The Disruptive Influence of Blockchain on International Trade

blockchain for international trade

  • The disruptive influence of blockchain app development in operating global supply chains, managing trade finance, and unleashing new business models are being recognized by major international trade organizations throughout the world.

    Challenges

    From the perspective of shipping and transportation, the trade and financing business is hampered by a lack of trust and coordination between exporters and importers, particularly in emerging and developed countries.

    Due to the complicated nature of operational processes in the international trading of products and commodities, the industry also has several operational inefficiencies. Shipping and commerce, for example, still rely primarily on human resources and are hampered by manual and paper-based operations that are expensive, slow, and prone to errors.

    Exporters and importers struggle to fund or guarantee their transactions, stifling growth and limiting globalization’s benefits. This industry has historically been resistant to technological and digital advancements.

    In Action With Blockchain

    Many start-ups and technology businesses have sought to produce products with varying degrees of success during the last 10-15 years— until the introduction of blockchain technology, which has been identified as the main use case for international trade.

    Many firms and consortiums have been spurred to update their old technology due to the potential influence of blockchain technology on international trade finance. Blockchain enables the tokenization of existing documents, letters of credit, and other documents, in addition to ushering in the era of digitization.

    Through the automation of agreements, business events, and other manually intensive activities, smart contracts will improve coordination between exporters and importers. The global adoption of blockchain technology will boost cross-border coordination, trade settlement, and standardization even more.

    Also, Read | Blockchain in Supply Chain | Use Cases, Advantages, and Features

    Advantages | Blockchain for Internation Trade 

    Review in real-time

    Financial documents linked to Blockchain are evaluated and approved in real-time, reducing the time it takes to start a shipment.

    Transparent factoring

    Blockchain invoices enable a real-time and transparent view of subsequent short-term financing.

    Disintermediation

    Banks using Blockchain to facilitate trade finance do not need a trusted middleman to accept risk, removing the requirement for correspondent banks.

    Counterparty risk is reduced

    Blockchain is used to track bills of lading, which eliminates the possibility of double-spending.

    Decentralized contract execution

    As contract provisions are fulfilled, the status of the contract is updated in real-time on the Blockchain, minimizing the time and manpower required to track the delivery of goods.

    Proof of ownership

    The Blockchain-based title gives transparency into the whereabouts and ownership of commodities.

    Reduced transaction fees and automated settlement

    Smart Contract contract provisions eliminate the requirement for correspondent banks and associated transaction fees.

    Transparency in regulation

    Regulators get real-time access to important papers to help with enforcement and anti-money laundering efforts.

    Also, Read | Supply Chain Traceability and Sustainability with Blockchain

    Applications of Blockchain in Internation Trade

    Reduced Trade Costs

    Blockchain can drastically cut trade expenses, including verification, networking, processing, coordination, transportation, and logistics, as well as financial intermediation and exchange rate costs, thanks to enhanced transparency and automated processes and payments.

    Although it is impossible to predict how blockchain technology could affect trade costs, the World Trade Organization (WTO) stated preliminary indicators point to a significant impact.

    Closer to a Paperless System

    Trade-in products involve several actors and are still paper-intensive, from trade finance to customs clearance, transportation, and logistics. As a result, many people consider blockchain as a promising instrument for improving the efficiency of trade procedures and facilitating the transition to paperless commerce. Take, for example, Australia and Singapore.

    Last year, the Australian Border Force (ABF), the country’s customs and border protection agency, announced its intention to use blockchain technology to facilitate cross-border trade with Singapore, to make it easier for businesses to digitally exchange trade documentation, according to an ABF announcement.

    Also, Read | Introducing Blockchain in Trade Finance for Significant Transformations

    International Commerce and Supply Chain Efficiency

    Blockchain preserves transactions in a permanent and near-inalterable manner as a decentralized, “trustworthy” ledger. It also relies on peer-to-peer networks that are uncontrollable by any single party.

    As a result, blockchain technology offers immediate, all-encompassing transparency, and because transactions uploaded to the blockchain are time-stamped and cannot be easily tampered with, blockchain technology allows products and transactions to be easily traced. 

    According to the WTO, the areas with the most potential for blockchain application right now are banking (particularly trade finance), customs and certification processes, transportation and logistics, insurance, distribution, intellectual property (IP), and government procurement.

    Settlements Following a Trade

    Current trading processes are widely seen as inefficient because they include too many intermediaries (security trade brokers, custodians, and payment agents), are prone to settlement hazards, and have unpredictable and lengthy settlement cycles.

    Blockchain technology can radically simplify the post-trade chain, ensuring and supporting the consolidation of securities registers while also allowing for faster execution, lower transaction costs, and real-time settlement at T+0.

    Also, Read | Use Case: Simplifying Financial Post-Trade Processing with Blockchain

    Automated Workflow and Customs Duty and Charge payments

    On a blockchain, smart contracts can be created to accomplish x when y happens, automating what are often still laborious operations involving costly intermediaries. Smart contracts might be used to automate customs fees, tariffs, and tax payments in a single window.

    When customs officials have finished pre-arrival formalities for the importer’s consignment, smart contracts could trigger advance payment from the importer. Importers’ shoe-leather expenses of making payments and submitting paper-based proofs of payment would be reduced by automating payments, as would customs’ payment reconciliation costs. It might also reduce legal conflicts and litigation expenses, as well as boost supply chain trust and confidence.

    Impact on Trade Finance

    Trade finance, being an extension of international trade, is subjected to the same time-consuming operating procedures. The majority of financial institution denials of trade finance requests presented by SMEs in emerging economies are due to regulatory issues, a lack of trust, and low profitability.

    Many of these concerns are addressed by blockchain, which authenticates documents, streamlines operational processes, and facilitates cooperation among different parties. Furthermore, blockchain facilitates access to alternative investors via marketplaces, thereby expanding the pool of cash available to smaller firms.

    Also, Read | Blockchain Smart Contracts for Driving Business Innovation

    Conclusion

    The widespread adoption of Blockchain in international trade will aid in the reduction of friction in the global economy. It is projected to benefit importers and exporters in particular, as it will provide them with financial assistance in regions where the present financial arrangements are inadequate.

    By removing duplicate techniques and successfully lowering the expenses associated with foreign transactions and processes, blockchain international trade firms expand their international trading potential. While implementing blockchain solutions, there is still some nitty-gritty to be taken care of, such as correct regulation requirements for this revolutionary technology.

About Author

Mudit Kumar (Writer)

Mudit has been working with Oodles since 2017. He writes about technologies that not only disrupt the digital space but also influence the physical world. Initially, he explored revolutionary technologies like ERP (Enterprise Resource Planning) and AI (Artificial Intelligence). Now, he focuses on unfolding the elements of blockchain technology, given its potential and edge over others.


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