TheCOVID-19crisisis challenginggovernmentstostep uptheirefforts to digitize public management. International trade is no exception. This isan opportunity to make a qualitative leap towardsthe modernization offoreign trade proceduresthroughtechnologies such as blockchain.
The need for government authorities to exchange documents, usuallyinpaperformat, to comply with requirements relating to the import, export, and transit of goods can constitute a barrier to trade. Processing an international trade transaction at a border crossing can require the exchange of around36 documentson average, and up to 240 copies when financing is also considered.
It is estimated that exchanging paper documents reduces potential international trade by15%. Thedigitizationandmodernizationof customs and logistics processes couldrestorethat 15%, which would imply a US$1.8 trilliontradeincrease this year, and US$5.2 trillion per year globally up to 2050, according toTradelens.
Facilitatingdocumentexchangein foreign trade operationsin Latin America and the Caribbean (LAC)by using blockchain would make regional value chains more efficient, a much-needed step forward for trade after the pandemic.These efficiencieswould boost private-sector efforts to relocate part of the production chainsfor given products or services to Latin America (nearshoring) and would foster preferential trade by leveraging the rich networks of trade agreements that arealreadyin force.
Blockchain in trade: the IDB and WEFpartnership
Since 2018, theInter-American Development Bank(IDB) and theWorld Economic Forum(WEF) have workedtogether tovalidateblockchain’s potentialforincreasingefficiency, transparency, and interoperability in the trade ecosystem.
As part of this joint effort,the IDB’s Integration and Trade Sector recently published two reports that seek topromote the use of blockchainintrade:“Windows of Opportunity: Facilitating Trade with Blockchain Technology,” a white paper published in partnership with the WEF, and “Blockchain and international trade: new technologies to increase and improve Latin America’s international transition,” publishedin SpanishbyitsInstitute for the Integration of Latin America and the Caribbean (INTAL). The latter includes a chapter entitled “Tracing products back to their origin: facilitating regional trade through blockchain” by Rafael Cornejo.
Rethinking theIntegratedProcess ofOrigin (IPO)
One of the documents exchangedinpreferential foreign trade is the certificate of origin. Exporters must obtainitto be able to export within their trading bloc without having to pay customs duties.
There arecurrentlythreephasesin trade operations impacted by the regulations contained in trade agreements onrules oforigin. Thesephases workindependently and in isolation from one another in terms of documentation.
- Phase1:The manufacturing process of the exported good
- Phase2: Issuing the declaration and certification that the good qualifies as an originating good
- Phase3:Controland verification of origin
Implementing anIntegratedProcess ofOrigin (IPO) using blockchain wouldmergethese threephasesinto a single process,improvingaccess to tariff preferences. The main advantages would be:
- Access to secureinputinformation provided by the producer and the issuer of the certification of origin to determine compliance.
- Greater security for operators within preferential trade and better information on the origin of goods.
- Customs facilities can focus efforts on verifying the least reliable import operations.
Figure 1. Data Providers and IPO Users
Source: Rafael Cornejo, “Trazar desde el origen: facilitando el comercio regional con blockchain, Integration & Trade Journal no. 46 (IDB).
What are the advantages of using blockchain in IPOs?
Blockchainhas the potential to improve and facilitate the operational conditions of tradeingoods imported under preferential schemes. Applying this technology to certifying the origin of a good leads to greatersecurityand more guarantees, contributes to streamliningthe monitoringprocess by providing more reliable data on the origin of each product, andfacilitatingthe application of risk analysis criteria. The following chart summarizes the benefits in each of thephasesdescribed above.
Figure 2. Advantages of the IPO that derive from the use of blockchain
Source: Rafael Cornejo, “Trazar desde el origen: facilitando el comercio regional con blockchain, Integration & Trade Journal no. 46 (IDB).
Blockchain would help implement the extended cumulation of origin, 1 whichhas yet to be put in place appropriately and effectively in LAC. It would also increase the efficiency of trade transactions,thereforehelping to increase preferential trade operations.It won't be necessaryto prove that aspecificproduct qualifies as an originating good because the supply chain itself would showwhetherit qualified for preferential marketaccess.
Who are the stakeholders inanIPO?
Implementing an IPO is a process that involves both the public and private sectors. Stakeholders includeprivatetradeoperatorswho participatein exporting products,government authoritiesprocessing and overseeing these procedures,andorigin-certifyingbodiessuch as chambers of commerce or industry associations.
Figure3. Stakeholders in IPOs
Source: Rafael Cornejo, “Trazar desde el origen: facilitando el comercio regional con blockchain, Integration & Trade Journal no. 46 (IDB).
Next steps
Given the opportunity presented by this technology,specialists from the IDB’s Integration and Trade Sector and the WEF are preparing a proposal to implement ablockchainpilot project in some LAC countries. It seeksto validate the benefits of using blockchain in the IPO and assess its impact on strengthening preferential trade. The followingare theactivities identified to implement the pilot project:
Figure 4. Pilot project activity sequence
Source: Rafael Cornejo, “Trazar desde el origen: facilitando el comercio regional con blockchain, Integration & Trade Journal no. 46 (IDB).
Some countriessuch asChile,Colombia,andPerúalready started exchanging digital certificates of origin. Their objective isto streamline trade through their respective single windows for foreign trade, which the IDB has played a major role in implementing.Bilateral efforts like these are important. Similar initiatives arerequiredin other countries since there ismore need than ever before for regional policies involving both public and private stakeholders.
According to a survey conducted by the WEF,65%of thepolledcompanieshavestarted using new technologies to reconfigure their value chainssincethe pandemicbegan, and59% have made efforts to increase the visibility and control of the data involved in these chains.
To make the most of the opportunities created by the changes to global value chainstriggered by the pandemic, it isvitalto harnessnew technologies (theso-calledTradeTech)to improvetrade, increase efficiency, drive economic development, and enhance inclusion in LAC.
- Cumulation of origin is the mechanism contemplated in trade agreements that enables originating inputs that were produced by a country party to a given trade agreement to be recognized as originating goods in any other member country of the agreement. All agreements contemplate the cumulation of goods obtained or processed in other member countries, and the cumulation of processing is also permitted in some cases. If cumulation is not allowed, producers in a given country can only source inputs produced within that country if they are to comply with the rules of origin for the final good (Cornejo, “Trazar desde el origen: facilitando el comercio regional con Blockchain .”)