Can blockchain really help international trade? There is no doubt that blockchain technology has opened new opportunities for international trade, albeit with some significant challenges from different perspectives that are required to overcome.
Whether it is the Latin American countries or the Caribbean islands, every country seems to have incredible opportunities within their reach when they leverage blockchain technology in different stages of international trades.
It will not only increase the trading volume across borders allowing seamless and fast flowing of goods across borders but will also help in economic recovery.
Global trade and commerce have been benefited by blockchain technology the most with several companies around the world using Ethereum blockchain technology in particular for realizing its transformative potential.
The supply chains have unlocked new business models that have helped them in simplifying the complex procedure and reducing the high operations cost involved in it.
It has also helped the SMEs a lot allowing them to participate in international trade now more easily and freely at low cost.
Therefore, blockchain technology has revolutionized the entire global trade and commerce ecosystem.
However, blockchain itself is still in its developing stage and therefore implementing it in international trade is not free from risks.
If you are a small business owner and want to implement blockchain in order to extend your business on a global scale you will need to do a lot of research to determine its feasibility.
However, if you do not want to visit a number of websites for that, here is an article that will simplify and cut the process short.
Through this article you will come to know the benefits and the challenges in using blockchain in international trade.
Contents
Can Blockchain Really Help International Trade?
Blockchain technology has not only helped the exporters and importers but has also helped other players such as banks, shippers and the customers as well.
This is because blockchain has different use cases in trade and commerce especially on the global scale.
Some of its use cases are:
- Improvement in business processes and management of supply chains
- Improving the logistics of bulk commodity
- Facilitating trade finance
- Assisting in post-trade settlement
- Tracking and tracing of goods in transit to ensure proper and timely delivery and
- Helping in assets and marketplaces tokenization.
When it comes to improving the business processes and management of supply chains across the globe, blockchain technology proves to be the best aid.
It helps in digitizing, securing, streamlining, and eventually accelerating the entire operational procedure.
There will be no paper-based processes that normally take a long time to verify and legally enforce documentation, which, in spite of that, cannot always prevent frauds.
With reliable and real-time data sharing, issues with gas and power are also resolved with blockchain technology.
This is because it allows:
- Proper info alignment
- Faster settlement processes
- Rapid imbalance resolution and
- More proficient delivery practices.
Also, with proper and timely reporting of energy produced and carbon emissions, issues with renewable energy and use of renewable assets are also resolved by the use of blockchain technology.
Blockchain technology also ensures more network transparency, trust and more effective governance systems that link all parties and stakeholders involved in a transaction.
When it comes to managing bulk commodities and its logistics, it involves a large number of counterparties.
If there is no proper coordination, the process will not be effective.
Most of these parties are located in remote areas where economies are still emerging but they need to be as efficient as the market is today or else commodity trading will be a low-margin service.
This can only be assured when there is a strong and more efficient logistic service between the producers and consumers.
This will increase the margins by reducing the cost of operation as well as the risks involved in commodity trading.
And, the deterministic and effective trust structure of the blockchain technology will ensure easy accessibility within the commodity market.
In terms of trade finance, blockchain technology will simplify the cumbersome and tedious operations processes.
This technology will help the SMEs in particular who find their trade finance requests to be turned down due to reasons like:
- Compliance failure
- Low profitability and
- Lack of trust.
Blockchain technology will resolve these issues with proper and authenticated documentation, coordination between the stakeholders, and by streamlining the operational procedures.
It will also enhance the accessibility to alternative investors in the marketplace which will help the small businesses in having a larger number of sources of funds.
Blockchain technology will also improve the current inefficient practices by removing the intermediaries from trading.
These can be the custodians, the security trade brokers, payment agents and more.
This will improve the post-trade settlement processes by removing the risks and the time consuming and unpredictable settlement cycles.
The technology will make it simpler and improve the series of post-trade operations.
This will eventually guarantee and facilitate consolidating securities registers but at the same time it will ensure that:
- The speed of execution does not drop
- The transaction costs are low and
- Real-time settlement at T+0 is enabled.
Marketplaces and asset tokenization will also be ensured by blockchain technology which will help international trades.
This will not only help in the above mentioned processes but will also:
- Increase liquidity in the market
- Simplify the accessibility between demand and supply parties
- Enhance the efficiency in operation and
- Encourage healthy competition.
Finally, in terms of tracking and tracing of goods, it is the transparency and the single-source-of-truth feature of blockchain technology that will eliminate the chances of delays in delivering and receiving of goods.
With all these features, varied use cases, and benefits, blockchain technology has really changed the concept of international trades.
Everything in a blockchain is connected in an uninterrupted way, which provides a one-point source for the parties involved in a transaction to get all relevant information.
This sets up the key part of international trade whether it is B2B or a B2C form of a trade.
It has paved the path for e-commerce marketplaces where producers and retailers do not need to sell their products from any physical locations any more.
The business channels allow selling products and receiving payments across borders over the internet.
Here are some of the different ways in which blockchain helps in international trade, a few of which are already mentioned above, discussed in brief.
When it comes to financing trade, it refers to financial products and services that should not only facilitate trades but also mitigate the risks involved in it.
With the use of blockchain, parties are connected to viable and reliable third-party sources for funds where the exporters, importers, and their respective banks are all brought on the same platform to facilitate interaction and finance proceedings.
Use of blockchain has also helped the traders to get their Letters of Credit which is a crucial document in trade finance.
This is a letter of promise issued by the bank of the buyer to guarantee the obligations of the customer to the vendor to pay for the goods shipped.
The Letter of Credit is one of the most crucial documents used in international trade which guarantees the security of a trade in spite of the legal complexities between the two countries and the distance between the two parties involved in the trade.
Open account trading is required to conduct an international trade.
This is actually a trade finance instrument used commonly while making cross-border trades.
It is used by the trade partners and their banks.
It refers to the sale wherein the importer receives the goods even before making the actual payment to the exporter or the payment becomes due.
Open account trading is used when there is a significant level of trust of the exporter on the creditworthiness and payment records of the importer as well as on the jurisdiction of his country, should there be any arbitration clause initiated.
The terms related to cost and cash flows of an open account are specifically beneficial for the importer but there is a certain amount of risk in it for the exporters.
During international trades, inbound and outbound monetary transactions are needed to be made.
This should be ideally fast, and, most importantly, secure.
Blockchain technology ensures both without the need of any third-party intermediaries like a traditional bank, which not only makes the process time consuming but also very tedious and cumbersome.
The blockchain technology will take care of the regulatory, customs, and administrative duties as well without complicating the process.
Whether it is related to the tax implications on the imported goods or any other types of services including custom clearance, blockchain will help in doing it all and also ensure that the correct standards are maintained all the time.
Some of these standards include certifications for:
- The origin
- Sanitary and phytosanitary and
- Conformity assessment.
The exporters and importers may have issues in identifying the rules to these and the applicable custom duties which is simplified by the use of blockchain technology.
In international trade, logistics is the integral part. This involves several aspects such as:
- Transportation
- Warehousing
- Material purchasing
- Material handling
- Inventory control and management
- Distribution and lots more.
There are several actors engaged in the process which makes it quite complicated to properly coordinate everything.
It needs a lot of documentation and resources to keep everything organized and ‘ship shape.’
Blockchain technology, once again, can manage it all most efficiently and that too without the need of any intermediaries or brokers between the carriers and the shippers.
Finally, blockchain helps in identifying, tracing, and tracking the products as they move through the different stages.
This ensures the well-being of the consumers by eliminating the chances of any fraudulent activity or counterfeiting.
It also protects the reputation of the company and its revenue.
Whether it is a pharmaceutical product, a luxury item, or any other type of item, product traceability facilitated by blockchain technology helps the customers to improve their purchasing behavior.
They can identify the origin of a product as well as its manufacturing process.
Key Beneficial Features
It is due to the beneficial features of the blockchain technology that helps in foreign trade.
First of all, and perhaps the most significant beneficial feature of the blockchain technology that facilitates international trades is its ability to store data safely in an encrypted and digital format.
Apart from the security, this encrypted data is transparent and immutable or tamper-proof.
It can be accessed by anyone who is authorized in order to get real-time info regarding the transactions made between different parties. These parties can be anyone including and not limited to:
- Big corporations
- An international supply chain
- Investment pools, and
- Supplier networks.
Blockchain technology is particularly helpful in international trade because such trades have a value chain associated with it which is pretty vast and includes complex areas such as:
- Packaging and handling
- Transportation and shipping
- Customer care
- Customs administration
- Financing
- Administrative obligations of the different regional and international firms and
- Logistics.
All of these can be properly managed and streamlined to make the services all the more effective by adopting blockchain technology.
Therefore, blockchain technology is very helpful to optimize the international trading process.
Some other beneficial features of the blockchain technology that facilitates international trade in particular are:
- The digital nature of it helps to integrate the physical processes and make them more efficient by using smart contracts that enhance productivity eventually.
- The combined verification process of transactions ensures the authenticity of the products reducing the chances of counterfeiting by the use of NFTs at the time of creation which later on can be treated as digital certificates helping the producers, retailers and customers alike.
- More controlled and effective distribution control outside the channels helps the retailers and brands to define definite rules for such management by the use of smart contracts.
- Provision of more effective after-sales services that include recall, maintenance, and warranties with better lifecycle information and provenance related to the product in smart contracts enhances the trust of the customers on the brand.
- Providing verified information regarding the raw materials used and the manufacturing process of the products by each stakeholder involved in the supply chain makes the brand more reliable to the customers.
Finally, real-time information removes the difficulties in proving ownership of product by the customers using the Non-Fungible Tokens related to the physical products reduces the chances of counterfeiting and thefts, which further facilitates a safer secondary market.
Therefore, it is the immutable nature of the distributed blockchain ledger that eliminates the chances of data manipulation and frauds.
Nothing can be changed on the blockchain without the knowledge of all the participants in it.
Also, the native ability of blockchain to produce and transfer digital assets boosts up the trading processes of the different existing commodities. Use of smart contracts further facilitates the process and reduces delays by automating the process.
Add to that, use of blockchain technology also allows overcoming different issues regarding Know Your Customer and other regulatory compliances.
With real time monitoring enabled by this technology irrespective of the number of parties involved also allows the regulatory agencies to gain easy access to these permissioned consortiums on the blockchain to ensure improving the Anti-Money Laundering protocols and auditing.
Finally, blockchain technology has the ability to provide easy access and interaction between the alternative investors to ensure proper supply and the SMEs of different emerging markets to ensure consistency in demand.
Therefore, it is the decentralized architecture of blockchain technology that makes it visible to all the participants in the network.
This means that everyone has the entire copy of the data along with the updates.
This implies that no one in the blockchain network needs to trust a central authority.
This provides instant transparency across the board which suits the main objectives of using blockchain technology in international trade.
These blockchain platforms are highly resistant to attacks as compared to traditional databases due to the concomitant use of Decentralized Ledger Technology and several cryptographic techniques.
All information on the blockchain is time-stamped before these are added to it and therefore these cannot be modified.
This has two specific implications such as:
- Any changes made in it can be tracked easily and immediately which ensures authenticity of the documents and products and
- It does not need keeping a backup of the database which eventually eliminates the need for disaster recovery.
And, use of smart contracts allows automating the process which reduces the chances of errors, missing out on opportunities, and lower efficiency.
Benefits
Using blockchain in international trade is not a new concept but the significance of it seems to have increased manifolds since 2020 with the outbreak of the COVID 19 pandemic.
In today’s post-pandemic world, it is expected to play even a more significant role and offer a varied range of benefits to the international traders.
It helps a lot in the verification of origin certifications, digital quality, sharing of information related to the trades in real time for all the different stages of the trade.
And, it ensures traceability of the goods in transit as well as guarantees safety and security when it comes to financing and making or receiving payments.
Apart from that, use of blockchain technology in international trade helps to improve the relation and operation of public and private services by simplifying cross-border trade.
This contributes to reduction of transaction costs as well as competitive improvements.
Some other notable benefits of using blockchain technology in international trade are:
- Reducing logistics costs
- Safeguarding operations right from start to finish
- Contributing to digitalization of the entire process and rules of trade
- Streamlining customs clearance and certifications with real time sharing of data
- Sharing of mutual recognition agreements
- Increasing interoperability between all parties involved in a particular trade
- Making faster and safer payments at low cost than the traditional SWIFT network
- Lowering transaction times with no minimal requirements which is especially helpful for the SMEs and
- Reducing the time to issue a Letter of Credit from several days to a couple of hours.
The most significant benefit is that international trade is becoming hassle free and is moving closer to paperless trading with the use of blockchain technology.
Apart from that, the inherent beneficial characteristics of the blockchain technology have also helped the traders to use it as a useful tool to employ the WTO Trade Facilitation Agreement or TFA as well as to assist in Business-to-Government or B2G and Government-to-Government or G2G processes.
Both blockchain technology and smart contracts helps in administering the border process through a single national window which increases the efficiency in trades making them much more transparent and secure.
It also ensures accuracy of data related to the trade.
Insurance is another significant area that is benefitted by blockchain technology.
Since this is also automated via smart contracts, it reduces the administrative costs, the complexities in the administrative processes while handling claims and the hassles in handling multinational insurance policies especially related to the maritime insurance segment.
Risks and Challenges
Just like any other thing, use of blockchain technology in international trade also comes with some significant risks and challenges.
One of the most significant challenges of implementing blockchain into international trade is the one that it has to face from the governments but there are other significant challenges as well.
Ideally, these challenges can be categorized into three specific groups as follows:
- The first one is regarding the technical issues that the traders have to face and which include the complexities related to the development of the technological infrastructure.
- The second significant challenge is related to the administration and governance aspect. This includes the requirement for open standards and creation of business and sector coalitions in different countries that will ensure both economies of scale and interoperability.
- The third significant issue is the implementation on a large scale. This includes data quality management, developing a comprehensive system, participation of the different parties involved in a transaction, and creating safe interfaces along with legacy systems.
The real challenge however seems to be in making G2G processes across the borders more efficient.
This is because it will need to do away with the issues with interoperability at the technical level.
Talking about interoperability, it is faced both at the technical level as well as in the semantics.
This refers to the information that is communicated by the data.
There are several platforms existing and are being developed that use different types of algorithms and technical interfaces that do not communicate with each other.
As a result, this creates the ‘digital island problem.’
There are lots of technical solutions being developed but all those are in their infantile stage which is why the issues with semantics cannot be addressed actively.
All these mean that the sender, receiver, and anyone in between cannot interpret the data in the same uniform way.
It is a serious issue and can jeopardize international trade in the long run which is why different international organizations have formed working groups that will look into the interoperability issues and increase its standards.
Some of these organizations are:
- The International Chamber of Commerce or ICC
- The International Organization for Standardization or ISO
- The United Nations Centre for Trade Facilitation and Electronic Business or UNCEFACT and
- The World Customs Organization or WCO.
Apart from that, it will also need political standardization to ensure a better and more effective regulatory framework is created to facilitate this paperless trade.
But then, there are the legal challenges in deploying blockchain on a global scale.
It will not only need a conducive and a strong regulatory framework but will also need to be valid and compliant with the laws and liabilities as applicable.
This will ensure that the access and use of data is regulated.
One of the most significant issues is the legal status of the transactions made on a blockchain network.
This means that there needs to be legislation that will recognize these transactions.
This validity may be ascertained by the e-signatures on the e-documents of any e-transaction.
Several governments have already started working on designing such legislation.
For example, the United Nations Commission on International Trade Law or UNCITRAL has implemented the Model Law on Electronic Transferable Records still a lot is yet to be done.
This is because there are some specific issues related to the liability and jurisdictions of the laws.
This will need a technical workaround of the permissionless blockchain networks.
Another significant challenge with respect to the legal issues is related to data privacy and especially the right to be forgotten encapsulated in some codification.
This seems to be a priori incompatible in relation to blockchain technology in spite of the fact that it also allows the users to have a greater control over their data but via different mechanisms.
The observers and regulators feel that there are two particular legal issues that may perform as enablers of the blockchain technology.
These are:
- Codification of law – The objective of it is to make the laws machine readable so that it facilitates substitution of the obligations in a contract into the digital contract code or smart contracts.
- Legal identification – This will help in the proper identification of the companies across the globe.
This transformation may impact the technology underlying global trade and commerce as well as in the understanding of the legal implications.
This will, in turn, affect the developmental process of the collective solutions that may be designed to deploy the technology.
However, legal concern is the key while developing a comprehensive ecosystem that works on the internet because it is the proper governance approach that will bring companies together.
It is not only the responsibility of the governments and the regulators to look for standardization in the legality, policymaking and regulatory framework but all the players in the ecosystem.
This includes and is not limited to:
- The civil society organizations
- The software developers
- The inter-governmental organizations
- The academics and other settings.
All should support the deployment of the blockchain technology on a global scale.
In the same way, it is also necessary for the international organizations like the WTO to take initiatives to raise awareness of the benefits of the use of blockchain technology along with its limitations and challenges.
This will have a significant effect on global trade and commerce.
It is only a collective and cooperative effort and initiative that will make international trade much smarter with blockchain technology making it look completely different in about 10 to 15 years.
Also, the limited scalability of blockchain technology due to the size of the blocks as well as the high consumption of energy are two most significant challenges in using the blockchain technology more extensively.
In addition to that, the new algorithms that are being created to be less energy sensitive and move away from the notion of blocks are quicker and more scalable but do not have a desirably long history to rely on.
If you look at the technical aspect, another significant challenge of the blockchain technology is related to the security aspect, in spite of the fact that it is advertised to be extremely resilient to hacks and cyber threats.
This is because the distributed nature as well as the cryptographic techniques used in this technology is not fully immune to such hacks and cyber threats.
There are lots of instances when a network of a crypto exchange was hacked and coins worth millions of dollars were stolen.
Moreover, the advances in technology that have resulted in quantum computing can pose a significant threat to blockchain technology in the long run.
It is for these reasons developers are working on finding post-quantum algorithms hoping that these will be defiant to quantum computing.
Another major challenge is the anonymity maintained in transactions made on blockchain.
There is some immediate rectification required in this aspect so that it is easier for the exchanges and institutions that need to follow KYC protocols.
This will ensure that they come into compliance with rules and regulations surrounding international trade.
If that is not done then fraudulent exchanges may violate the international restrictions and engage in transactions with dubious actors.
Solutions like transactions that are signed by authorized signatories of it or customs offices may be very useful in preventing such undesired activities.
However, in spite of all these challenges, it is due to the features of blockchain technology that a lot of private and public sectors are exploring and experimenting the possibilities of easing trade finance, provenance of goods and improving customs processes by using blockchain.
Even the financial institutions are trying to find easy access to funds and lower the cost of trade finance.
The shipping industries are using this technology to ensure more transparency in movement of goods.
Therefore, with such potential, the policymakers and governments should encourage use of blockchain.
Ideally, the governments should intervene in this aspect and help the traders to overcome these challenges by providing support with different financial and technical programs.
This will really help in promoting the use of blockchain technology in international trade.
With such an initiative from the government, the businesses will be able to reap the maximum benefits from international trade by enhancing the quality and quantity of trade flows across borders.
This will ensure that no country is pushed to the sidelines while others move ahead to a more prospective future in international trade.
Conclusion
As you can see from this article, blockchain technology has a lot of potential to facilitate international trade.
However, it does come with significant challenges, which, when known, are not that difficult to overcome.
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