Foreign trade efficiency rises with digital finance, but gaps persist

The research identifies several mechanisms through which digital finance improves the quality, not just the quantity, of foreign trade. First, it lowers financing barriers for small and mid-sized exporters, which have traditionally been underserved by legacy financial institutions. By using AI and big data to assess risk, digital finance platforms extend credit and liquidity more efficiently, especially in regions with underdeveloped banking systems.

Amid global trade realignment and rising economic uncertainty, digital finance has emerged as a powerful lever for restructuring China’s export competitiveness. New research analyzing a decade of provincial data confirms that digital financial services, including mobile payments, digital lending, and intelligent supply chain platforms, are playing a decisive role in improving trade efficiency, financing access, and the sustainability of export growth.

Published in Sustainability, the study titled “Research on the Mechanisms and Effects of Digital Finance on High-Quality Development of Foreign Trade” evaluates data from 30 Chinese provinces spanning 2011 to 2021. It shows that digital finance directly promotes high-quality development of foreign trade (HDFT) and does so through both improved financial development and infrastructure upgrades. The study also reveals significant regional disparities and threshold effects, meaning digital finance’s impact varies depending on financial maturity, investment conditions, and internet access.

How does digital finance promote high-quality foreign trade?

The research identifies several mechanisms through which digital finance improves the quality, not just the quantity, of foreign trade. First, it lowers financing barriers for small and mid-sized exporters, which have traditionally been underserved by legacy financial institutions. By using AI and big data to assess risk, digital finance platforms extend credit and liquidity more efficiently, especially in regions with underdeveloped banking systems.

Second, it optimizes the allocation of financial resources. Digital finance integrates trade information and accelerates financial decision-making, enabling targeted capital deployment that supports emerging industries and innovation-driven exporters. This real-time responsiveness also reduces transaction costs and shortens trade cycles.

Third, digital platforms facilitate cross-border e-commerce, online logistics, and digital settlement systems. These innovations not only enhance convenience and traceability but also support the internationalization of small-scale trade. As digital infrastructure expands, these systems become essential in reaching new markets and offering diversified financial services tailored to exporters’ evolving needs.

Quantitatively, the study’s fixed-effects regression analysis found that a 1% increase in the digital finance index corresponds to a 0.0766% improvement in HDFT. Furthermore, mediation analysis shows that financial development and infrastructure construction explain significant portions of this effect, specifically, 0.0101% and 0.0163%, respectively, confirming their role as transmission pathways for digital finance’s impact on trade.

Where does digital finance work best and where does it fall short?

The study found stark regional differences in how digital finance influences trade development. In China’s eastern provinces, where port infrastructure, financial maturity, and digital readiness are strongest, the positive effects of digital finance on HDFT are both statistically significant and economically large. A 1% increase in the digital finance index leads to a 0.122% improvement in trade quality in the eastern region.

By contrast, digital finance had a negative or statistically insignificant impact in central and western provinces. These areas suffer from weaker infrastructure, lower digital adoption, and limited exposure to global trade flows. In some cases, underdeveloped financial regulation or misaligned policy incentives led to inefficient resource allocation or financial risks that undermined exporters.

Even within the same regions, different aspects of digital finance perform unequally. The study found that while coverage breadth and usage depth contribute positively to HDFT, the digitalization level of financial services had a slightly negative impact. This may reflect implementation challenges, such as inefficient platforms or underdeveloped regulatory oversight, particularly in less digitized environments.

Additionally, heterogeneity analysis based on financial development levels showed stronger positive effects in regions with more advanced financial systems. In high-finance provinces, a 1% increase in digital finance yielded a 0.0712% gain in HDFT, compared to just 0.0262% in low-finance regions. This indicates that digital finance acts more as an amplifier than a corrective mechanism, performing best where supporting institutions are already strong.

Are there threshold effects that shape digital finance’s impact?

One of the study’s most significant contributions is the identification of nonlinear, or threshold, effects. These reveal that the benefits of digital finance on HDFT are not constant but increase after surpassing certain development benchmarks.

Three key thresholds were identified:

• Digital finance development level: When the digital finance index exceeds 5.8049, its positive impact on HDFT strengthens; beyond 6.0169, the effect becomes significantly greater, rising from 0.0097 to 0.0222 per 1% increase. This suggests an “increasing marginal return” on digital finance investments after a foundational level is achieved.

• Investment environment: Regions with higher ratios of fixed-asset investment to GDP saw greater returns from digital finance. When this investment ratio exceeds 0.2938, the effect of digital finance on HDFT nearly doubles, underlining the importance of parallel public and private sector investments in enabling digital transformation.

• Internet penetration: The share of internet subscribers relative to population also affects outcomes. Below a 44.14% penetration rate, gains are modest. Once this threshold is crossed, digital finance's ability to enhance trade quality more than doubles. This highlights the role of digital connectivity in unlocking the potential of smart financial services.

Collectively, these findings validate the study’s hypothesis that digital finance’s impact is not just linear, but dynamically conditioned by regional readiness and institutional context. In short, the same digital toolkits will yield vastly different outcomes depending on where and how they’re deployed.