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Brazil is pioneering a digital transformation in trade finance that promises to revolutionise how small and medium-sized enterprises (SMEs) conduct cross-border business. At the intersection of technology and international trade, the country is dismantling long-standing barriers that have historically prevented smaller businesses from accessing global markets.

The struggle for SME financing in Brazil

Micro and small enterprises (MSEs) account for 93.7% of all legally constituted companies in Brazil. Despite their significance, MSEs face persistent challenges in accessing trade finance, exacerbated by fluctuating interest rates and structural disparities in financial markets. During periods of high interest rates, which peaked at 14.25% between 2013 and 2016, small business loan rates reached 30.6%, leading most SMEs to be cut out of the financing market.  

A brief reprieve occurred between 2016 and 2021 when government programmes like Pronampe and PEAC temporarily increased lending to SMEs. Since then, regulatory reforms have sought to support SMEs through improved protections for angel investors, investment-based crowdfunding, and a requirement for financial institutions to allocate 2% of demand deposits to micro-entrepreneur loans.

However, since 2021, the Central Bank has again raised interest rates, to 13.75% in 2022 and 12.25% in 2023 making loans once again inaccessible to SMEs and continuing the historical trend of large corporations receiving a disproportionate share of business loans. 

The specific challenges of the Brazilian context— high borrowing costs, limited access to credit, and structural market disparities—create significant barriers for MSEs in leveraging trade finance. The disproportionately high interest rates on loans for SMEs compared to large corporations limit SMEs’ capacity to engage in competitive trading as they struggle to finance working capital, purchase raw materials, or cover shipping and customs costs.

Even when government measures boosted SME lending during the pandemic, this was primarily focused on domestic investments. Instead, trade-specific needs remained challenging due to the perceived higher risk of international transactions.

Technology: the great enabler

However, Brazil is committed to changing things. The country is rolling out a mammoth investment of 186.6 billion reais (£24.4 billion) aimed at catapulting its industrial sector into the digital era. This wide-ranging strategy, financed by a mix of public and private capital, targets critical technological domains including semiconductors, industrial robotics, and emerging technologies such as artificial intelligence and the Internet of Things (IoT).

The nation’s technological development blueprint, spearheaded by the Missão 4 da Nova Indústria Brasileira (NIB), sets formidable targets: by 2026, a quarter of Brazilian industrial enterprises are set to undergo the digital transformation, and half are planned to have done so by 2033. This initiative represents a strategic manoeuvre to place Brazil at the centre of global technological supply chains, positioning it as a key player in international trade.

A key part of the strategy is establishing a robust semiconductor manufacturing ecosystem. A recently enacted law and investment from Brazil’s federal industrial agency will inject a total of 25.5 billion reais (£3.3 billion) into the industry by 2026. Semiconductors, used in everything from smartphones to artificial intelligence to advanced weapons systems, are a fast-growing industry with vital strategic importance: a trade spat between the US and China has recently seen the former ban curb the export of chips used to make semiconductors to China, which could lead to China looking elsewhere for its production. Brazil could be ideally positioned to benefit from a trade war between the US and China, and its investment in semiconductors could see it become a key exporter to both countries. 

Central to Brazil’s strategy is the innovative DREX project, a digital currency initiative launched by the Central Bank. This collaborative effort with banks and technology providers leverages electronic bills of lading and blockchain technology to simplify cross-border payments, representing an important step towards modernising trade documentation. 

Digital solutions are emerging as the key to unlocking international trade potential. Since SMEs operate with a fixed cost base, they can expand their trading options by leveraging digital platforms, driving direct bottom-line growth.

In addition to Brazil’s specific issues, the traditional trade finance model has always been difficult for smaller companies. SMEs struggle with trade finance’s multiple complex requirements, such as navigating logistics, managing compliance, mitigating fraud risks, and coordinating various financial services. Digital platforms promise to streamline these processes and provide a unified approach to international trade documentation, making the process much more accessible for newcomers.

The implications of this digital shift extend beyond just technological innovation. Digital trade platforms can significantly reduce transaction costs, improve transparency, and provide SMEs with tools previously accessible only to large corporations. For Brazilian SMEs, this represents a potential game-changer in accessing international markets.

Refitting the legal system for the tech era

Legal systems must keep up with breakneck advances in technology. Catherine Lang Anderson, partner at A&O Shearman and an expert in trade finance, emphasised the legal complexities underlying the digital transformation. “Trade finance has roots going back 3,000 years to ancient Babylon—the challenge has been adapting centuries-old legal frameworks to digital realities,” she said, speaking at the Brazilian Chamber of Commerce and A&O Shearman’s ‘Navigating Trade and Commodities Finance: Overcoming Challenges and Seizing Opportunities in the UK and Brazil’.

Recent legislative efforts from around the world highlight countries’ commitment to the digital transformation. The United Kingdom passed the Electronic Trade Documents Act in 2023, a leading global example and a crucial step in regulating trade digitisation; now, Brazil is also making substantial strides through initiatives like the DREX project and collaborative international agreements.

Worldwide, recent advancements tell a similar story. The global trade landscape is evolving rapidly, with digital solutions offering unprecedented opportunities for smaller businesses to compete on the international stage. Brazil’s proactive approach positions it as a potential leader in the digital trade revolution.

Where next for Brazil?

Even as the legal system evolves to embrace digitisation, other challenges remain. Data verification, complicated user interfaces, and inconsistent implementation across diverse business sectors have all slowed down adaption and innovation in the sector. However, the momentum towards digital trade is clear and accelerating.

For Brazilian SMEs, the message is optimistic. Digital platforms are not just a technological upgrade: they offer the opportunity for a fundamental restructuring of how international trade can be conducted, promising to expand access like never before. By reducing barriers, increasing transparency, and providing sophisticated tools, these innovations could go a long way in democratising global commerce.

As Brazil continues to invest in digital trade infrastructure, the country is not just modernising its approach to international business but potentially reshaping the global trade ecosystem. The future of trade is digital, and Brazilian SMEs are at the helm of this journey.