One of the most tone-deaf suggestions in the Brexit proceedings so far came in August 2017, when the UK Brexit team released a long-awaited position paper setting out its proposal on how to manage its border with Ireland. It suggested that “technology-based solutions” – meaning blockchain, the technology behind cryptocurrencies such as Bitcoin – could be implemented to “make it easier to comply with customs procedures.”
The UK’s vague and misguided solution was quickly ridiculed by experts at home, as well as seasoned counterparts abroad. Although blockchain technology has now been around for ten years, it has not seen any meaningful implementation in global supply-chains, let alone within customs offices. Indeed, a “seamless and frictionless” border in compliance with fundamental customs procedures – itself a unicorn – cannot simply be coded into existence on its own. In reality, questions of capacity and time constraints mean that technological solutions are actually unworkable.
Although Brexit’s customs predicaments cannot simply be wished away via blockchain, the use of such a technology, in general, would reduce trade costs, increase transparency, safeguard against fraud, and overall expedite trade by reducing customs clearance times. While blockchain is not a technology that could replace a border, it could cut costs and streamline procedures of an already well-managed one, to the point of making them virtually “frictionless”.
However, while the financial industry and the tech industry have shown promise in their proposals for uses of blockchain, progress has been slow, and major success stories are yet to be seen. The technology comes with certain risks, and comprehensive implementation requires significant resources and expertise. Indeed, although the commitments of global tech giants are encouraging, the lacklustre regulatory response to the advent of blockchain is stifling its growth, and preventing firms and governments alike from reaping the associated benefits. Customs regimes around the globe have done little to promote the technology, and firms have consequently been slow to adopt it. This may strike some as strange, given all of its potential benefits and the ostensible ubiquity of the word.
What Blockchain can do for trade
Now, picture the global fragmentation of a multinational enterprise: a complex supply-chain of producers and distributors through which vast amounts of goods and wealth travel through intricate logistical channels and legal hurdles using contracts, certificates and approvals. This involves exchanges of information between numerous entities, including customs and other regulatory agencies, which comes at high costs or otherwise provide opportunities for error and fraud. Today’s customs handling requires significant man-power if standards on safety, customs valuation and rules of origin are to be upheld.
Thanks to blockchain, it is now possible to make all of these processes significantly more efficient and transparent. Using blockchain within a supply-chain would provide a firm with the infrastructure necessary to remove the need to secure each transaction or step in the supply-chain through intermediaries via registration, tracking and certification. Information on any shipment – whether it be a proof of purchase, a clearance form, a bill of lading, insurance – can be made part of a block, a transparent chain of custody, and be accessible to suppliers, transporters, buyers, regulators and auditors. Having all this information in one location would not only lower transaction costs but also decrease auditing and accounting costs as well.
From the standpoint of global logistics, the implications supply-chain management, inventory flows and warehousing, and the associated matters of possession and provenance are of great significance, even revolutionary. Used in customs handling, exporters could upload all the documents onto a customs office blockchain and instantly prove their abidance with all the import rules – for example, qualification for preferential rates through rules of origin, sanitary and phytosanitary (SPS) rules, or compliance with embargoes (e.g. against conflict minerals). The technology could also facilitate implementation of new concepts like Mode 5 and tariff deductions for services inputs (see Cernat 2014; Antimiani & Cernat 2017), as well as border tax adjustments for carbon or corporate taxes.
Using blockchain is essentially an evolution of today’s Authorized Economic Operator (AEO) system, under which the EU allows exporters with a proven track record to be granted faster customs clearance. AEO is ultimately based on trust: that major shippers (that account for large amount of customs traffic) have their documents in order. While granting AEO status to all importers would be open for abuse and defeat the purpose of having a fast lane if everyone can be on it, blockchain systems allow for expediency, while allowing for the swift authentication of all documentation.
The outlook for blockchain and trade is therefore very promising, but as the next section shows, the technology has so far only seen very narrow applications.