SMEs have long been struggling with the complexities of international trade. All until blockchain and other distributed ledger technologies have demonstrated unprecedented ways of revolutionizing international trade.
Definition of blockchain
Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value. The distributed database allows two or more parties to transact directly with each other without the need for a third party. Transactions are verified by network nodes through cryptography and recorded in a public or private decentralized ledger. The use of blockchain technology eliminates the need for a central authority, middleman, or clearinghouse to verify or approve transactions.
Below we describe how blockchain technology approaches each complexity one at a time:
- High tariffs
- Multiple non-tariff measures
- Lack of transparency and cumbersome customs procedures
- Difficulties in accessing trade-related information
- Lack of skills and technology
- Logistics costs
- International payments
- Illuminate intermediaries
- Access to trade finance
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High tariffs
A known way to overcome high tariffs is to join a free trade agreement (FTA) or customs unions. FTA’s and customs unions eliminate tariffs between member countries, making it easier for SMEs to export.
Although tariffs can be lowered by making the process of tariff calculation and collection more efficient and transparent. Evidence and simplicity now can play its role on the global scale. For example, a company that exports goods to a foreign country could use blockchain technology to track the shipment of those goods and calculate the applicable tariffs. This would allow the company to submit an accurate invoice to the foreign government, and it would also help ensure that the correct tariffs are paid.
A good example is a project called Batavia, which is a joint venture between IBM and Maersk. Batavia is a blockchain-based platform that streamlines the entire supply chain process for international trade. The platform allows companies to track shipments, submit customs declarations, and pay duties and taxes. Batavia has been implemented in several countries, including Denmark, Sweden, and Singapore.
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Multiple non-tariff measures (NTMs)
Non-tariff measures are regulations other than tariffs that make it difficult for SMEs to export. Some common NTMs include import quotas, product standards, and licensing requirements. To overcome these obstacles, SMEs reserch the NTM’s that apply to their products and try to comply with as many as possible. They often enjoy working with trade associations or other experts to help them navigate the complex regulatory environment.
The elimination of NTMs can be done through the use of blockchain technologies in a few ways.
– the distributed ledger could be used to create a single global registry for all products. This allows companies to verify that a product has been certified for compliance with all applicable regulations and requirements before it is exported.
– the blockchain could be used to manage customs processes and automate the clearance of goods. This eliminates the need for paper documents and reduces the processing time for imports and exports.
– the blockchain could be used to track the supply chain for goods. By tracking the movement of goods through the supply chain, it becomes possible to identify any issues with product safety or compliance.
– the blockchain can also be used to create digital certificates of origin which can be used to verify the origin of goods. This reduces the time and cost involved in verifying the authenticity of goods.
The diamond industry is one area where blockchain technologies can be used to eliminate multiple non-tariff measures. The diamond industry is currently plagued by fraud and counterfeiting. For example, it is estimated that up to 50% of all diamonds on the market are counterfeit. Blockchain technologies can be used to create a digital “ledger” of diamonds that records all the details of each diamond, including its origin and authenticity. This would make it easier for consumers to buy diamonds online and would help to reduce fraud and counterfeiting in the diamond industry.
The food industry is another area where blockchain technologies can be used to eliminate multiple non-tariff measures. Blockchain technologies can be used to create digital “ledgers” of food products that record all the details of each product, including its ingredients and nutrition information. This would make it easier for consumers to buy food products online and would help to ensure that food products are safe and healthy.
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Lack of transparency and cumbersome customs procedures
Customs procedures can be complicated and opaque, making it difficult for SMEs to know what is required of them and also delaying shipments and increasing costs. Albeit transparency and trust are key to a successful business transaction, many commercial dealings suffer from a lack of transparency, which can lead to mistrust and stalled deals.
To overcome these obstacles, SMEs get to work with a freight forwarder or customs broker who can help them navigate the customs process. They also act proactively in obtaining all the necessary documentation upfront and submitting it in a timely manner.
Using blockchain technology in turn SMEs overcome these problems by creating a secure, transparent record of all transactions. By allowing all participants in a transaction to access the same information, blockchain technology reduces the need for trust and speeds up the customs process.
Several companies are already using blockchain to streamline international trade. Provenance for example is using blockchain to create transparent supply chains. Provenance allows consumers to track the origins of their products and ensure that they were produced ethically and sustainably. This transparency gives customers peace of mind and encourages them to buy ethical products.
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Difficulties in accessing trade-related information
Another obstacle that SMEs face is difficulty in accessing trade-related information. This includes information on potential buyers and suppliers, as well as regulations and policies that affect trade. One way SMEs overcome this obstacle is by using online resources such as trade portals and databases. SMEs also reach out to local trade associations or embassies for help obtaining information relevant to their business.
The transparency and security of the blockchain also allow businesses to overcome difficulties in accessing trade-related information.
For example, the TradeLens platform, developed by IBM and Maersk, is a joint venture that uses blockchain technology to streamline global trade. The platform has been used by over 20% of Fortune 500 companies to manage their supply chains. The platform has overcome difficulties in accessing trade-related information by allowing businesses to track goods as they move around the world.
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Lack of skills and technology
A lack of skills and technology can be a major obstacle for SMEs when trying to participate in international trade. Skilled specialists are often in short supply, and technology can be expensive. One way to overcome this obstacle is by partnering with an established company in the destination market that has the necessary skills and technology. SMEs also invest in training their employees so they are better equipped to do business in foreign markets.
Blockchain technology here too plays its part. It opens SMEs access to skills and technology. For example, blockchain platforms are used to automate business processes, such as payments and order tracking while allowing them to focus on their core business activities. Additionally, the use of blockchain technologies can help SMEs to develop and deploy innovative applications, which then makes it possible for them to compete with larger businesses.
For example, the Australian start-up company Power Ledger has developed a blockchain-based platform that allows businesses to trade surplus energy with each other. This platform has helped Power Ledger to become one of the leading providers of energy solutions in Australia.
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Logistics costs
The use of blockchain technology helps SMEs overcome difficulties with the transportation of goods internationally in a few ways:
-by providing a secure and transparent way to track goods as they move through the supply chain. This can help companies ensure that their products are not lost or stolen and that they are delivered on time and as expected.
-by streamlining the process of customs clearance. By using blockchain to track goods, companies can submit all required customs documentation automatically, which can speed up the clearance process. Additionally, by providing an immutable record of all transactions, blockchain can help reduce the risk of fraud or misunderstandings.
– the blockchain can help reduce the cost of international logistics by making it easier to connect with partners around the world. By creating a decentralized network for exchanging data and payments, blockchain can help businesses find new suppliers and customers more efficiently and at a lower cost.
Guardtime’s blockchain for maritime logistics aims to correct industry issues stemming from inefficiency as well as lack of trust and transparency. The company’s ledger uses smart encrypted contracts and decentralized shipping tracking to quickly verify data in a way that protects it from cyber attacks and manipulation.
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International payments
Blockchain technology creates a secure, tamper-proof record of transactions that can be shared between trading partners. This eliminates the need for intermediaries such as banks and customs officials, who can often slow down the process and add to the cost of doing business and it also streamlines customs procedures by creating a shared database of customs information. This way traders can electronically submit customs declarations and receive approvals in real-time. In addition, blockchain could be used to automate many of the processes involved in trade, such as customs clearance and document verification. This would reduce the need for human involvement, which can often lead to errors and delays.
One example is a project called WeTrade, which is a blockchain-based platform for trade finance. WeTrade allows companies to conduct cross-border trade transactions using smart contracts. The platform has been used by more than 1,000 companies in 10 different countries, and it has helped reduce the time it takes to complete cross-border transactions by up to 80%. Founded by a consortium of major banks in Europe and live since January 2019, WeTrade connects buyers, sellers, banks, insurers, and logistics organizations in a network that simplifies cross-border trading. Key benefits include reducing counterparty risk, automating transactions, and integrating the end-to-end trade ecosystem.
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Illuminate intermediaries
The blockchain could also be used to create decentralized marketplaces for goods and services that would allow traders to conduct business directly with each other, without the need for intermediaries. This business model cuts out the cost of using third-party platforms and could lead to lower prices for consumers.
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Access to trade finance
Many SMEs lack access to affordable trade finance which makes it difficult to finance international transactions. To overcome these obstacles, SMEs get to explore options for reducing their logistics costs, such as using express delivery services or consolidating shipments. They also seek out financial institutions that offer affordable trade finance products.
Traditional forms of trade finance are associated with high costs and burdensome procedures, due to a paper-heavy process and the challenges of coordinating multiple players involved in a trade transaction.
Blockchain offers interesting opportunities to improve the efficiency and inclusivity of financial services and financing while providing for a secure environment for cross-border transactions. Importantly, it can help SMEs build a credit history and facilitate their access to trade finance. Blockchain is also seen as an opportunity to promote financial inclusion in countries with large unbanked populations, accelerate payments via the use of smart contracts, enhance security and reduce fraud. Blockchain can improve the security of traditional trade finance transactions, digitalize processes and facilitate “know your customer” (KYC) financial guidelines (i.e. verification of the identity, suitability, and risks involved with maintaining a business relationship).
More potential benefits of using blockchain/DLT to facilitate trade finance include increased cybersecurity; greater transparency; real-time transactions; automation of payments (via smart contracts); easy audibility of transactions; easy inclusion of additional participants.
Back in 2016, Barclays and fintech start-up Wave reported to have conducted the first live blockchain-based trade finance deal. Conducted through a permissioned ledger, the letter of credit transaction process was reduced to less than four hours (traditionally required 7-10 days). In 2018, HSBC completed what it claimed was the “world’s first commercially viable trade finance transaction” using blockchain. For marine insurance contracts, the Insurwave blockchain platform allows all parties (e.g. shipping companies, brokers, insurers, and suppliers) to access the same ledger, updated in real-time. The Insurwave platform aims to accelerate billing and payment processes and to provide greater transparency, in particular on claim history, to better inform pricing decisions, while ensuring greater security of data and transactions.