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How Blockchain can revolutionize international trade?

24-Aug-2022 By: Sourabh Agrawal
How Blockchain can revolutionize international trade?

Many underdeveloped and developing countries rich in resources have an incredible opportunity in their hands named blockchain.

 Leveraging the power of blockchain may help boost trade with the world and help the economy soar. Additionally, blockchain can help solve many other problems, the biggest one being logistics and operations.

International trade is worth $17 trillion. To put $17 trillion into perspective, gold's market cap is just $11 trillion. International trade can be broadly divided into two parts,75% of goods and the rest 25% of commodities. International trade is a complex process since every country has different restrictions, regulations, and taxes. 

There are many other problems like lack of trust and coordination between two parties, especially in the emerging markets, lots of unnecessary paperwork, etc. Over the past few years, various MNCs and startups have tried to solve these problems but were either not successful or partially successful. Blockchain technology promises a reliable solution for such problems while drastically cutting operation costs. Hence, many companies and consortiums are researching blockchain implications and developing suitable software for utilizing blockchain to its full extent. 

Why blockchain?

Blockchain has the power to take digitization to a new level; it facilitates the tokenization of paper trails, letters of credit, and much more. Smart contracts, another feature of blockchain, can help build a trustless system and help improve coordination by automating agreements and business events.

Although blockchain emerged as a financial use case, it has many other implications, and data management is one of them. Blockchain simplifies the data recording process; it is more transparent and secure than the current framework. However, blockchain's resistance to data alteration makes it the preferable technology. 

The extended value chain tied to international trade includes extensive and complex logistics solutions, customs, financing protocols, and bureaucracy, all of which can be streamlined and more accessible through blockchain. 

In the field of logistics, blockchain helps optimize a process, makes shipments and goods traceable, and guarantees the security of payments with easy cross verification through a real-time information portal that will support every stage of trade. As a result, blockchain can drastically improve how private and public service operations are conducted. 

TradeLense, a blockchain-based shipping solution developed by IBM and Maersk, has outperformed every other traditional shipping solution. 150+ organizations have successfully used the project; IBM claims that companies have said 20% and reduced the time consumption by 40%. TradeLens is an early example of the potential implications of blockchain technology; there will be many more such solutions, potentially better than TradeLens, in the near future.

In the finance and payment sectors, blockchain is significantly faster and more secure than other digital methods. In addition, SWIFT, which is generally used for cross-border transactions, is costlier than blockchain.

Blockchain in different sections of international trade

Commercial transactions

One of the critical attributes of a blockchain-based system is the elimination of middlemen. Furthermore, in a decentralized ecosystem, vendors are not subjected to governance; hence, there is a degree of flexibility that centralized systems fail to provide. 

However, a decentralized marketplace such as that described earlier applies to only a limited part of applications; international trade is far more complicated than other marketplaces wherein blockchain technology is applied. Vendors and traders must adhere to multiple legal systems, privacy laws, and conceptions of trust. In a decentralized marketplace, all these constraints can be delegated to a trustless system of algorithms; i.e., vendors are essentially trusting the code instead of trusting or speculating on each other. 

Besides, storing transaction details in the blockchain smart contract can also be very helpful. This will help store transaction details which will be accessible to only the involved parties like financers, buyers(importers), sellers(exporters), creditors, and insurance brokers. 

Trade finance

The financials of international trade are very complicated and can be divided into different parts according to the nature, item, and system of the trade. There are various aspects of Trade Finance that blockchain and DeFi can help improve. 

Letter of credit and open accounting

A letter of credit is a financial instrument that is provided by a bank, guaranteeing that the seller will receive money from buyers on time and at the correct value. This is an important financial solution created as a token of trust. The reason why blockchain needs to be included in the equation is that the current system is quite costly and creates a massive paper trail. 

Besides, open accounting is associated with several risks, including denial of payment and a high grace period, which can be misused. With the help of smart contracts, importers can send payments to the smart contract, probably with cryptocurrencies. The smart contract will unlock payment and automatically send it to the exporter only when the importer receives the shipment. 

Blockchain will eliminate the need for banks to coordinate with multiple players and factor in other costs like risk estimates, paper trails, and other processes. 

Cross border payment

One of the most common blockchain use cases across different sectors is cross-border payments. They significantly reduce both, the cost and time of transactions. The international trading sector is no different. The current banking infrastructure is highly complicated and inefficient when it comes to cross-border payments. Apart from that, any type of grievance solving involves time-consuming bureaucracy that can be eliminated entirely by blockchain. 

Customs and administration

Finance is one of the most common and evident use cases of blockchain, but blockchain has many other lesser-known but excellent use cases. Blockchain can streamline the customs process, majorly increasing transparency and thereby decreasing the chances of malfeasance. This is possible through real-time information sharing and by automating the process of selection and submission of customs documents and verification sets either through the method of trial and error or with predetermined benchmarks. 

With blockchain, customs officials' high workload can be reduced and optimized through tamperproof data in smart contracts. These smart contracts, even though transparent and built (probably) on a public ledger, can process private information with high privacy and security, giving access only to the predetermined parties. 

Logistics and operations

No matter what the sector is, logistics is one of the most complicated divisions. A global supply chain includes multiple supply chains connected to each other with multiple agreements bound by multiple countries' regulations. For even a single error, a high level of coordination is required to fix it. 

Digitization of trade exchange operations could streamline the document-sharing process between players like importers, exporters, customers, brokers, insurance agents, creditors, financiers, and port operators.

  • Smart contracts could save time since the majority of these documents are operated manually. 

  • Output-based smart contracts that partially trigger based on shipment steps can save costs.

  • Real-time access to past and current transactions, eliminating the need for paper trails completely. 

Tracking, traceability, and transparency of trade

Blockchain can be used to store and access important documents and certifications; the authenticity of these documents can be verified via proof of authenticity. This can significantly limit the use of counterfeits, especially in the field of rare and collectible items. 

Problems with Blockchain 

While blockchain is an exciting and developing technology, it is still in its infancy. It has many problems and drawbacks that are to be corrected.

When it comes to cross-border transactions, the biggest problems with blockchain are lack of regulation and high taxes, with the cost and time of transactions differing from crypto to crypto. Furthermore, in countries like India, you have to pay 1% TDS on crypto transactions and so on, plus cess. Apart from this, various other intermediaries are also involved in converting crypto into fiat, further driving up the cost. 

Another issue that the current blockchain scenario is facing is the instability in price; there is a 5-10%+ movement in cryptocurrencies every day. If the cryptocurrencies are locked in smart contracts, they are measured in units instead of their corresponding fiat value. 

Another issue is scalability; blockchain is still in its infancy, and many new and promising projects are arising, but with that, many such projects are biting the dust on a weekly basis. Some of these projects are worth billions of dollars, supporting millions of users and stablecoins. Scalability will improve with new projects and users, but full-scale adoption of blockchain is not possible now. 

What does the future hold?

Blockchain has the power to help change international trade, especially for countries rich in natural resources that have huge supply chain operations. Platforms like TradeLens are already cutting costs by leveraging the power of blockchain technology; this can be expected from many other companies in the near future. 

Currently, blockchain has very limited use cases, but there are crypto companies like VeChain and WaltonChain that are revolutionizing the logistics and supply chain industries by either eliminating the middleman or drastically cutting the intermediation costs. These companies are heavily funded by venture capital, and their native currencies are also supported heavily by investors, citing a bright future.