With the emergence of blockchain technology, this innovation is anticipated to revolutionize international trade. This article explores how blockchain, as a transformative technology, can significantly alter traditional infrastructures in international trade and introduce new capacities to this realm.
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We live in a world where innovation and new technologies continuously impact and reshape our lives.
Our lifestyle and commerce are intricately tied to the global economy. Technological advancements—from the invention of the steam engine and the establishment of industrial factories to the discovery of electricity and the advent of the internet—have enabled mass production of goods and services, which we rely on for daily living. Consequently, the continuous evolution of information and communication technologies has profoundly influenced our interactions.
However, the world of international trade has struggled to keep pace with these advancements. Despite recent efforts to digitize certain procedural aspects of commerce, conducting international trade and business interactions remains heavily paper-based.
For instance, it is said that exporting a shipment of roses from the Netherlands to Kenya today can generate a paper trail up to 25 centimeters high. Yet, new technologies like blockchain can simplify all these processes.
It is worth noting that security concerns and the complexities of navigating necessary procedures—discussed further in this article—pose significant challenges for the digitalization of international trade across geographic borders and among parties involved in cross-border transactions.
Definition of International Trade
International trade refers to the system of economic and commercial interactions between international entities. In simpler terms, any exchange or transaction involving goods or services between two countries is considered international trade.
Given its importance, governments and businesses active in international trade have increasingly recognized the value of global commerce due to its benefits. Hence, a significant portion of human societies’ growth and development depends on governments’ success in solving economic and social issues, particularly by removing barriers and restrictions to international trade.
Some benefits of international trade include fostering connections and cooperation among countries, promoting peace and friendship, optimizing the use of economic and production resources on a global scale, encouraging higher quality of goods and services in competitive markets to enhance profitability, and contributing to economic and political growth and development through foreign trade.
International trade generally falls into three main categories; Imports Exports Re-exports:
Imports:
Importing involves purchasing goods and services from a foreign country. This may be due to a need for products or services not produced domestically or to complement domestic production. For example, China may need to import crude oil due to insufficient domestic production.
Exports:
Exporting involves selling domestically produced goods and services to foreign countries. This activity allows nations to present their products in global markets and bring foreign currency into their economies. For instance, Iran might export oil and petrochemical products to China.
Re-exports
Re-exportation occurs when goods and services imported from one country are exported to another country. In this scenario, the importing country acts as an intermediary in international trade. For example, if Iran imports tires from China and then exports them to Iraq, this is categorized as re-exportation.
All three types of trade—imports, exports, and re-exports—play vital roles in countries’ economic development and fostering international connections. They also significantly impact global economic flows.
Looking at international trade from another perspective, it involves the exchange of goods and services across borders. Some countries engage in international trade by applying the theory of “comparative advantage” to exchange goods or services.
This theory, first introduced by David Ricardo, an English economist, aimed to improve England’s trade practices. In his article “Principles of Political Economy and Taxation”, Ricardo explained that if a country could produce a good at a lower opportunity cost or price compared to others, it held a comparative advantage in that good.
At the time, England needed to import wheat. Ricardo argued that instead of hesitating over extensive wheat imports, England should focus on exporting goods requiring machinery or specialized labor. Countries with comparative advantages typically shape their export strategies around these strengths.
Essentially, differences in capabilities allow nations to produce goods they are more efficient at and import those they lack domestically. This reduces production costs and prices, expands markets, and encourages economic growth.
Another influential theory is Adam Smith’s “Absolute Advantage,” introduced in his seminal work “The Wealth of Nations”. Smith argued that trade is not a zero-sum game where one side benefits at the other’s expense. Instead, each country specializes in producing certain goods and trades them for others it needs.
According to Smith’s theory, trade between two countries is justified only if it is based on absolute advantage. However, this theory addresses only a small portion of international trade practices.
International trade, with its complexities, has evolved through various financial, social, and political factors.
Since the inception of the first international trades, the cycle of improving methods and processes has been in constant transformation. Historically, international trade processes have embraced new technologies, albeit sometimes at a slower pace. Nonetheless, the progress has been substantial.
Adopting technologies like electronic signatures, online contracts, and internet-based trading operations reflects this evolution. With the advent of blockchain technology, a new gateway has opened, promising significant transformations in international trade.
Blockchain’s Ability to Overcome Trade Barriers
Considering blockchain’s capabilities, the first question that arises is: What are blockchain’s impacts and applications in international trade? A closer look reveals that blockchain can play a pivotal role in various aspects and processes of foreign trade.
The World Trade Organization (WTO) has described blockchain’s influence on global trade as revolutionary. Blockchain’s ability to eliminate trade barriers marks the beginning of significant changes in international trade structures.
Previously, international businesses faced numerous barriers from governments and major corporations. These included geographical borders, political relationships, sanctions or hostile relations, cultural differences, legal requirements, and differing regulations among countries. These factors posed challenges for global traders.
However, blockchain’s decentralized nature facilitates permanent and nearly immutable storage, allowing for smoother trade exchanges and relationships. This provides the necessary security for cross-border trade.
Blockchain technology can be applied in various industries, including finance, healthcare, supply chain management, and international trade. It can facilitate the exchange of goods and services, provide a secure and transparent platform for payments, mitigate fraud and counterfeiting risks, ensure confidentiality, promote fair competition, enable mutually beneficial contracts, and streamline bank guarantees and letters of credit.
International trade often involves complex interactions among multiple parties, including buyers/importers, sellers/exporters, customs officials, transport operators, port authorities, banks issuing letters of credit, and insurance companies. This network creates diverse responsibilities and benefits for the stakeholders.
If these interactions lack transparency, disputes may arise among the stakeholders.
Trust and transparency are crucial to preventing such issues. Blockchain technology, with its inherent capabilities, can address these challenges and significantly facilitate trade relationships.
Although blockchain in international trade is still in its early stages, researchers at the WTO view its potential benefits as highly significant.
Application of Blockchain in International Trade
1) Blockchain: The Creator of Paperless Trade
International trade operations involve highly complex processes and numerous stakeholders, all of whom contribute to these activities. Despite advancements, these operations still heavily rely on vast amounts of paperwork.
In 2014, the shipping company Maersk tracked a refrigerated container transporting roses from Kenya to the Netherlands. For routine documentation and navigating the physical processes and bureaucratic hurdles, the company estimated that approximately 30 regulatory entities and over 100 individuals interacted during the journey, creating a paper file 25 centimeters thick. Transporting the shipment took 34 days, while processing the associated documentation required 10 days.
This raises an essential question: why should trade, which thrives on speed, operate in such a cumbersome manner?
To execute international trade, the following documents need to be prepared and processed:
- Documents related to the trade transaction, such as contracts of sale, commercial invoices, and packaging lists provided by the exporter before export.
- Trade financing documents, such as letters of credit (LCs).
- Shipping documents, including bills of lading and insurance policies.
- Documents for border procedures, such as certificates of origin issued by chambers of commerce or government agencies.
- Health, agricultural, and phytosanitary certificates, often issued by health ministries for food, plant, and agricultural products.
- Compliance certificates, ensuring the product or service meets specific importing country standards.
- Export/import permits, issued by the relevant authorities if required.
- Customs declarations.
- Customs inspection reports.
It’s clear that blockchain technology, by streamlining these processes, could significantly accelerate trade while enhancing accuracy, security, and transparency.
2) Facilitating Trade Finance Supply Chains
Another pressing question about blockchain’s role in international trade is whether it can simplify trade finance supply chains.
Access to financial resources is critical for trade activities. A small percentage of international trade transactions involve buyers prepaying sellers in cash and transferring the remainder upon receiving goods. However, 80% of trade finance mechanisms rely on traditional methods like letters of credit (LCs) and bank guarantees.
If the financing of commercial activities is done accurately and promptly, it can play a significant role in the upward trend of commercial transactions. The reality we are facing is that financing of commercial activities is conducted in a traditional manner, often accompanied by high costs and complex banking processes.
The existing practices and patterns, due to their reliance on a heavy paper-based process and exhausting coordination challenges, as well as involving multiple executive bodies and numerous individuals, can slow down the execution of commercial affairs. This issue can create many insecurities in the path of traders’ commerce.
Challenges related to the mutual trust between parties in a commercial transaction, fraud detection and prevention, identity verification of parties involved, and credit assessment of banks are among the issues that affect financial resource provision. This is where we need to seek effective and reliable solutions to facilitate and address these matters.
It must be said that blockchain has the capacity and capability to create transparency, trust, and assurance in the supply chain. By using blockchain, all data related to various stages of the supply chain, such as production, transportation, warehousing, and distribution, are made transparent and accessible for review by both parties. Consequently, this reduces fraud, counterfeiting, and intellectual property rights (IPR) violations and also enables more precise and faster tracking of goods.
3) Simplifying International Financial Transactions
Blockchain introduces transformative solutions in financial payments—a cornerstone of international trade. Blockchain’s advantages include decentralization, immutability, and enhanced security, briefly outlined below:
A) Decentralization
Blockchain technology facilitates financial flows between individuals by eliminating intermediaries. As a result, there is no longer a need for a unique third party to process and store transaction data. Therefore, the use of blockchain in financial services can prevent cybercrimes related to financial accounts, hacking, or online fraud.
Additionally, transaction data is protected by a unique security system due to the absence of a central authority for storing transaction data. Another advantage of financial services is that blockchain technology eliminates the control of intermediaries in financial transactions. Ultimately, it can be concluded that the use of blockchain in financial affairs ensures better and more cost-effective accessibility.
Blockchain can be utilized in international financial processes such as money transfers, settlements, and payments. Using blockchain, financial transactions can be conducted quickly, securely, and at minimal cost. Moreover, blockchain can serve as an infrastructure for digital currencies in international transactions, such as Bitcoin.
B) Immutability
Blockchain’s immutable nature ensures that once data is added to the chain, it cannot be altered. This feature enables reliable and transparent record-keeping, which is particularly beneficial in systematic trade transactions.
C) Security
Blockchain employs encryption to secure its ledger. Only individuals with unique keys can access transaction data. Furthermore, its decentralized, peer-to-peer structure ensures an unparalleled level of security. Blockchain’s security, immutability, and efficiency make it an attractive solution for banks and traders seeking to improve transparency, minimize costs, and reduce risks in international financial transactions.
4) Smart Contracts: The Savior of International Trade
Smart contracts are one of the most fascinating aspects of blockchain technology, representing a significant service that blockchain can offer to international trade.
It should be noted that smart contracts themselves do not constitute a blockchain but are a standout feature attributed to these types of contracts.
In the blockchain realm, the term smart contract can be misleading since smart contracts are not truly “smart” (they lack cognitive or artificial intelligence). Instead, they are self-executing contracts that independently enforce their terms.
For instance, they operate on an “if… then…” logic—e.g., if goods are unloaded at Port X, the payment is processed.
Responsibilities and obligations of the contracting parties, payments, penalties, and enforcement guarantees outlined in the contract can benefit from this capability, ensuring precise execution.
Smart contract providers can automate predefined terms, including any contractual provisions or controlled variables influenced by the contract, such as temperature, payment processing, price changes, etc. This task is handled by oracles (tools for accessing external information). Oracles are the mechanism through which smart contracts “interact” with external data.
Some contracts require access to information outside the blockchain, and external data can impact the contract process. For example, a stock trading contract may need access to financial market information. Tools that connect blockchain networks to the external world and enable data access are known as oracles.
Another example involves a sensor placed in a refrigerator, which could act as an oracle in a smart insurance system. If this sensor detects a temperature drop below a certain threshold, it processes the data, and if damage occurs to a shipment of meat products, it immediately activates the insurance obligations and compensates the policyholder.
In the blockchain ecosystem, since they cannot access data outside their network, they combine with other technologies such as IoT (Internet of Things), banking processors, and classified information transactions in ports. Using a network of smart devices and sensors connected to the internet, they can send and receive data and use the collected IoT data to trigger actions. For example, they can authorize the loading or unloading of goods based on controlled payments.
5) Blockchain: The Steadfast Enforcer of Intellectual Property Rights
Intellectual property (IP) is a crucial component of international trade. Numerous products, from pharmaceuticals to high-tech items like smartphones, benefit from IP rights. These protections foster substantial investments in research and new designs across all industries.
Ultimately, such investments lead to the creation of valuable products for public use, where the true worth of these products often lies in their innovation, ideas, and knowledge.
Previously, in an article titled “Expanding Intellectual Property Rights in Blockchain” published in the eighth issue of the research journal, the significance of IP rights and blockchain applications in this area were extensively discussed.
In the realm of IP rights protection, Francis Gurry, Director General of the World Intellectual Property Organization (WIPO), explicitly highlighted blockchain technology in a 2017 interview as an opportunity for protecting IP rights. He predicted that, with comprehensive attention, this technology could address many challenges associated with IP protection.
One of the main pillars of the World Trade Organization (WTO) is the TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights). This agreement is integral to the WTO’s framework, providing some of the most comprehensive regulations on IP rights at the international level.
The agreement encompasses various IP rights and includes substantive provisions to protect them. It was universally agreed upon by countries in 1994, with the WTO overseeing its implementation.
Key features of the TRIPS Agreement include:
a) Legal protections for various forms of IP rights, such as copyright, performers’ rights, producers of sound recordings, broadcasting organizations, trademarks, geographical indications, industrial designs, patents, circuit layouts, and undisclosed information.
b) Setting minimum standards and referencing conventions like the Paris Convention (industrial property), Berne Convention (literary and artistic works), Rome Convention (performers and broadcasters), and Washington Treaty (integrated circuit layouts).
c) Implementation procedures, including administrative, civil, and criminal measures, as well as interim actions and border-specific rules.
The TRIPS Agreement significantly influences international trade, driving substantial capital flows in financial markets.
Global companies like Apple, Microsoft, Meta, and Coca-Cola are deeply intertwined with IP issues, making their separation unimaginable. This underscores the importance of leveraging blockchain’s capabilities in IP management.
Blockchain can be used to register and manage IP rights such as brands, software, and patents. These records can be securely maintained and verified globally, protecting them against forgery and unauthorized modifications.
Additionally, blockchain can confirm authenticity, detect counterfeits, and address parallel imports or stolen goods during identification or recovery processes.
6) Blockchain and Transformation in E-Commerce
E-commerce has recently become a key focus in international trade law discussions. One of the persistent issues in international trade has been its reliance on paperwork and overly complex processes. Efforts have been made to streamline these processes using electronic data exchange.
With the advent of blockchain and its opportunities, new horizons have opened for trade, particularly e-commerce. Blockchain’s integration into e-commerce represents a turning point for large-scale transformations in international trade. Its potential lies in simplifying and executing even the most intricate trade processes without disrupting transaction integrity.
Future benefits of blockchain in e-commerce include improved supply chain management, quality assurance, enhanced security in contractual agreements, and greater data security. However, numerous undiscovered and underexplored potentials remain.
7) Supply Chain Management in E-Commerce
Supply chain oversight is a fundamental aspect of commerce, providing both parties with confidence that goods and payments will reach their destinations as intended.
By integrating blockchain with supply chain systems, tracking and managing information become more accessible for everyone involved. Combined with IoT, blockchain facilitates seamless operations, allowing connected devices and sensors to collect, share, and use data to enable specific actions.
8) Quality Assurance in E-Commerce
Quality assurance of goods involved in international trade contracts is an integral part of their provisions. In the future of e-commerce, blockchain technology can be leveraged to monitor the quality of goods step by step.
Many companies and manufacturers aim to produce high-quality yet cost-effective products for their customers. On the other hand, buyers expect to receive the items they purchase in the best condition and quality. With current shipping processes and the ability to track products using this technology, it is possible to fully trace goods from dispatch to delivery to the customer. Moreover, customers can use blockchain and QR codes to verify the status and quality of the product they purchased.
9) Data Security in E-Commerce with Blockchain
Blockchain plays a significant role in data storage and security in e-commerce. Protecting and securing customers’ personal information is one of the most critical features businesses can offer. In an era moving rapidly toward digitization, a platform capable of ensuring security is essential.
Businesses and enterprises can use blockchain technology to provide the necessary security for their users. Blockchain allows data to be stored in an encrypted format, making it challenging for anyone to alter the information.
10) Identity Verification with Blockchain Technology
Blockchain offers an optimal solution for revolutionizing digital identity verification processes. Since blockchain data is immutable by nature, this characteristic enhances the reliability of its database. In addition to data immutability, blockchain provides fast and secure access to user information, making it highly effective for identity verification.
Given the high level of security and reliability offered by blockchain databases, both governmental and non-governmental entities can rely on the data stored in this centralized ledger for identity verification without the need for additional checks. Another advantage for users is that they no longer have to waste time and energy on repetitive identity verification processes across multiple institutions.
With blockchain-based identity verification, data transparency is guaranteed through distributed ledgers, and organizations can access accurate and up-to-date information. As a result, the likelihood of fraud, identity theft, and financial crimes decreases significantly. Additionally, this method reduces complexities and restricts unauthorized third-party access to information without beneficiary consent.
Countries Utilizing Blockchain Technology in International Trade
Some key countries using blockchain technology in international trade include:
China: China is one of the largest countries leveraging blockchain in international trade. Applications of blockchain in China include creating a digital payment system to facilitate international transactions, tracking supply chains, offering services based on digital identity, and even launching a national digital currency called the “Digital Yuan.”
Switzerland: Switzerland is a pioneer in using blockchain for international trade. The country employs blockchain to track and verify the origin of goods, prove product authenticity and quality, facilitate financial transactions, and even establish a digital marketplace for real estate transactions.
South Korea: South Korea makes extensive use of blockchain in international trade. Its applications include creating an electronic trade system for exports and imports, registering intellectual property rights, tracking and verifying the origin of goods, and even integrating blockchain into the insurance sector.
United Arab Emirates: The UAE also utilizes blockchain in international trade. It uses the technology to expedite trade processes, enhance trust and transaction security, track and verify the origin of goods, and establish an electronic trading system.
The Challenging Path of Blockchain Adoption in International Trade
Encountering challenges with new technologies is natural, but the approach to addressing these challenges is crucial. Offering solutions, gaining sufficient understanding, and mastering new technologies can significantly help resolve these issues. The use of blockchain in international trade also faces challenges, including:
a) Regulations and Laws:
One major challenge is the conflict of laws and regulations between countries. Each country, based on its legal framework, may have different regulations regarding intellectual property rights, personal data protection, transaction settlements, and other trade practices. This can complicate the adoption and implementation of blockchain in international trade.
b) Security Protection:
Data security and protection in blockchain are vital. While blockchain generally offers high security, the risk of cybercrime remains, potentially impacting the technology’s adoption in international trade. Privacy concerns in blockchain are also a challenge that needs attention.
c) Standards and Compatibility:
Establishing shared standards and compatibility between blockchains is another challenge in international trade. Creating a unified blockchain infrastructure and enabling collaboration between blockchains require international standardization and agreements, which demand extensive negotiations and considerable time.
d) Acceptance and Collaboration:
In international trade, collaboration and acceptance among all trade partners are essential. Coordination and cooperation in this domain are often facilitated by the World Trade Organization (WTO), which can play a significant role in blockchain adoption.
The opportunities blockchain offers traders and countries can lead to a major leap in expanding international trade relations. Effective use of blockchain in international trade requires cooperation among countries, trade partners, and relevant organizations. Establishing shared regulations, international agreements, and necessary coordination are essential for this purpose.
Although blockchain’s use in international trade comes with challenges that need resolution, its potential to enhance security, transparency, and efficiency in trade is undeniable.
Reaching a point of prosperity in this domain requires experts from both fields (international trade and blockchain) to outline precise frameworks for leveraging this technology. Ultimately, blockchain has the potential to revolutionize international trade dramatically.
Conclusion
The key takeaway is that blockchain is still in its development phase but is already causing significant changes across various fields, including international trade. By leveraging the capabilities of modern technologies like blockchain, a more efficient system for international trade can be established, enabling traders to conduct business with greater ease.
Innovative technologies like blockchain can simplify financing and payment processes in foreign trade transactions. At the same time, banks can digitize processes to monitor their clients’ payments and financial transactions more reliably and securely. These benefits could lead to reduced costs for international trade transactions.
New technologies like blockchain are like elephants in a dark room, whose true essence cannot be understood with dim light. To uncover their full potential and opportunities, we must shine a bright light on all aspects and examine them closely.
