We Don’t Need Political Solutions for Global Trade — We Need Practical Ones
This story originally appeared in Harvard Business Review on March 9th 2017.
What if we could track every component in a supply chain, automatically verifying their compliance with regulations and laws as they cross borders and are processed and combined with others to create a final product for sale? What if we could verify the pay and conditions of the factory workers each step of the way? What if we could account fully for the carbon emissions produced in manufacturing, shipping, and handling of the goods? In a recent paper, my colleagues at Hexayurt.Capital and I described a future in which blockchains, AI, and automated logistics explain how organizations and governments will soon be able to do all of these things and more.
These capabilities might seem like nice things to have, the metrics useful to measure. But as global supply chains become more complex, and the drive to harmonize global trade rules slows down or goes into reverse, the ability to answer these questions could become crucial for any business that hopes to grow in international markets.
For the last four decades, global trade rules have been harmonized by international treaties and trade organizations. In 2016 the trend began to reverse. One of President Trump’s first actions was to withdraw from the Trans-Pacific Partnership, a free trade deal among 11 countries. Britain not only voted to leave the European Union but also seems set to exit the single market free-trade zone.
All of this was foreshadowed in 2007, by Harvard economist Dani Rodrik, whose “trilemma of the world economy” predicted that it would be impossible to pursue globalization while maintaining nation states and democratic government. He pointed out that international rules would be hard to maintain and extend in the face of democratic demands for locally set laws and regulations.
This is a challenge for businesses that have come to depend on the harmonized rules of the international trading system in order to do business. In principle, there’s no problem with combining democracy, nation states, and reasonably open global trade. It’s the practicalities that make it difficult. In practice, every country making its own regulations and bilateral deals is a recipe for chaos and confusion. No human could possibly keep up with the required paperwork, with the regulatory and compliance burden imposed by such a system. But computers can, which leads us to the Internet of Agreements.
An agreement can be as simple as a handshake between two people who trust each other. But such trust doesn’t spread very far. Modern trade networks need hundreds of people to cooperate — not just the parties to the trade and their customers and suppliers, but also customs agents, tax collectors, and agents of the legal system. Because we can’t trust everyone, we need law and regulation, in the form of paperwork. If the paperwork is correct and matches what actually happened to get a product shipped across international borders, we know that everything has been done correctly. Discrepancies indicate malfeasance, corruption, or error.
Business runs on agreements — that shipments will be sent and received, salaries and invoices paid, goods transported, contracts fulfilled, debts honored, and the law complied with. Today this is often done on paper — payslips, bills of lading, safety certificates, professional credentials, with signatures and countersignatures to verify approval — but the near future will see the entire collection of documents digitized. Blockchain technology, with encryption keys verifying the authenticity of the data and decentralized storage ensuring that data cannot be lost, replaced, or tampered with, provides a perfect means for managing digital documents for trade.
This isn’t just a savings on paperwork; it’s a fundamental change in the nature of contracts and agreements. For much the same reason that computers have enabled us to handle much greater complexity in other areas, computers could handle checking 476 sets of regulations as easily as checking one. Armed with data about what has been agreed upon by the parties to a contract and what is required for regulatory compliance, computers can begin managing compliance for us. Machine-readable laws and machine-readable contracts enable machine-managed supply chains.
Consider the example of tracking food from the farm to a supermarket. London-based startup Provenance is already testing blockchain technology for tracking the origin of food; its ambition is to provide complete transparency over the entire supply chain. With access to such data, working out whether a given shipment is compliant with local regulations becomes a much more tractable problem, one that can be solved automatically. As economies of scale reduce costs, the idea of having a fully legible global supply chain begins to look feasible. Just as shipping containers boosted trade by standardizing shipping, the Internet of Agreements could standardize the ways we exchange and process the metadata of trade, and it’s this metadata that is important for compliance.
Other factors of production could be tracked and managed similarly. Imagine being able to inspect the labor contracts used by suppliers, so that you could ensure minimum standards of pay, safety, or education are being met. As factory workers clock in and out, and are paid for their work, a permanent record created on a blockchain could allow the factory owner to prove compliance with labor standards regulations in the markets they are selling to, at a trivial cost.
It’s this ability to automate paperwork, the system that allows us to trust each other across vast distances and cultural differences, that will allow us to extend globalization past the limits set by Rodrik’s trilemma. As we wrote in the Internet of Agreements paper, “The first globalization was an industrial model of globalization, where everything has to be made with the same standards before people can work together. In Globalization 2.0, computers take the strain of handling local differences in standards, regulation, and consumer preference, and advanced manufacturing meets these requirements because it can run small batches tailored to local needs efficiently.” This new environment does not require that everyone’s laws be the same, merely that everyone’s laws be connected and agreed upon in some way. The Internet of Agreements has the potential to facilitate this, allowing trade to flow where it’s both legal and satisfies market needs.
