Blockchain for global trade

Can Blockchain technology bolster global trade? Questions & Answers

There has been a lot of debate about the potential of Blockchain technology. Use cases in many industries popped up, yet the industry that has attracted maybe most attention is global trade. This Q&A blog article provides answers to frequently asked questions (FAQ) about this topic. I’ll start with some introductory questions about Blockchain, and then focus on Blockchain for global trade.

What is Blockchain?

Blockchain is a technology that implements a decentralized ledger, i.e. a decentralized list of all transactions that participate in the decentralized peer-to-peer network. Each participant in the network hence a copy of the full ledger (hence “decentralized”).

Is Blockchain equal to Bitcoin?

Many people initially became aware of Blockchain because of the bitcoin, however it is important to distinguish between the two. Blockchain is the underlying technology of Bitcoin. Bitcoin is an application that uses Blockchain technology. Other applications using Blockchain technology have nothing to do with Bitcoin.

Who maintains the Blockchain network?

Given that the ledger is shared by all nodes in the Blockchain network, it is owned, maintained and updated by each network participant (node) without a central authority to manage all the transactions.

What are important characteristics of Blockchain?

Blockchain technology provides the following characteristics:

  1. Distributed Ledger: rather than having a “trusted party” to manage a central ledger, Blockchain technology implements a distributed ledger where all the nodes in a network have a copy of the ledger
  2. Consensus: a method, agreed by all participants of the network, by which a transaction in the ledger is deemed valid;
  3. Provenance: providing an audit trail of transactions history;
  4. Immutability: once committed, a transaction cannot be tempered with / modified.

Why global trade is important

Since the invention of the container, global trade has been a critical part of most economies. Nations rely on import of foreign products as raw materials for production, or finalized products for consumption. Similarly, by exporting their own products they stimulate economic activities, create jobs and increase income from taxes. Globalization has resulted in a reality where most supply chains are international. According to OECD statistics, the value of goods imports in OECD countries was 9,604,635 million USD in 2016, and 10,526,040 million USD in 2017. In the same time, the value of exports in OECD countries was 9,351,995 million USD, and 10,188,980 million USD in 2017.

Why is Blockchain suitable for global trade?

Trade in goods is the flow of goods from a seller in one country to a buyer in another country through steps in the supply chain. A supply chain is in fact a series of events. Events include e.g. placing an order, container loading on a truck, container arrival at destination etc.

For many years, a major challenge in logistics and in Customs operations has been the lack of end-to-end transparency of supply chains. For example, when the seller and buyer do not know where the goods are, they cannot make re-routing decisions to optimize stock levels at different locations. Similarly, when Customs at the country of import cannot identify all the entities in the supply chain, they flag the shipment as high risk, and perform an inspection. If Customs knew the full supply chain flow, they could deem the shipment low-risk, and avoid its inspection. Avoiding unnecessary inspections results in faster supply chains.

Blockchain can solve such supply chain inefficiencies when all supply chain partners share supply chain event data in the Blockchain network, giving access to other supply chain partners (Customs is a supply chain partner). Every subsequent step in the supply chain is another block in the Blockchain. The provenance and immutability characteristics of Blockchain mitigate accountability risks.

How will Blockchain protect a company’s information While Using a Shared ledger?

Good question. Companies can be partners while at the same time competitors. They do not want to share all their information with all the parties in their network. How does Blockchain deal with this, thereby making Blockchain for global trade a feasible solution?

Several solutions are possible. One solution is encryption. If a company encrypts its shared data, other parties in the network cannot understand it, even if they have a copy of it. A party always remains the owner of its own data, and it defines access rights to its information. For example, a shipper can decide that its freight forwarder can read some of its data and that the Customs administration can read all of its data. In such a case, the freight forwarder will obtain a key to decrypt some of the data, and the Customs administration will obtain a key to decrypt all of the data.

Will Blockchain accelerate trade flows?

Blockchain is technological a means to implement supply chain transparency, giving participating parties access to rich information about the cargo, its whereabouts (i.e. its progress in the chain of supply chain events) and the parties involved in this flow. This transparency will result in increased efficiencies, for example it will enable cargo re-routing decisions (while en-route) and it will improve the ability of Customs to perform risk-based inspections. These and similar benefits will result in accelerating trade flows.

What is global trade compliance?

Compliance is a broad term, when concerning trade. Depending on the countries involved and on the nature of the goods, different legislations apply to the international flow of goods. “Compliance” refers to adhering to all these legislations. Some examples are:

  1. The exporter must possess an export permit (applicable for specific goods, e.g. weapons or other strategic goods)
  2. Certain health checks are mandatory in case of food, animals or plants, to avoid the spreading of diseases.
  3. Import duties apply at the country of import, based on the value of the goods, the origin of the goods and other criteria.
  4. Dangerous goods (e.g. flammable goods) require certain packaging to mitigate the risk of accidents during transport.

How will Blockchain impact global trade compliance?

Lack of information is a major challenge in compliance enforcement. Supply chain transparency – implemented through the Blockchain technology – will lead to improved ability to enforce law. For example, when sharing supply chain information in the network, there will be no doubt about the origin of the goods, reducing the risk that an incorrect country of origin is specified in a Customs declaration in order to avoid paying import duties.

How can Blockchain shape international trade?

In the future we could have two streams of cargo in international trade. Most companies are legitimate and will therefore be willing to share their supply chain data with other supply chain participants (including Customs) who can help speed up their supply chains and provide additional insights for them about their cargo. These parties will use a supply chain solution (implemented using Blockchain technology) to achieve supply chain transparency. Customs can regard them as an “Authorized Supply Chain” (see the World Customs Organization SAFE Framework of Standards). These companies can enjoy simplified border procedures because they provide rich supply chain information to demonstrate that they are in control of their supply chains. These companies will have granular insights about the progress of their cargo in the supply chain. Other companies, including those companies who have something to hide (but also companies who have nothing to hide yet choose not to share data), would not be able to benefit from the benefits of supply chain transparency. Global trade will then be divided into these two flows of cargo.

What about IBM Blockchain for trade logistics?

IBM and MAERSK launched TradeLens, a Blockchain solution for global trade. As described above, this and similar (future) solutions can offer substantial benefits that will reshape global trade. Success depends on a number of criteria, such as:

  1. Adoption pace
  2. The amount, variety and quality of data that is captured in the system
  3. Further evolution of the Blockchain technology, to provide scalability

The second point is of special interest, because supply chain transparency entails having all relevant supply chain data available. As an example, if you store an event saying that container X arrives at location Y at time Z, but there is no information about the contents of the container of about the shipper and/or consignee, the information does not suffice for risk management purposes. Similarly, if you store PDF documents rather than structured data, automated decision making is not possible because IT systems cannot interpret the data.

What are the hurdles to the adoption of Blockchain in trade?

Some main hurdles can be:

  1. Trust in Blockchain technology. Like with many new technologies, users must become comfortable with the technology, and trust it. Companies sharing data must trust that their confidential information is safe.
  2. Trust in the overall solution. The more data that companies will share, the higher the level of supply chain transparency, yet the more effort it takes to win the trust of participating companies. If companies share only a limited amount of supply chain data, the solution will not realize its full potential. Gaining the trust of participating in companies in the overall solution (technology, governance, benefits and more) is a pre-requisite for convincing them to share their data. There are no gains without data sharing.
  3. Broad adoption. It is plausible that IBM engaged with MAERSK because of the dominant market share of MAERSK. With such a large company behind the solution, it is likely that there will be a critical mass of companies willing to use the system. Such critical mass is required for the solution to be a financially sustainable business.

Are there Blockchain solutions for trade finance?

A number of consortia in the financial sector have been undertaking initiatives to develop Blockchain solutions for trade finance, i.e. focusing on the financial aspects of trade. Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Societe Generale and UniCredit launched the we.trade platform in 2018.

Another initiative is said to be lead by The Hong Kong Monetary Authority (HKMA), involving 21 banks, including HSBC and Standard Chartered Bank, Bank of East Asia, Australia and New Zealand Banking Group Limited, Hang Seng Bank, and DBS Bank.

Batavia is a third such platform. It is currently being developed by IBM in collaboration with a consortium of five banks: UBS, Bank of Montreal (BMO), CaixaBank, Commerzbank and Erste Group.

How Blockchain works in trade finance

Trade is a sequence of supply chain events. Each event in the physical flow can have consequences in the financial flow. Blockchain provides the consensus mechanism, provenance and immutability that allow parties to automate contracts and financial transactions. For example, upon recording the event “goods arrive at destination”, the Blockchain consensus mechanism implies that all parties agree that this event is valid. Therefore, as soon as the Blockchain network has recorded the event, the bank’s IT system can release the payment for this shipment. No need for paperwork, no need for manual processes. The seller will receive their payment faster than today is the case.

Will Blockchain solutions for trade finance be merged with Blockchain supply chain solutions?

I expect that this will be the case indeed. Solutions such as TradeLens focus on the physical flow, while trade finance solutions focus on the financial flow. Yet in global trade, the physical flow, the financial flow and the information flow are all related. This is why information is the lifeline of global trade. And therefore it makes a lot of sense to combine the two solutions.

Do you recommend Blockchain for global trade?

I recommend achieving supply chain transparency because I am convinced that all supply chain partners will benefit from such transparency. Blockchain is a means to this end. But the technology enough does not suffice. Critical design decisions will define the degree of benefits. These include which data will be shared, from which sources, how qualitative this data will be, and in which format it will be captured. Solving the supply chain transparency problem requires access to rich structured data from reliable sources.

 

Suggested reading:

  1. Will Blockchain revolutionize global trade?
  2. Why data is the lifeline of global trade

 

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Ziv Baida

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