Here’s why Blockchain can Make a Difference in International Trade
Over the past years, there has been a lot of buzz around blockchain in connection with Bitcoin and other cryptocurrencies. Also, numerous use cases in the financial sector have been emerging all around the globe. However, the general public has mostly overlooked the applicability of the technology in other areas throughout this period — rightly, one may wonder?
Let’s, therefore, take a look at the transport and logistics industry as an example, an area that remains commercially underestimated in the context of blockchain. The sector faces its biggest processual challenges in the segment of bureaucracy and paperwork. To tackle these, potential blockchain use cases could range from increased visibility and productivity across the supply chain to automatizing contractual transactions. Altogether, these applications follow one mutual goal — creating a trustworthy and transparent environment while eliminating local data silos. Experts have already started to recognize this potential. Morgan Stanley estimates the technology’s impact on global revenue to be as high as $500 Billion.
But while this all sounds very promising in theory, what does this mean in practice?
Issues in a real-world trade environment
To better illustrate my point, I have set up an analysis of a real-world use case. For this purpose, I chose the East African Northern Corridor (NC), a region with a lack of bureaucratic process efficiency on the one hand and an institutional environment proactively enhancing regional economic collaboration on the other hand.
Based on the findings of the use case analysis, three main segments of issues in transport and logistics have become evident:
Issues in border procedures: The issues identified in this segment can mostly be attributed to a lack of coordination of procedures at border crossings, increased bureaucracy and the usage of different platforms by different border authorities. Especially the latter leads to locking away data in silos and hence redundancies in repetitive processes, an issue which is also frequently highlighted in global trade studies. However, also infrastructural challenges are present in the region, for example at border posts, decreasing the overall efficiency of trade procedures.
Road issues: Other than border procedures, most of the issues across the roads in the NC relate to infrastructural challenges. Regular road shortfalls and a lack of fast truck weighing facilities strongly hinder transportation processes along major trading routes in the region. However, the impact of these issues has been steadily decreasing over the past years, also reflected in the results of the regional cargo tracking system, launched several years ago. Even though the tracking system has been developing over the past years, it is still far from leveraging its full potential. This is mainly due to a lack of electronic seals and no single tamper-proof regional tracking platform.
Policy and regulatory issues: Identified issues in this area across the NC mostly relate to non‑transparency of national trade policies and their applicability across borders, as uniform rules between countries are still lacking. This can be witnessed in most cross‑border trade scenarios where no trade agreements between countries are in place. Other relevant issues in this segment include visa fees and non-regional insurances, both fuelling overall trade costs in the NC.
Where can blockchain make an impact?
Summarising, multiple issues hindering transport and logistic efficiency are still present in NC. Many of them share similarities with global trade issues, thereby underlining the relevance of this use case analysis. These issues not only lead to first-order effects such as increased costs of transportation, but also to second-order effects such as supply shortages and potential regional conflicts. However, while most of this seems evident, the main question remains unanswered — how can blockchain be a difference-maker for this region?
To evaluate this question, I have highlighted three main areas where blockchain brings benefit to conventional trade processes:
Trust in data: The complex encryption mechanism guarantees the integrity of data which every user can transparently verify. This creates re-traceable and auditable data across the network — a big benefit when having multiple parties using this data during unrelated procedures.
Trust in a decentralized authority: Based on the consensus mechanism used by blockchain, data is accepted by network parties thereby eliminating the need for a central authority. This can especially be important when establishing a platform between multiple parties who do not trust each other, an aspect often found in transport and logistics.
Self-enforced contracting: In combination with the above, automatized smart contracts have the potential of mitigating contracting costs, as well as potentially eliminating trusted but costly middlemen. Moreover, they can be applied for administrative purposes by automatizing (semi-)manual procedures, such as the clearance of cargo.
Complementing the areas of issue in the NC with the aspects blockchain introduces to conventional trade, certain key benefits become evident. These can mostly be related to border procedures and their administrative as well as coordinative issues. Blockchain in this context can create a trusted tamper-proof platform with simultaneous access for multiple parties. This provides an essential basis for improving the coordination of border procedures and transparency of documentation. Bureaucratic procedures at border posts can be completed faster and verification time minimized, offering an opportunity for diminishing redundancies at border posts. Latter mostly occur due to the circumstances that the same data is validated and entered multiple times into the respective systems of different government authorities. The scale of these redundancies is also displayed in the fact that 70% of shipping data can be replicated across shipping documents according to a study by Accenture.
Apart from border procedures, the analysis shows that blockchain can strongly help reducing issues related to cargo tracking and re-tracing it to its origin. Building on the tracking system already in place, a blockchain-based monitoring platform in combination with IoT connected tracking devices can allow creating one single, true tracking record. Such a platform allows the sharing of information across all parties involved, resulting in easier re-tracing of cargo and improved control of compliance with legal regulations. In further context, this implies an overall reduction of redundant trade procedures.
The findings of my use case analysis clearly show that blockchain is more than just Bitcoin. As a tool for facilitating administrative procedures and improving transparency, the technology can be applied in areas that have hindered the efficiency of trade processes over the past decades. Decentralizing authority, creating trust as well as a single point of truth can make the difference when comparing to other technological solutions. This is especially crucial in sectors where most parties do not trust each other and spend vast amounts of money and time on securing their transactions. Hence, I argue that blockchain as an application for transport and logistics has not yet gained sufficient attention from the general public.
To conclude, blockchain should not be understood as the single solution to all problems in transportation and logistics, as also displayed in the findings of this use case analysis. However, when implemented in the right manner, this technology can become a strong enabler for increasing efficiency in trade processes.
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