Almost 90 years after the adoption of the Smoot-Hawley Tariff Act, which led to a reduction in trade between the United States and European countries and finally plunged the country into the Great Depression, everything indicates that history intends on repeating itself.
Tariffs imposed on steel and aluminum imports by the Trump administration provoke justified fears about the E.U. and other countries' retaliatory steps. These U.S. actions also prompted the World Bank to issue a forecast of a decline in world trade by approximately nine percent, the same figure as during the 2008 financial crisis.
Although this scenario has not yet been realized, international trade shows signs of weakening. The WTO (World Trade Organization) forecasts an increase in world trade growth in 2018 by 4.4 percent against 4.7 percent in 2017.
The cumulative effect of unfavorable trends, such as protectionism, increased risks, slower growth in commodity turnover and pessimism can have a negative impact on the value of trade operations, which will lead to an increase in the price of goods for the end user. With the help of innovative digital technologies, however, namely blockchain technology, it is possible to significantly cut the costs in the world of trade finance.
In general, blockchain and other technologies of the distributed registry can reduce the operational costs of the global trading system in three directions at once.
International trade operations are complicated, costly, and mired in bureaucracy. For example, the delivery of refrigerated cargo from Africa to Europe may include more than 200 acts of interaction between 30 officials and agencies. The process of paying invoices, starting with the approval of a letter of credit (LC), takes seven to ten working days alone. But the technology of blockchain can dramatically reduce the time spent on payment under international contracts, and, consequently, the transaction costs. Last year, a transaction for the export of equipment from Japan to Australia carried out all the processes on a blockchain platform, which allowed for a reduction in the effort to create and exchange documents, shortened the duration of the main processes from a few days to a couple of hours, and made the procedure transparent for all interested parties.
This technology also excludes intermediaries since transactions are approved by a network of several thousand members on the basis of consensus. The reliability of transactions based on blockchain provides an additional level of security since transactions published and approved cannot be changed or canceled.
Protection against Financial Fraud
Fraud and protectionism in the world trading system cause significant damage to the economy. A study conducted by John Zdanowicz, an expert on financial fraud, a professor at the Florida International University College of Business, showed that between 2003 and 2014, the number of counterfeit payment documents in the U.S. increased by 30 percent, from $168.3 billion to $230.5 billion. And as a whole, fraud with payments, tax evasion, and money laundering cost the country about $2.3 trillion of tax revenue.
Counterfeiting and duplication of invoices and bills are steadily increasing, as banks have limited possibilities to verify the authenticity of documents. With the technology of distributed registries, however, this problem is eliminated forever due to the overall transparency of the procedure, which does not allow the duplicating or forging of documents.
In addition, there are situations in which the supplier terminates the contract at a late stage of the transaction. But after the documents are placed on a blockchain platform, the network is responsible for the supplier's actions.
If the reliability, transparency, and security of blockchain technology is applied to just 10 percent of global trade transactions, this will significantly reduce the costs of banks to combat money laundering and financial fraud. This would not only offset some of the costs of world trade associated with protectionist measures but would also ensure the necessary transparency of operations, which simply does not exist yet.
Improving the Balance of Banks
Today, most banks are struggling to maintain a balance. They are forced to spend considerable money on insurance to protect themselves against possible litigation, outstanding loans, and losses caused to a third party, as these are all instances for which banking institutions are responsible. Blockchain is able to reduce these costs. Since there is very little probability that a blockchain-enabled contract will not be executed or will prove to be fraudulent, the need for insurance decreases. And, if the insurance company is connected to the platform, it is able to track each transaction and review insurance premiums. The same logic applies to other service providers, such as customs brokers and logistics companies.
The potential for blockchain and other technologies of the distributed registry in reducing the costs of the world trade system is huge. With proper implementation, the operating costs of trade and finance can be reduced by 50 to 80 percent, and the processing time of letters of credit by 80 percent.
And this is only the beginning.