How Blockchain will facilitate International Trade
Exploring a use case in international trades.
There have been tensions in the international trade modalities for over a decade. These tensions are due to the concern that most entities don’t play by the agreed multilateral rules.
And also that new multilateral rules are not keeping pace with the realities of the world today.
As we know, sea transport is a cost-efficient method of moving goods between countries. It is estimated that 80% of the world’s trade volume is carried by sea.
80% of world trade by sea creates a tonne of logistical nightmares.
Several actors participate in the shipping process — from funding to door delivery — making the process of coordination complicated.
For example, if it takes 15 days for a cargo ship from country A to get to country B. It will take ⅕th of the time, which is three days for clearance, offloading and other things.
Trade Distance
Studies and empirical evidence show that proximity between countries will likely increase trade between the two countries.
Distance between two countries can be either geographic or economic.
- Geographical distance — from point A to point B
- Economic distance — reflects institutional, administrative, political, and cultural differences.
The greater the distance between countries, whether geographic or economic, the greater the need for transparency and accountability for international trade.
Making the distance shorter is what Blockchain can provide.
Traders in the international market use trusted 3rd party intermediaries to guarantee the execution of transactions and ensure transparency and accountability.
These intermediaries introduce frictions and have substantial overhead costs.
This is where blockchain technology comes in.
Let’s dive into the details.
In this article, we will examine three applications of Blockchain in international trade:
- easing trade finance,
- improving customs processes, and
- tracking the origin of goods.
At its core, we will also look at Blockchain’s current limitations and the future of international trade with Blockchain.
First…
What is a Blockchain?
A blockchain is a distributed digital ledger that holds immutable data and is secured by an agreement of all the ledger(network) participants.
You’ll need to become a node to connect to a particular blockchain. Nodes participating in a blockchain can add, store, verify, and secure transactions on the network.
By design, every node in the blockchain network can access the entire Blockchain’s transaction history up to the genesis block.
A blockchain uses cryptography as its encryption mechanism to add levels of security and ensure data sent and received within the network is consistent across all participating nodes.
Every node can add data, but the data is verified and accepted into the network through a consensus mechanism. The consensus approach gives Blockchain its strength because it doesn’t rely on a centralized entity to accept, reject or verify data.
There are different types of blockchains:
1. Open blockchains (permissionless): Everybody can participate.
2. Closed blockchains (permission): For a specific group of related industries.
3. Hybrid blockchains: Combination of open and closed blockchains.
A blockchain’s design determines how its participants will behave. For example, some participants may be able to add data, while others may only view or monitor the data.
Let us now find out what Blockchain proposes for international trade.
The Blockchain value proposition for international trade
With the implementation of Bitcoin as the first cryptocurrency in the world, the Blockchain emerged as a new technology to foster peer-to-peer transactions.
Benefits of the blockchains value proposition
- Digitalization: International trade relies heavily on paper. Adopting a digital equivalent — Blockchain — will reduce errors and increase efficiency and costs.
- Tracking: Coupled with IoT sensors and the design of blockchains, tracking can be quickly done, and the immutability of previous records is enforced automatically.
- Decentralization: With Blockchain, there will be no need for 3rd party involvement in trades, thereby reducing cost, friction, and processing time. Blockchain is trustless, and this will build trust between trading parties.
Limitations of traditional methods of international trade
We will look at the three significant limitations of traditional methods used for international trade and outline some of their inherent problems.
Trade Finance
Naturally, an importer will wish to pay upon receipt of the merchandise, and the exporter will want payment before the merchandise is shipped.
Of course, this scenario is not fluid, and I don’t think international trades would have survived for long if they had followed the above procedure.
There’s a gap between the importer and the exporter. To close this gap, someone has to step in to make guarantees for both parties.
This someone is called “Trade finance,” and it is not done by a person but by:
- Banks
- Trade finance companies
- Importers and exporters
- Insurers
- Export credit agencies and service providers
By introducing a reliable and trusted third party, trade finance helps exporters and importers conduct business securely.
It facilitates trade by helping importers and exporters build trust.
But there’s a problem with traditional trade finance.
Financial institutions rejected over 50 percent of SMEs’ trade finance requests in 2014. On the other hand, multinational corporations had a rejection rate of only 7 percent.
Access to trade finance is even more difficult for SMEs in developing countries.
The estimated value of unmet demand for trade finance in Africa is US$ 120 billion (one-third of the continent’s trade finance market) and US$ 700 billion in developing Asia. Bridging these gaps in provision would unlock the trading potential of thousands of individuals and small businesses worldwide.
Source: https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf
Customs procedures
The most painful part of international trade is custom clearance. The customs process involves all the tiny details before a shipment is cleared.
The traditional custom clearance is painful because most countries use lots of paper works.
For example, different people must process trade licenses, customs, and cargo declaration paperwork, sometimes separately. Trade security procedures must also be completed and verified by many entities.
Maersk, the world’s largest container carrier, said, “A single container could require stamps and approvals from as many as 30 people, including customs, tax officials, and health authorities.”
According to Maersk, tracking containers is straightforward, but the “mountains of paperwork that go with each container” slow down the process.
Maersk discovered that a single container moving from Africa to Europe required about 200 communications and the verification and approval of more than 30 organizations involved in customs-, tax, and health-related matters.
Paperwork gives room for error and delays, plus it’s expensive.
Custom delays for perishable goods are expensive.
The World Economic Forum (WEF) estimates that reducing friction in the supply chain could increase global GDP by nearly 5 percent and trade by 15 percent.
Origin of goods
According to studies, people worldwide are becoming conscious of the origin of goods and services they buy.
The Centers for Disease Control and Prevention (CDC) estimates that around 48 million people are ill due to foodborne pathogens.
How Blockchain will Solve the limitations of international trade
Trade Finance
Trade finance implemented with Blockchain at its core will increase transparency and reduce human error and processing time.
In July 2018, European banks, in partnership with IBM and ten major financial institutions, launched a trade finance blockchain platform called We.Trade.
It appears the initial focus is on small and medium-sized businesses trading within Europe.
And that’s a good start.
Customs procedures
Blockchain will drastically reduce the paper trail in customs procedures and increase the productivity of all the departments involved in the customs procedure.
Using smart contracts would also provide another advantage. Importers will be able to pay customs duties quickly, and the relevant authorities can control customs payments.
In 2018, IBM and Maersk partnered to build Tradelens — a blockchain that will digitize the global supply chain.
TradeLens will allow parties involved in a shipment to track the container from inception to endpoint.
Provenance of goods
Using Blockchain to track the origin of goods will not prevent infections directly. However, with Blockchain, tracking and isolating disease outbreaks will be quicker.
Blockchain technology can also track the origins of sub-standard and fake goods by providing an auditable and tamper-proof record of product origins.
Some other Blockchain use cases in international trade
These are some other blockchains use cases in international trade:
- Decentralized marketplace.
- Cross-border payments — DeFi applications like Uniswap and Curve Finance are already doing this.
- Shipping documents.
- Blockchain-based certificate of origin (CO) — COs are easily tampered with, and there are increasing concerns about the actual origin of goods.
- Proof of authenticity for luxury products.
Barriers to the adoption of Blockchain in international trade
The single most exclusive barrier to the adoption of Blockchain in international trade is Maturity.
Blockchain technology, as we know, came into the limelight from the inception of the Bitcoin cryptocurrency.
According to multiple reports, the Blockchain used in most cryptocurrency solutions can not sufficiently handle international trade due to scalability issues.
Experts suggest that a closed or hybrid blockchain is most suitable for international trades.
Of course, by design, blockchain technology faces some of these issues inherently.
Some of them include:
- The Smart contract problem
- The oracle problem
- The lack of standard problem
The smart contract problem
Smart contracts add another layer of complexity to the Blockchain. Although they are efficient and automated, an error or a malicious compromise of the smart contract can lead to a catastrophic disaster.
Moreover, these disasters will cause an avalanche of distortion to every other activity as every activity in international trade interlinks.
The oracle problem
Within the blockchain context, an oracle is a software component that connects the secured blockchain environment to the real-world environment.
Data on the Blockchain by design is secured, immutable, and consistent. But the data fed into the Blockchain from real-world activities are prone to errors and inconsistencies, making blockchain data integrity questionable.
The Blockchain has an oracle problem because it needs to be consistent in the following:
- Validation of identities
- Integration of historical data and
- Integration with other systems.
Although there are projects like Chainlink — an Ethereum-based oracle — the technology maturity of its implementation is still a big obstacle.
Lack of standards
Interoperability amongst different blockchains and the lack of a common standard for blockchain cross-interaction is another critical potential barrier to the adoption of Blockchain in international trade use cases.
The future
In 2018 the European Blockchain Partnership (EBP) was created, committed to establishing the European Blockchain Services Infrastructure (EBSI), supporting the delivery of cross-border digital public services.
The European Parliament adopted several non-legislative resolutions regarding Blockchain and its use in various fields during the same period.
Blockchain is an emerging technology, and its future is bright.; we have seen the bulk of its early use case in
- DeFi — Cross-border finance and
- NFTs — proof of ownership.
Aside from finance, blockchain technology can be implemented elsewhere. Its successful implementation will herald the token economy era.
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