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BLOCKCHAIN COULD REPLACE MOUNDS OF PAPER AT THE BORDER

blockchain

BLOCKCHAIN COULD REPLACE MOUNDS OF PAPER AT THE BORDER

This is the third in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

What’s Even Better Than No Tariffs?

Smoother and faster customs procedures could boost global trade volumes and economic output even more than if governments were to eliminate the remaining tariffs throughout the world – up to six times according to an estimate by the World Bank.

Blockchain is a promising technology that, if widely adopted by shippers and customs agencies, could reduce the current mounds of paperwork and costs associated with import and export licenses, cargo and shipping documents, and customs declarations.

Below the Snazzy Surface of Trade Policy

Trade agreements work when the people who want to buy and sell across borders can use them. Engaging in international trade transactions requires diving into the rules and regulations of international customs processes. Businesses either have someone in-house to handle this or they hire companies whose business it is to manage these processes.

Moving goods through the customs process means preparing the relevant paperwork for import or export at each step in the process. The paperwork at each step must be confirmed and verified, sometimes separately by different people. These procedures — in rich and poor countries alike — can be complex, opaque and laden with inefficiencies that raise costs and cause delays at best. At worst, less automated processes can leave the door open to corruption and security breaches.

paperwork in shipping

Trade policymakers have increasingly focused on simplifying and modernizing customs procedures — a policy approach commonly known as “trade facilitation.” Nearly all modern free trade agreements have a trade facilitation chapter and the World Trade Organization has an entire Trade Facilitation Agreement devoted to eliminating red tape at national borders to streamline the global movement of goods.

Too Much Paperwork

The international shipping industry carries 90 percent of the world’s trade in goods but is surprisingly dependent on paper documentation. In a New York Times article, Danish shipping company Maersk commented that tracking containers is straightforward. It’s the “mountains of paperwork that go with each container” that slow down the process.

A shipping container can spend significant time just waiting for someone to cross the t’s and dot the i’s on the paperwork. Delays pose real costs to traders and represent a deadweight loss of resources that could have been spent elsewhere in a more productive manner. The cost of handling documentation is so high that it can be even more expensive than the cost of transporting the actual shipping containers.

Beginning in 2014, Maersk began tracking specific goods such as avocados and cut flowers to determine the true weight of compliance costs and intermediation. The company discovered that a single container moving from Africa to Europe required nearly 200 communications and the verification and approval of more than 30 organizations involved in customs, tax and health-related matters. Maersk’s office in Kenya has storage rooms filled from floor to ceiling with paper records dating back to 2014.

single container paperwork v2

Lost Opportunities

Inefficiencies in customs processes create chain reactions, extending the costs and inefficiencies throughout the transportation industry and all the way to the consumer. In just one example, as many as 1,500 trucks might be lined up on a given day on both sides of the critical border crossing between Bangladesh and India. Many trucks wait up to five days before crossing. Examples like this are not hard to find in developing countries.

Delays for perishable items are painfully costly for traders, but also for consumers. Economist Lan Liu and economist and horticultural scientist Chengyan Yue examinedlettuce and apple imports in 183 countries. They determined that reducing delays from two days to one would increase lettuce imports in those countries by around 35 percent, or an additional 504,714 tons of lettuce, increasing in world consumer welfare by $2.1 billion. The same improvement would increase apple imports by 15 percent, enabling shipment of an additional 731,937 tons and increasing consumer welfare by around $1.1 billion.

Complexity Makes Corruption Easier

Fraud constitutes a major threat to the customs process. Fraudulent behavior can involve the forgery of bills of lading and other export documentation such as certifications of origin. A fraudulent shipper could claim “lost” goods, underreport the cargo, and steal the difference. Or a shipper could misrepresent the amount or quality of shipped goods and pay less than the required amount for their imports.

Fraud can be perpetrated by a shipper, by the receiver of goods, a customs official, or an interloping third party. The greater the complexity of customs procedures and the more discretion granted to customs officials, the more likely corruption will be present at the border, creating both risk and costs for companies working to avoid corruption.

Indeed, corruption acts as a “hidden tariff” for companies and reduces legitimate customs revenue for governments. The World Customs Organization estimates the loss of revenue caused by customs-related corruption to be at least $2 billion.

Blockchain Makes Corruption Harder

Blockchain is a digital distributed ledger that is secure by design. Each transaction in the shipping process is uploaded to the chain if (and only if) it is agreed upon by the other users. It is nearly impossible to make a fraudulent claim or edit past transactions without the approval of the other users in the network.

Blockchain could discourage corruption by simplifying procedures and reducing the number of government offices and officials involved in each transaction. Each transaction can also be audited in real time, allowing users to see exactly when and where disputes arise and exactly what the discrepancies are.

This level of transparency enables participants in the network to hold each other accountable for mistakes or purposeful deception. Though blockchain does not prevent false information from being entered into the system, it does reduce opportunities for the original information to be corrupted by intermediaries involved in the shipping process. Rather than parties relying on the good faith of shippers and customs agents, blockchain greater assurance of the integrity of each transactional record.

Blockchain technology in customs and border-crossing procedures could also be used to prevent circumvention and transshipment—that is, when shippers send goods to a neighboring country before the destination country in an attempt to avoid tariffs on goods from the real country of origin. The importer ends up liable for duties and penalties. (For example, some exporters from China are now sending finished products through Vietnam to avoid new U.S. tariffs on goods from China.)

All In on Blockchain?

The use of blockchain in customs processing is still nascent. An advisory group for U.S. Customs and Border Protection is broadly exploring the role of emerging technologies like blockchain.

IBM and Maersk have partnered to demonstrate how blockchain can simplify shipping. Their plan would allow all parties involved in a container’s shipment to observe and track the container from inception to endpoint. For example, after a customs agent verifies the contents of a container, they can immediately upload information to the blockchain with a unique digital fingerprint that visible to all other users. The ease of access to information throughout the blockchain system reduces time-consuming correspondence among the parties.

For all this to work, customs agencies, shippers and suppliers will have to cooperate to integrate blockchain technology along the supply chain and across borders. By reducing time and cost, blockchain could be a boon to the majority of honest global shippers. By providing greater accuracy and transparency, blockchain would be a bust for dishonest brokers who manipulate the current inefficiencies in customs procedures to commit fraud or gain from corruption.

ChristineMcDaniel

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

 

This article originally appeared on TradeVistas.org. Republished with permission.

blockchain

SMALL AND MEDIUM-SIZED GLOBAL TRADERS ARE BANKING ON BLOCKCHAIN

This is the second in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

Give Me Some Credit

Every business requires capital to operate. To sell products to customers overseas, many companies also need trade financing and insurance from third-party lenders. About 80 percent of all global trade is transacted through third-party lenders and cargo insurers, but the process is complex, can be costly and many banks find it too risky to support small and medium-sized enterprises (SMEs).

Blockchain has the potential to increase transparency, speed and accuracy in assessing risk across the trade finance process, which in turn could expand the supply of credit available for international trade transactions – good news especially for SMEs that face significant hurdles accessing credit. Here’s how.

Pay Me Now or Pay Me Later

Buyers who import goods from sellers in other countries generally want to pay upon receiving the merchandise so they can verify its physical integrity on arrival. Exporters, on the other hand, generally prefer to be paid as soon as they ship the goods. Trade finance can bridge this gap.

Exporters and importers engage third-party lenders and insurers who will guarantee payments on the basis of collateral and indemnify the exporter, importer and related parties in the event that the merchandise is damaged, stolen or lost while in transit. In this way, trade finance provides the credit, payment guarantee and insurance needed to facilitate an international trade transaction on terms that will satisfy all parties.

80% of trade relies on finance

Steps on the Trade Journey

Intermediaries such as freight forwarders typically manage the physical journey of merchandise, from the original producer to the border, across the border (maybe several borders), and to the final buyer.

Each step must be verified: when was the merchandise transported from the factory or farm to a warehouse, when was it moved from the warehouse to a container, when was the container loaded onto a ship, when did the ship get underway, when was the container unloaded from the ship at port, and when was the merchandise transported from the port to the end consumer.

Different trade finance instruments, such as lending, letters of credit, factoring and cargo insurance cover legs of the journey. A letter of credit is a guarantee from a bank that a buyer’s payment will be received and be on time or else the bank will take responsibility for the payment. Factoring is accounts receivable financing to accelerate cash flow. Cargo insurance insures the merchandise while en route.

Without Finance, Trade Would Sink

The World Trade Organization estimates that 80 percent of global trade relies on trade finance or credit insurance. The global trade finance sector (i.e., the global volume of letters of credit) is worth roughly $2.8 trillion. Demand for trade financing exceeds availability, resulting in the underutilization of existing capital. According to the Asian Development Bank, the global trade finance gap — the difference between the demand for and supply of trade finance — has reached $1.6 trillion.

SMEs Face a 50 Percent Rejection Rate

The shortfall in supply reflects the complex and risky nature of trade finance which often involves multiple parties. Before banks will issue letters of credit in trade finance, they require potential customers to present a solid credit history and a strong balance sheet, conditions that tend to favor larger institutions.

SMEs typically experience more difficulty navigating the trade finance process and dealing with the cost and complexity of banking regulations than larger companies. In 2014, SMEs had trade finance requests before financial institutions rejected at a rate of over 50 percent. In comparison, the rejection rate for multinational corporations was only seven percent.

Links in the Trade Finance Chain

According to the United Nations, there are typically eight major steps required to obtain a letter of credit, although in practice the Credit Research Foundation lists more than twenty. Each step of the process is dependent on the previous steps, and some steps involve sending the same document back and forth for verification purposes. The administrative burden is greater for SMEs than for large firms.

survey of 2,350 SMEs and 850 large firms conducted by the U.S. International Trade Commission in 2010 showed that lack of access to credit is the major constraint for SME manufacturing firms seeking to export or expand into new markets and it is one of the top three constraints for SME services firms.

rate of rejection for trade finance

How Blockchain Can Help Ease Trade Finance

Requirements to authenticate each transaction in the trade finance and insurance process can engender large amounts of paperwork and cause delays at each step. Every handoff must be approved and verified.

Instead, blockchain uses digital tokens that are issued by each participant in the supply chain to authenticate the movement of goods. Every time the item changes hands, the token moves in lockstep. The real-world chain of custody is mirrored by a chain of transactions recorded in the blockchain.

The token acts as a virtual “certificate of authenticity” that is much harder to steal, forge or hack than a piece of paper, barcode or digital file. The records can be trusted and greatly improve the information available to assure supply-chain quality.

Using blockchain as a digital ledger for these handoffs would allow involved parties to instantly track and receive secure information about the traded goods. Parties can monitor the entire shipping process and verify the completion of each step in real time. This increased transparency and ease of monitoring reduces the risk that a borrower presents to a potential lender or insurer.

Banking on Blockchain

A number of financial institutions are piloting the use of blockchain-enabled trade finance platforms.

Bank of America, HSBC, and the Infocomm Development Authority of Singapore collaborated in 2016 to develop a trade finance application designed “to streamline the manual processing of import/export documentation, improve security by reducing errors, increase convenience for all parties through mobile interaction, and make companies’ working capital more predictable.” Using the application, each action in the workflow is captured in a distributed ledger and all parties (the exporter, the importer, and their respective banks) can visualize data in real time, offering transparency to authorized participants while ensuring confidential data is protected through encryption.

Barclays used blockchain in 2017 to issue letter of credit that reportedly guaranteed the export of $100,000 worth of agricultural products from Irish cooperative Ornua to the Seychelles Trading Company, noting the parties were able to execute a deal in four hours that would usually take up to 10 days to complete.

A group of European banks launched a trade finance blockchain platform in July 2018, initially focused on facilitating small and medium-sized businesses trading within Europe. In September 2018, the Hong Kong Monetary Authority announced plans to launch a trade finance blockchain platform. Twenty-one banks are participating in the platform, including large institutions such as HSBC and Standard Chartered. The Hong Kong Monetary Authority is also reportedly working with its counterpart in Singapore to develop a blockchain-based trade finance network to settle cross-border transactions.

Lessons for Trade Policymakers

As the trade finance industry begins to utilize blockchain technology, there are some potential implications worthy of policymakers’ attention.

First, the large number of intermediaries and corresponding administrative costs in trade finance tend to fall particularly hard on SMEs and the relatively higher cost of each transaction makes SME financing less attractive to banks. If blockchain can reduce the costs of trade finance, more small and medium-sized businesses could trade globally.

Second, although blockchain technology does not alter the fundamental credit risk of borrowers, the increased transparency and access to information it delivers could improve the accuracy of banks’ risk assessments. If perceived risk is greater than actual risk, a nontrivial number of loan applications may be denied even though those loans have the potential to be successful. If blockchain brings greater confidence and issuance of good loans — that is, those that are paid back — the transactions they support would bring value to the economy.

In these important ways, blockchain can increase transparency across the trade finance process and decrease risk for all parties, in turn expanding the supply of credit available for international trade transactions.

ChristineMcDaniel

 

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on TradeVistas.org. Republished with permission.

Blockchain

Where Have You Been? Blockchain for Tracking Goods in Trade.

Why is it so hard to track the origin of a diamond, or take longer than we’d like to trace the source of a food safety outbreak? It turns out that we’ve been tracking the supply chain in some really antiquated ways, but that’s about to change thanks to blockchain.

Origins and Travels

The “provenance” of a good refers to its origin as well as a chronological record of its ownership, location, and other important information as it moves along a supply and distribution network.

Many companies are exploring the use of blockchain technologies to help track this information much deeper into their supply chains than previously feasible. A retailer, for example, might require detailed information about materials, components, and ingredients as would manufacturers sourcing from a variety of suppliers.

Using blockchain technologies to track the origins of raw materials and follow domestic and international supply chains can also help meet the increasing demand for consumer information about globally produced goods, providing more transparency and accuracy about a product’s long journey to the store.

How Blockchain Can Help

Blockchain works to track the provenance of a good thanks to digital tokens that are issued by each participant in the supply chain to authenticate its movement. Every time the item changes hands, the token moves in lockstep. The real-world chain of custody is mirrored by a chain of transactions recorded in the blockchain.

The token acts as a virtual “certificate of authenticity” that is much harder to steal, forge or hack than a piece of paper, barcode or digital file. The records can be trusted and greatly improve the information available to assure supply-chain quality.

Blockchain technology can also make the audit process more efficient. The ledger distributes responsibility to the owners of pieces of information while ensuring verification along the way. The transactions are transparent to parties on a permission basis.

Consumers Want to Know

Surveys show that consumers in the United States and around the world are becoming more aware and interested in the origins of the merchandise they buy and the food they consume. Many also want to know how production processes of the goods they consume impact the environment and society.

The Pew Research Center found that 75 percent of Americans are “particularly concerned” for the environment, and 83 percent make an effort at least some of the time to live in ways that protect the environment. Nearly three out of four Millennials surveyed by Nielsen say they would pay extra for “sustainable” products and brands with a reputation for environmental stewardship. When it comes to food products, 71 percent of people surveyed by Label Insight said they want access to a comprehensive list of ingredients when deciding what food to buy.

Sustainable Coffee, Genuine Brand Purses and Conflict Diamonds

Retailers are concerned that brand loyalty is on the decline. But with some products, high consumer demand for product information is associated with higher expenditures, meaning people might pay more for a product they believe is ethically or sustainably sourced or manufactured. Blockchain can be used by companies to verify the claims their customers care about.

Take Starbucks, for example. Since 2004, the company has worked to support farmer livelihoods through its Coffee and Farmer Equity (C.A.F.E.) program. In 2015, they announced that 99 percent of their coffee was “ethically sourced,” complying with a set of principles and practices at each step of the supply chain from farm to cup. Last year, they took traceability to the next level by piloting the use of blockchain to create a transparent and direct connections with tens of thousands of coffee farmers. Customers can now see up close a supplier’s sustainability practices.

Worried your designer handbag isn’t the real deal? The luxury goods industry is seeking to use blockchain to verify the authenticity of its product. Brand name shoes, dresses or purses would have specific codes that retailers and consumers could use to track changes in ownership. Given the decentralized blockchain platform and multiple authentication processes to update the ledgers, fraudulent entries will be nearly impossible. The auditable and tamper-proof records produced through blockchain technology could help combat trade in counterfeit goods, which is a $1.77 trillion problem for manufacturers according to the International AntiCounterfeiting Coalition.

Blockchain is a promising development for the diamond industry, which struggles to prevent so-called “conflict diamonds” from entering their value chains. A United Nations panel reportedly found that 140,000 carats of diamonds were still being smuggled out of the Central African Republic between 2013 and 2015 and traded illicitly to finance armed conflict despite an export ban. De Beers, which controls 37 percent of the global diamond market, reported earlier this year that it was able to track 100 high-value diamonds from mine to retailer using blockchain technology.

Food Safety and Quick Recalls

The Centers for Disease Control and Prevention estimate that each year roughly one in six Americans, or 48 million people, becomes ill as the result of a foodborne pathogen (e.g., salmonella, listeria, or E. coli). Blockchain technology will not necessarily prevent outbreaks but could be used to track their source more quickly and prevent outbreaks from becoming epidemics. Retailers and regulators could use the distributed ledger technology for accurate and rapid information about potentially contaminated food.

Walmart is pioneering the use of blockchain to maintain easily accessible records of food provenance. In a simulated recall, The company was able to trace the origin of a bag of sliced mangoes in 2.2 seconds compared with the 6 days, 18 hours, and 26 minutes it would take using a standard approach of working with suppliers.

Australian exporter InterAgri is experimenting with using blockchain to track the production and global delivery of its Black Angus Aussie Beef. Teaming up with JD.com, a major e-commerce site in China, InterAgri aims to detect and eliminate food fraud such as counterfeit Aussie beef illegally marketed in China. By some cost estimates, food fraud affects approximately 10 percent of all commercially sold food products, creating food safety concerns for the consumer and liability issues for producers.

Coming to a Shelf Near You

In principle, blockchain could be applied to tracking provenance information for virtually any good, from agricultural commodities to luxury goods. Although blockchain technology is still not prevalent or the industry standard, more producers and retailers are exploring ways to track their own supply chains to increase quality assurance and their ability to communicate information about their products to consumers.

It will take trial and error and significant work with suppliers to ensure interoperability and efficiencies, but such experimentation will be essential if the U.S. and global economies are to realize the benefits of blockchain in international trade.

This is the first in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

ChristineMcDaniel

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on TradeVistas.org. Used with permission.

Questionable affect on employment from application of anti-dumping duties to shipments of export cargo and import cargo in international trade.

Both Sides of the Manufacturing Equation

President Trump and his economic team have an opportunity to fix something that none of their predecessors have been able to get right: price discrimination.

A form of price discrimination, dumping is said to occur when foreign manufacturers sell their goods at a lower price than they charge their domestic consumers.

Under US anti-dumping laws, a finding of dumping enables the imposition of a tariff on the goods being dumped. The tariff is meant to basically make up the difference created by discrimination by increasing the price of the imported product. That can provide temporary relief for the company or companies competing with lower-priced imports, but it raises costs for US companies and industries that depend on those same lower-priced imports.

Down in the Dumps
Fifty-eight percent of anti-dumping duties are awarded in cases involving primary metal industries. US producers in these industries have been hard hit over the last decade by excess production in China that is subsidized in some form by the Chinese government. In an effort to alleviate losses, these industries have sought protection from “unfair” competition. At the same time, many US manufacturers rely on iron, steel, and other metals to make their products. The anti-dumping duties means they have to pay more for those materials than what their competitors are paying on the world market, which puts them at a disadvantage.

One for Every 17
In 2015, 394,000 Americans worked in primary metal industries that include steel, aluminum, copper and others, according to the US Bureau of Economic Analysis. In comparison, over 6.5 million Americans are employed in industries that rely on those metals as inputs, such as machinery, computers, electrical equipment, motor vehicles, and other fabricated metal products.

Neighbor v. Neighbor
These workers live in the same communities. Cuyahoga County, Ohio, is home to 4,924 iron and steel workers. The county is also home to 44,503 workers in manufacturing sectors that use these metals as inputs. Stark County is home to 2,985 iron and steel workers, and 13,278 downstream manufacturing workers.

It isn’t just a matter of jobs. Consider also the value created by different industries. Primary metal manufacturing added $55.9 billion in value to the US economy in 2015. Manufacturers that use primary metals as direct product inputs created $1 trillion in value to the US economy.

The price impact is clear on downstream industries of anti-dumping duties on products used in production processes. The effects of a less competitive upstream market, and possible supply shortages resulting from the investigation itself and cessation of imports after the duty is imposed, can also cause harm to downstream users. A 1999 economic study calculated the collective net economic welfare cost of anti-dumping duties at that time to be $4 billion, or .06% of GDP. In today’s terms, that translates into $10.8 billion.

Does the anti-dumping duty save more jobs than it costs? Empirical evidence suggests that anti-dumping duties cost more jobs in downstream production than jobs saved in upstream production dig deeper with these studies. But because the US International Trade Commission (USITC) doesn’t typically study the employment impact, the data for actual cases is somewhat sparse.

In 1995, the USITC did estimate the economic effects of an anti-dumping duty on tapered roller bearings. The effects of dumping alone: a net loss of 27 jobs. The effect of the anti-dumping duty: a net loss of 169 jobs. The duty cost more jobs than it saved.

The True Cost of an Import Tariff
Before President Trump intervened to secure tax breaks to stay in Indiana, executives at Carrier, an American air conditioning manufacturer, cited high costs as a factor in their decision to move production.

Consider the example of Carrier’s Performance Series MAQB12B1, 12,000 BTU Single Zone High Wall Mini Split retails for approximately $1,600 per unit. Air conditioners are generally made of different types of metal, many of which are subject to antidumping and countervailing duties: steel, subject to a 64-percent to 191-percent duty; copper, 25-percent to 27-percent duty; and aluminum, eight-percent to 374-percent duty.

The precise cost share of metals in this air conditioner is not publicly available. But metals are 15 percent of the input cost of machinery on average. To the extent these inputs are imported, these duties could mean an additional $19 to $898 per unit in supply costs alone.

Workers in Harm’s Way
Anti-dumping duties on primary metals might help 400,000 metal workers, but it also disadvantages six million other manufacturing workers, whose families and communities equally value their jobs.

The USITC determines whether a petitioning industry has experienced injury from imports for the purpose of imposing anti-dumping duties, but does not have to analyze the harm to companies, industries, and the US economy from imposing those duties. Yet helping one set of workers with anti-dumping duties can put other workers at risk.

Taking the step to include the impacts to downstream industries and their workers in USITC analyses would begin to assure that both sides of the manufacturing equation are considered.

Christine McDaniel is a senior economist at Sidley Austin, LLP. Her previous roles include Deputy Assistant Secretary at the Treasury Department and Senior Economist for Trade at the White House Council of Economic Advisers.