How can Blockchain Boost International Trade?
1. Global trade since the pandemic
The Covid pandemic represents the single largest challenge to global trade for decades. With restrictions of varying severity coming in and out of force worldwide on a rolling basis for the past two years, normality for international trade is now hard to remember. 2020 saw world trade volumes plunge in a way never witnessed previously. Although trade rebounded sharply in 2021, there can be no doubt that the flows of goods and services worldwide that global growth relies upon are today more fragile than perhaps at any point in recent history.
However, as research by the OECD has made clear, the impact of the pandemic has varied dramatically in terms of its impact on different sectors, regions, and individual countries. Their analysis suggests that the pandemic generated trade changes in a single year, roughly equivalent to the level of change that would have occurred over as many as five consecutive years.
However, the pace and severity of the disruption can be seen to have had specific upsides concerning two fundamental aspects of global trade.
· Firstly, the pandemic created new or intensified previous incentives toward risk mitigation strategies on the part of consumers, firms, and governments.
· Secondly, the drive to develop, test, and implement new technologies to manage cross-border trade dramatically accelerated.
Both were direct consequences of the pandemic-induced disruption. As this report will outline, both suggest an increased role for blockchain technology in this sector is likely shortly.
2. What are the main problems facing global trade today?
Macroeconomic research conducted by the Bank of England has shown that shipping costs have risen dramatically since the onset of the pandemic.
This context has made it all the more essential for firms and governments to be looking for cost-efficiencies anywhere and everywhere. This is where blockchain technology can make a positive impact.
Aside from Covid-related problems, the pre-existing difficulties with conducting successful cross-border trade are well-known. Primary amongst these are three issues to which blockchain has a considerable amount to contribute.
· Storing and displaying the correct documentation
Trading across borders is infinitely more complex than domestic trade, partly because the exchange now has to comply with two or more regulations rather than just one. Therefore, demonstrating that trade is legal and compliant involves a great deal of paperwork requiring input from both the importer and the exporter.
While specific requirements vary from one country to the next, an international shipment is likely to need at least some of the following, if not more, documents to be prepared and ready to be displayed.
Commonly necessary trade documents include Air Waybill; Certificate of Origin; Bill of Lading; Combined Transport Document; Bill of Exchange; Insurance Certificate; Packing Specification; plus various Inspection Certificates from customs posts the cargo has passed through.
This generates a great deal of work for international traders. The fact that much of this administrative work is just carried out on paper creates obvious problems of trust and authenticity.
· Availability of trade finance
Only a tiny fraction of global trade is settled in cash before the goods are shipped because buyers' only way to pay once goods have been received and inspected. Therefore, financing is essential to bridge the time gap between when an exporter ships a consignment and when they receive payment.
The traditional method involves ‘letters of credit,’ whereby a letter is issued by the buyer’s bank guaranteeing that the agreed payment to the seller will be received on time and for the correct amount. If the buyer is unable to make the pre-agreed payment on time for whatever reason, their bank is required to cover the total or remaining amount of the purchase.
This process, whereby one or both of the trading partners’ banks undertakes to bear some of the risks for financing the transaction, means financial institutions are unwilling to commit to such arrangements without undertaking extensive due diligence.
This is highly labor-intensive, and the paper-intensive process takes considerable time and effort to complete. Research carried out by the Boston Consulting Group and SWIFT found that this process commonly involves more than 20 separate entities for a single trade finance deal, with necessary data typically contained in between 10 to 20 documents, creating approximately 5,000 data field interactions.
As will be argued below, blockchain technology is uniquely capable of speeding up and simplifying these tasks.
· Tarif revenue collection and the accuracy of government trade data
Finally, there are a series of use-cases whereby blockchain can improve certain government trade-related processes.
Tarif collection is another process that currently involves extensive paperwork and state employee time. This requires a great deal of infrastructure to be installed at docks, ports, airports, train stations, and road entry points. Transporters often have to wait for extended periods while customs declarations are checked and other regulatory procedures are completed. This all serves to add time to delivery schedules and, therefore, indirectly raises costs for consumers.
3. How can blockchain applications help?
As World Trade Organisation economist Emmanuelle Ganne has argued, blockchain is today the most exciting technology with the most transformative potential to solve some major global trade problems.
· Towards paperless trade
The ability of blockchain to enhance the efficiency of business processes means we can move in the direction of entirely paperless trade. By allowing the safe, secure, and reliable digitization of trade documents, specific administrative procedures can be automated, thus enormously speeding them up.
Many banks and IT companies are currently working on such systems, including a Red Date Technology built and BSN-based project. Termed the Blockchain-based Transnational Trade Network (BTTN), this network aims to facilitate paperless trade by connecting trade partners together on a private network of blockchains, including both permissioned and permissionless chains. Once connected to this network, importing and exporting firms can then share data between jurisdictions in real-time via the BTTN data center.
· Trade finance on the blockchain
As explained above, the current trade finance system is costly and slow. The digitization of trade finance processes can thus bring significant savings to international trade transactions.
The most proposing developments here relate to digitizing and automating payments and digitizing information contained in scanned PDF documents. It is precisely the immutable and transparent nature of the blockchain that can enable full confidence in such digital processes to flourish.
One of the earliest and most impressive decentralized applications of this type emerged from a collaboration between Barclays and fintech start-up Wave, who successfully conducted the first know blockchain-based trade finance transaction back in 2016.
This transaction took place on a permissioned chain and provided trade finance to facilitate the export of approximately $100,000 worth of dairy products from Ireland to Seychelles. Crucially, the process of obtaining a letter of credit, which usually takes around ten days, can be cut to less than 4 hours, according to Barclays.
· Smart contracts at the customs post
It would be possible for smart contracts to be encoded based on the relevant legal and regulatory
requirements to allow the automatic payment of customs duties.
The technical architecture to allow this would rely on a digital mechanism for monitoring external events, sometimes described as a ‘blockchain oracle.’ The third-party services provided by the oracle can then be used to trigger smart contract execution if all the pre-defined conditions are met.
A simple example of this concept in action would be that an oracle could be designated to monitor a delivery truck equipped with sensors. A smart contract could be linked to this oracle and would then be able to execute payment when the delivery crossed the border automatically.
Decentralized applications similar to the proposal above could also be used to allow intermediaries to collect tariffs and any other taxes due on a shipment on behalf of governments. Not only would this save time at borders, but it would significantly reduce the scope for piracy or other forms of customs fraud.
Finally, using blockchain applications to collect tariffs would also help improve the accuracy of trade data and statistics, a certain amount of which is still based on approximations due to the challenges of managing and systematizing all the relevant data.
4. Is blockchain tech the future of global trade?
The short answer to this question is that we still don’t know for sure, although several blockchain-based applications seem to open up fascinating opportunities in cross-border trade.
However, there are risks ahead, particularly around scalability and whether or not such applications can be deployed as widely as they’d need to be to have the desired impact.
We are still a long way away from distributed ledger technology being as widely understood and used by either governments or companies as it would need to be to transform the global trading system for the better.