Blockchain Regulations within Global Trade-(Part 4)
In the first three parts of this series we have looked at some of the more broad topics within Blockchain all of which can be read here if you missed them.
After now building a foundation of knowledge on the subject it is now time to move into the more hot topic discussions around Blockchain and what needs to be put in place to allow the tech to scale.
The focus of this post is going to be around regulations within global trade. Many think that if we can find a solution for global trade and Blockchain integration that it will be much easier to solve regulation issues in other areas.
In order to be able to cover this topic in-depth we need to overlook many different aspects such as the current issues within global trade and the proposed solutions then how Blockchain can be implemented in order to solve some of these issues and what will need to happen.
Current issues and current solutions
There are many issues that are currently within global trade such as lack of access to specific markets or regions, to managing streams of customs paperwork and data. The emergence of technology such as artificial intelligence and the Internet of Things has catalysed innovation to break down some of these barriers to trade on a scale never previously seen before. With this new wave of innovation, Blockchain has been adopted massively by companies such as IBM with the example of Tradelens which aims to digitise the supply chain through Blockchain technology.
With this in mind, it is crucial for businesses moving forward to set a flexible outward-looking strategy for the future of their global trade that allows for Blockchain and other technology-based solutions to flourish.
Focusing on our first major issues that currently circulate within global trade: Transactional costs associated with intermediaries and paperwork. As we all know international transactions rely heavily on the role of intermediaries and physical paperwork. Many different actors and companies check, process and authorise products and good on supply chains. All of these operating across international borders that bring with them new sets of rules, this protracted process adds time, resources and costs which in turn burdens the operators seeking to produce good and access markets.
There are many types of international trade documents that are issued and processed along the entire supply chain, but for the focus of this post we will solely be referring to the bill of lading (the bill of lading is a document issued by a carrier to acknowledge receipt of cargo for a shipment). The bill of lading requires extensive coordination across different organisations and operators, with inherent admin costs and time consumption. As such this paperwork is susceptible to mistakes or purposeful tampering which can damage the reputations of the organisations and incur further costs and a time delay.
Reducing the bureaucratic barriers to trade is one of the core objectives that need to be addressed. Technology can simplify the need for duplications, unnecessary interactions that result in overlapping documentation and administrative paperwork.
The second issue we are to look at is: Exchange of information. As it currently stands there is a constant stream of limited and inconsistent information throughout the supply chain. it is so prolific that it is commonplace resulting in the hindrance of the flow of goods. With there being such a frequent exchange between all parties there is the inevitable result of issues such as data quality, mistakes in data, and delays in submission of data. It is true that the necessary data is not always fully accessible between those who need it. This then results in further delays and duplication that can result in goods not reaching their destination in time which adds costs to manufacturers and producers.
The seamless exchange of information between different parties across the supply chains as well as customs officials and regulators will improve trust in the provenance of products and increase business compliance. This moves us into the third and final issue we will explore: Increasing the use of preferential trade access. Each country has a set of tools for trade which enhance the preferential market access of its producers and widen the choice of consumers. One of the most influential tools is the Free Trade Agreement (FTA), however there is a growing concern over the underutilisation of the trade preferences that are guaranteed by these FTAs. The conditions attached to the greater levels of reciprocal market access can be very complex. As an example a textile manufacturer that is in Country A may have a tariff when exporting a specific good to Country B. An FTA will be able to facilitate the lowering of these tariffs or completely wipe them out. In most cases, to make use of this reduced tariff the exporter from Country A will need show compliance with the country’s rules of origin. For this the exporter will need show the nationality of the goods to ensure the product is what it says it is. As this is the case exporters are normally reluctant to produce the paperwork and certification to demonstrate the goods nationality composition that its exporting as this total cost can be often higher than the tariff they would incur outside the preferential access. What this example demonstrates is that there are major issues around this process. One is the difficulty in understanding the rules for obtaining preferential origin. Another is the cumbersome procedures for obtaining documents needed to benefit from the preferential treatment. With all these issues through the implementation of technology it can lessen and remove the disincentive complex rules created for businesses to utilise the hard-won access granted by FTAs.
Moving away from the doom and gloom of the current issues that we currently face within global trade, we can now explore some of the technological solutions that are currently implemented. As we know since the invention of the internet itself, technology has better-abled businesses to develop and invest in new avenues. Advances in technology have had a twin effect on reducing the natural barriers of distance and have simplified the complex web of rules and regulations.
But as we focus on global trade it is important to note some specific advances that have been adopted. More widely known is the adoption of data analytics, track-and-trace technology and the integration of Internet of Things devices, such as RFID tech and artificial intelligence. These technologies can identify the past and current locations of inventory items along the entire supply chain in order to reduce the burden on manufacturers and producers a detailed audit train (in theory of course — a whole post could be made in the failings of this).
Additionally, the United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) developed recommendations to incorporate electronic information flows to simplify and standardise procedures. Finally one of the most prominent developments is within ‘single window systems’. These systems are used by customs organisations that enable businesses to electronically submit applications for certifications, licenses, permits and customs declarations, by reducing multiple channels of interactions with different officials, regulators and inspectors to one single entry point which significantly cuts the paperwork and inefficiencies associated with duplication.
Changes through Blockchain Integration
Many understand that Blockchains integration into global trade issues would streamline a lot of these issues but the questions is: Can Blockchain fully revolutionise international trade?. One thing that must be understood from the start is that Blockchain is not a silver bullet, its key features of immutability, proof of origins and verification certainly do have the potential to alter how we conduct global trade, but that does not mean it is the only technology that will do this, Blockchain will be part of a suite of emergent technologies that will alter global trade. Through Blockchain integration the reduction of transaction costs between parties by removing the need for physical paperwork as well as any of the administrative hurdles that would imposed by third parties.
One of the key major benefits tat Blockchain will bring to global trade is through streamlining documentation. As it currently stands paperwork is king and within the intensive nature of global trade this means that documents can be prone to errors, losses and in some cases fraud, through the integration of Blockchain it can remove some of the pressure and volume of paperwork and the manual verification that comes along with it. However, this does not mean that Blockchain is a single solution as we are still a long way from being able to fully digitise global trade processes, as it is inevitable that some paperwork will always be required but nonetheless the streamlining effect of Blockchain have the potential to facilitate even more transactions on supply chains thereby increasing global trade. For example, by participating in a blockchain network, customs organizations will be able to collect the data required for a good to pass through a supply chain in a more accurate and timely manner, this is because the information would be recorded on the Blockchain information such as location, buyer, seller of a good all of this digital paperwork could be collected and processed as data instead of a series of paper documents.
As well as this ledgers also allow all parties in the transaction to see the same information recording the status of the consignments at the same time. This improves the ease of communication between parties and fundamentally provides mutual trust.
Another area in which Blockchain will aid in the advancement of global trade is through data flow. There is an unquestionable connection between Blockchain and cross-border data flow for global trade, A network based on Blockchain can provide trust between different platforms by integrating previously disparate data from multiple sources. Additionally, Blockchain has the potential to facilitate and even strengthen the security of the data flow which would prevent fraudulent documentation and any counterfeit goods in the global supply chain. With the integration of verification along multiple stages of a supply chain could be a great benefit, this is because Blockchain automatically registers data once it has been verified and stores it chronologically without amending previous entries (whilst this is the case in theory, there are many cases that dispute GDPR incompatibility as it currently stands — but more on that in a future post).
How does this work?
There are a multitude of considerations that need to be taken into thought when looking to make Blockchain work within global trade. Looking at regulatory considerations is key as going paperless requires more than the technology and technical interoperability. It requires a conductive regulatory framework. Only the correct framework for recognising digitised documents and transactions are essential for ensuring a completely frictionless trade.
Whilst there is a large amount of investment into the technology we do need to recognise that there are still many legal provisions to recognise tools, such as e-signatures and e-documentation, because of these legal provisions we are still far away from having a global trading system that allows for a paperless trade. In a more controversial point looking towards scrapping the traditional paperwork system as a whole and having a al-carte menu of standardised smart contracts would provide a paperless and automated trade, but as it currently stands a smart contract does not currently fall under what is a legally binding contract. However from this point policy makers should be taking this opportunity to consider how regulations can be designed flexibly, to stand the test of time and welcome in these developing technologies. With one of Blockchains potentials is to integrate data from multiple sources, it will be essential for regulators to build mechanisms that can recognise and facilitate convergence between them.
Now looking towards international standards, as it standard currently there is very little happening on this front with more looking to potentially happen within 2021 with the explosion of Bitcoin again this year and with more Blockchain start-ups than ever, one notable contributions is from ISO who is currently working to develop 11 international standards for Blockchain, ranging from terminology to taxonomy and ontology, guidelines for governance to privacy and personally identifiable information protection considerations.
Finally looking towards building a shared understanding. Stakeholders from across commercial business, civil society and governments must now work to build a shared understanding of the Blockchain and its implications for global trade. Stakeholder engagement is at the heart of Blockchain deployment for global trade.
The potential impact of Blockchain solutions in the global trading system on trust, security, transparency, and consumer confidence is massive. This is a race to innovate not regulate.
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