions but also be good for the environment.
While this transformation to digital trade documents has taken some 131 years since the adoption of the Bills of Exchange Act in 1882, the UK government projects a major boost for the country’s international trade, already worth more than £1.4 trillion, and will reduce the estimated 28.5 billion paper trade documents printed and flown around the world daily. Business-to-business documents such as bills of lading – a contract between parties involved in shipping goods and bills of exchange used to help importers and exporters complete transactions currently have to be paper-based due to longstanding laws. According to the International Chamber of Commerce, digitalizing trade documents could generate £25 billion in new economic growth in the UK by 2024, and free up £224 billion in efficiency savings.
Policy Rationale
The rationale behind launching ETDB 2023 is simplicity itself. In their joint Impact Assessment (IA) of the Bill, the UK Departments for Digital, Culture, Media & Sports and for Science Innovation and Technology stress that “the operation of many documents important to international trade, including bills of lading and bills of exchange, is premised on their possession. The person in possession of the relevant document can claim performance of the obligation recorded in the document and can transfer the right to claim performance of that obligation by transferring (physical) possession of the document.”
However, in this fast-evolving digital age, there are deficiencies in the current legal position which prevent the move to electronic versions of the above documents. English law – like many other trade jurisdictions around the world – does not currently recognise intangible things as being amenable to possession. This means that electronic forms of trade documentation, which are considered to be intangible, cannot be possessed and cannot, therefore, be used in the same way as their paper equivalents. “This,” said the IA, “was not an issue when technology did not exist to make electronic documents with the same relevant properties. However, technology has now developed which can provide an electronic equivalent of a paper trade document. The legal system has not kept pace with this technological development. The proposed legislation will correct this problem, allowing electronic trade documents to have the same legal effects as their paper equivalents. Without (primary) legislative change, trade will continue to be paper-based and thus more costly, complex, and time-consuming than it otherwise could be.”
The IA assessed two options. Doing nothing, it concluded, would yield no additional benefits. Businesses would have to continue to deal with unnecessary costs, complexity and time delays (all of which have been exacerbated by the pandemic). Inaction could also diminish the primacy of English and Welsh Law as the governing law for international trade transactions, as traders may instead switch to using US or Singaporean laws to underpin their transactions. For many OIC countries with their historical, kith and kin, and diaspora relations with Britain, London as the global financial centre and the most proactive non-Muslim jurisdiction for Islamic financial transactions, including Murabaha and Sukuk, and the pre-eminence of English law as the governing law for the documentation of the above transactions in the international market, the implications could be important.
The chosen approach is to introduce primary legislation to recognise electronic trade documents on an equal legal footing to physical trade documents. “This allows for take-up according to the preference of firms and technology coordination across industries. Benefits include increased growth through improved trade efficiency.”
However, the adoption of the Bill will not necessarily see a rush to electronic trade documentation migration. Nor will it be a panacea to seamless trade documentation, as some have claimed. Only those businesses, says the UK government, that see benefits as outweighing the costs will switch to using electronic trade documents. It is expected that once larger businesses and organisations make the switch, then smaller firms will soon follow. ETDB 2023, says its promoters, “is an incredibly important piece of legislation, small, succinct, and simple with just one clear aim – to allow the digitization of trade documents.” Not surprisingly, there is no associated secondary legislation.
Monetised Benefits and Costs
These include:
i. The total costs saved by businesses that shift to electronic trade document systems, through saving on the costs and time associated with producing and handling these documents, or experience issues such as paper documents being lost or information being re-keyed incorrectly – which have until now been a significant cost to the business.
ii. The initial transition costs, for example, developing new internal processes, purchasing the required technological capabilities and training staff to use the new system.
iii. Familiarisation costs incurred by businesses, whether they ultimately adopt electronic systems or not.
iv. Ongoing costs associated with operating the electronic trade document systems, including continuous staff training and technology maintenance/upgrades.
Not surprisingly, there is no associated secondary legislation. The International Chamber of Commerce (ICC) is confident that the digitalisation of trade documentation is expected to lower transaction costs and promote greater efficiency, transparency and security in international trade. It stresses that there is a strong desire in industry to transition towards digitized ways of doing business.
Given the cross-jurisdictional nature of international trade, global legal reform is essential to facilitate the use of electronic trade documents. In recognition of this international coordination problem, the UN proposed a Model Law on Electronic Transferable Records (UNMLETR). However, whilst some smaller jurisdictions, such as Singapore and Bahrain, have enacted legislation consistent with the model law, no major economy is yet fully compliant. Given the extent to which international trade transactions (even those not involving the UK) are based on the Law of England and Wales, it is most likely that UK legal reform in line with UNMLETR would act as a model and significant catalyst towards global legal reform and the development of an electronic trade document ecosystem.
Under its 2021 G7 Presidency, the UK secured an agreement amongst G7 countries to work together to progress coordinated legal reforms in line with UNMLETR. The UK government commissioned the Law Commission of England and Wales to examine the provisions of UNMLETR and make recommendations on how to bring UK law into conformity, which has resulted in the current ETDB Bill. “This legislation is permissive and stipulates that business-to-business electronic trade documents which satisfy certain criteria should be treated as functional equivalents of their paper counterparts. The proposed reforms cannot be made in any other way than through primary legislation because there are no existing legislative powers which could be used to implement this measure to cover the range of trade documents covered by the Bill,” said the IA.
Data Protection Adequacy
There is one other important implication, including for OIC/ICIEC member states dealing with or through institutions in the UK. On 18 July 2023, the UK and Türkiye announced plans to begin talks on an updated free trade agreement (FTA). The deal would replace the existing UK- Türkiye FTA, which was rolled over when the UK left the European Union and doesn’t cover key areas of the UK economy like services, digital and data. The UK is the second biggest services exporter in the world – behind only the US, and the services sector contributes around 80% of the UK’s GDP.
“Türkiye is an important trading partner for the UK,” stresses British Business and Trade Secretary Kemi Badenoch, “and this deal is the latest example of how we are using our status as an independent trading nation post-Brexit to negotiate deals that are tailored to the UK’s economic strengths.”
Bilateral trade between Türkiye and the UK reached £23.5 billion in 2022 – up more than 30% from the previous year. “The new FTA is an opportunity to strike a 21st century deal that is better suited to the modern economies of both the UK and Türkiye, covering areas such as digital trade and services, and could also potentially lead to cheaper goods and more choice for UK and Turkish consumers,” she added.
Türkiye is a major supplier of goods such as vehicles, clothing and electrical machinery and goods to the UK, which is its 4th largest goods export market, in return for £6.4 billion of UK goods exports, including power generators and metals.
In terms of data privacy and transfer, Türkiye could be a beneficiary of London’s policy to grant prioritised countries data adequacy status so that UK-based organisations can transfer personal data to these countries without restrictions or safeguards, subject to them passing the impact assessment. South Korea is the latest country to be afforded this “Green Rated – Fit for Purpose” New International Data Transfers Adequacy status by the UK Department for Digital, Culture, Media (DDCM) and Sport after approval from the UK’s Regulatory Policy Committee. The Status is considered fit-for-purpose for various business sizes, including small and micro businesses.
According to the DDCM, the status proposal aims to reduce barriers and burdens to organisations transferring personal data to the Republic of Korea while providing trust and confidence that all citizens’ data rights are upheld. The proposal is expected to be net-beneficial to businesses as they would no longer be required to purchase International Data Transfer Agreements (IDTA) to send data to the above country.
