Unblocking cross-border trade
Facilitating international movement of goods via blockchain could become a reality for developing countries
by VICTORIA TUOMISTO, Associate Expert, and MOHAMMED SAEED, Senior Trade Facilitation Adviser, International Trade Centre
Global trade is experiencing a major boost to easing movement of goods across borders. The implementation of the World Trade Organization (WTO) Trade Facilitation Agreement (TFA) is driving the reduction of time and cost of cumbersome trade formalities. However, an equally powerful force expediting cross-border trade is the accelerating progress of the digital technology in areas spanning from trade logistics, automated processing and e-payments to immediate access and exchange of trade information and documentation.
DISRUPTING TRADE PROCESSES
The International Trade Centre (ITC) surveys of traders in developing countries consistently show that procedural inefficiencies such as excessive time and cost of completing border formalities are a key obstacle to cross-border trading. While the TFA aims to introduce administrative efficiency and transparency into these formalities, the processes of submitting, moving, verifying and securing trade documentation are also particularly ripe for technological disruption.
One of the most hyped and potentially game-changing technologies of the day is the distributed ledger – commonly known as a blockchain, a design form of the technology – which is a shared digital database that can record every transaction. Thanks to its features all kinds of financial, trader and product-related information can be made available digitally and the cloud-based ledger should, in theory, ensure that records are immutable. Its use started in financial services in the form of virtual currency bitcoin and more recently in trade finance. Since 2016, the technology has increasingly been tested for cross-border trade-facilitation purposes.
AMPLIFYING TFA BENEFITS
Blockchain technology allows real-time tracking of changing ownership of goods across borders. The end-to-end visibility of live data on the transaction increases transparency and access to information for the private sector and government authorities alike. This traceability and immediate data access should improve predictability for the actors involved and boost efficiency across the supply chain. Its adoption by border-regulatory agencies in particular can remove the need for manual, paper-based, lengthy formalities and documentation requirements as information such as e-certificates and e-permits are immediately shared by all authorized parties.
For the private sector, access to such eased processes should help reduce trading costs and may reduce the need for intermediaries such as customs brokers and agents. Customers, meanwhile, should have better information on the origins, movements and features of the product. For border agencies, and particularly customs entities, blockchain solutions can in turn improve their capacity for risk analysis and targeting, optimizing clearance processes.
Most importantly, collective transparency, authorized and authenticated participation, and the immutability of records on blockchain should help to build trust between all actors in the trading process – a key requirement to joint design and implementation of trade facilitation reforms. Bringing light onto every aspect of a transaction should level the playing field and build confidence.
In January 2018, following a number of test and proof-of-concept initiatives, IBM, the technology company, and Maersk, the Danish shipping company, announced a joint venture in developing blockchain solutions to help track international freight and replace inefficient trade documentation processes. Previous pilot projects included mapping the total paper flow of the door-to-door shipment of flowers from the Kenyan city of Mombasa to Rotterdam in the Netherlands, while IBM collaborated with Singapore Customs in deploying blockchain to send customs declarations from the United States of America to Singapore.
Despite its potential advantages, blockchain poses some serious challenges for businesses and authorities alike. First, the extensive transaction volumes and computation requirements involved demand adequate technical and operational capabilities in the form of sufficient electricity and reliable internet access, as well as human resources and skills to manage the system. The current databases and software, such as existing single-window systems used by border agencies, need to be integrated with blockchain technology.
Second, the records must be immutable, secure and the ledger itself inviolate. A data breach – let alone a hacking attack and theft of actual cryptocurrency, a case of which was reported in December 2017 – would immediately reduce trust in the system. Border agencies must have access and confidence in all the required certificates, permits and licences in the database to clear shipments. Businesses, on the other hand, need to trust that the ledger provides an appropriate level of confidentiality and security for the sensitive commercial information they may be required to share. Ultimately, such systems work only when all parties trust and use the technology and have the tools and capacity to do so.
The recent pace of other digital technologies suggests that distributed ledger technology will also evolve rapidly. Competing forms of the technology will emerge that will operate under differing access rights. A system may function with permission rights managed by only one or a few actors – for example the government or the technology provider itself – or by all individual actors given authority to decide with whom they want to share data. The chosen underlying technology will then determine the type of governance system required.
A clear legal and regulatory framework mandating and governing the use of blockchain is required to address those concerns. Just as e-signatures and e-documentation require the same legal standing as their physical counterparts, so must blockchain be mandated by domestic legislation to allow border agencies to operate and clear valid declarations.
Beyond domestic laws, international standards should be created to increase the legality and mutual trust of documentation shared across borders. On this front, the European Commission’s Directorate-General Connect is currently studying standardization needs. Finally, given the rapid advancement and applicability of this technology, urgent regional and international regulatory cooperation is needed to ensure the documentation shared using the distributed ledger is recognized as valid by authorities in different jurisdictions.
Despite concerns, blockchain raises hopes for accelerating the benefits of trade facilitation, especially where trade formalities are most costly. Just as some developing countries have adopted advanced technology over existing mainstream infrastructure, such as the use of 3G networks instead of copper cables, so can blockchain help economies to leapfrog current best practice systems. With the assumed gains in efficiency and cost-effectiveness that the technology offers, business should benefit, and government become more effective. Its tamper-proof nature should also provide less opportunity for fraud and corruption.
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