[Together with Chris Berg, Sinclair Davidson, Mikayla Novak and Jason Potts this article was published at Cryptoeconomics Australia]
International trade is an information problem.
As goods move between firms and across borders, information about the provenance, characteristics, and compliance liabilities (whether they are subject to taxes or tariffs) of those goods move alongside them.
Handling companies need to know which goods are going where.
Regulators and trade authorities need to know whether the goods crossing a national border are compliant with domestic regulations.
(Does a good need an import permit? Does it require any special documentation? In Australia the Minimum documentary and import declaration requirements policy is a 27 page document.)
And end-users increasingly demand information about where their goods came from and how they were produced.
(Consumers want to know where their food is grown, whether it was grown to organic standards, or was manufactured gluten-free or nut-free. Advanced manufacturing firms want assurances that components — such as aircraft or wind turbine parts — are of high quality. And everyone wants assurances that their goods have been looked after while in transit.)
The result is piles of documentation shipped alongside internationally traded goods.
And the demand for documentation is growing. Supply chains are getting more complex. Regulatory requirements are increasing. End-users want more information about what they’re buying.
FinTech is the application of new technology — particularly developments in computer science — to the financial services industry. RegTech does the same for regulatory compliance.
Now we have TradeTech — the application of information technology to reduce the information costs of international trade.
TradeTech can reduce transaction costs, increase transparency for firms, regulators, and consumers, facilitate trade finance, and significantly lower regulatory and tariff compliance burdens.
Tackling border costs
One TradeTech application, blockchains used to manage supply chains, have the potential to provide a new digital services infrastructure for international trade in goods.
Blockchains use a combination of cryptography and economic incentives to allow people to come to a consensus on a shared digital ledger without the need for a trusted third party. Blockchains are a technology for secure non-hierarchical information governance.
Blockchains can store information about the provenance and distribution of tradable goods through the entire supply chain in circumstances where firms (and regulators) through the supply chain do not necessarily trust each other.
The invention of the shipping container in the 1950s radically transformed international trade by tackling the high cost — and unreliability — of getting goods on and off ships intact.
But in the 2010s, it isn’t the cost of transport that is the biggest burden on international trade. According to IBM and Maersk, the costs of bringing goods across borders are higher than the costs of transport costs.
In 2018 and 2019 we expect blockchains used in supply chains and to facilitate global trade will be one of the breakthrough blockchain use cases.
The impact of this sort of TradeTech will provide an enormous boost to the potential for global trade.
Facilitating trade flows
The information flows that facilitiate international trade are still to a remarkable degree governed and organised on a one-to-one basis and using paper. Each firm in a global supply chain passes off information relating to a tradeable good to each other one step at a time, vouchsafing that information until it can be passed to the next firm on the chain.
Furthermore, despite two decades of the digitisation of global commerce, it is still the case that international trade is a significantly paper-based process — which is slow, error-prone and raises fraud risks.
The growth of the regulatory state over the last thirty years has significantly increased the compliance costs of trade. While regulatory harmonisation and tariff reductions have encouraged larger volumes of trade, these have been matched by greater demands for information those goods travelling across borders.
New regulatory concerns about labour, environmental, chemical, and biosecurity standards are being reflected in international trade agreements and are translating into more regulatory requirements at the border.
Longer and more complex supply chains as a result of globalisation has multiplied these compliance burdens.
Blockchains can provide a ‘rail’ on which all this information travels.
Blockchains are uniquely suited for an era of advanced globalisation, the regulatory state, and demand for information about product origins and quality.
But TradeTech needs multilateral coordination
Private industry is developing the technology for blockchain-enhanced supply chains.
But there is the need for an international coordination to ensure that industry is able to exploit the opportunities this technology presents.
For example: information rmanaged on blockchains needs to be accepted as valid and compliant by domestic regulators.
One risk is that industry-developed blockchains might not be not treated as compliant with existing regulations. Goods could then remain subject to existing paper-based processes, necessitating double-handling of compliance and reducing the benefits of blockchain-enhanced trade.
Another risk is that individual trading countries adopt their own standards, which would also necessitate double-handling.
A further risk is that standards are developed by early market leaders in the blockchain-facilitated trade space, are adopted by regulators and trade authorities on an ad-hoc basis, and through regulatory lock-in limit the contestability of this trade infrastructure.
The benefits of TradeTech will be realised in a world of open-standards, rather than closed ones.
Multilateral bodies like APEC (Asia-Pacific Economic Cooperation) should be considering these questions now.
We don’t think governments should try to regulate the development of blockchain technology, or compel its introduction. The blockchain is an experimental technology that needs space to evolve. But there is a clear role for multilateral bodies to set standards for information managed through blockchains.
TradeTech doesn’t need government regulation or direction. But it does need government cooperation.