According to a report published by leading consulting firm Bain & Company and World Economic Forum, blockchain distributed ledger technology is expected to bring the fourth industrial revolution that will bring in efficiencies to SMEs and emerging markets participating in global trade. The improvements in tracking and efficiencies are expected to bring $1 trillion improvement in global trade finance gap.
The report takes into consideration the costs and effect of the administrative processes paper-based involved in cross-border transactions. The distributed ledger based on blockchain technology could simplify things and prevent illegal trading activity by offering a complete traceability record of origins of various goods.
Paper Monster Hijacking Global Trade - Drawbacks of Paper-Based Documentation
The authors of the report have mentioned one of the biggest obstacles of global trade is traditional paper-based processes that are inefficient and time-consuming at the same time. For example, a test shipment of flowers originating from Kenya and reaching the Netherlands will generate 200 separate documents. Besides the difficulty in handling so much paperwork, the cost of processing these documents is also a big factor and the processing costs are approximately 1/5th of the total physical transportation expenses.
Making the supply chain completely digital-based would improve the efficiencies and also reduce costs. The report also states converting paper-based documentation into electronic formats and using smart tools and technologies could help small and medium businesses participate in global trade much effectively and get good profit margins that are must for sustaining businesses.
Digital ledger – smart technology to bring transparency and remove trade barriers
Small and medium businesses are required to hire blockchain developers to build blockchain-based traceability and recording system that will reduce the dependence on paper-based documentation in cross-border trades altogether. With blockchain technology, it will be easy for SMEs to create immutable records and share them easily. This will help bring transparency in the trade for governments and it will be easy for authorities to prevent drug trafficking and smuggling. The ability to track shipment information of the goods and its origin will also provide consumers with ethical information about products to make an informed choice.
Blockchain technology could help 1.5% global GDP growth in the near future
In today’s scenario, a large volume of global trade (1.5 trillion dollars’ worth) is lost due to rejected trade finance transactions. This can be averted by employing blockchain technology to address the efficiency issues related to trade and supply chain finance that is paper work based including letters of credit. This would improve trust and also increase trade volumes. The result is the digital transactions supported by blockchain technology could save the 1.5 trillion dollars’ worth of global trade that’s lost currently due to paper-based transactions. This would mean a 1.5% GDP growth in global trade in the next decade.
The distributed ledger technology is expected to bring efficiency, trust, and faster transactions through the following features
- Minimize human errors in document check
- Faster credit risk assessment through credit history check
- Low-cost, instant and secure exchange of data
- Instant reconciliation and verification of records
- Smart contracts for the automatic execution of the workflow
The blockchain technology is also expected to shorten the trade transaction and it would reduce the lead time from weeks to a few hours. This will have a positive effect on inventory costs, transportation, and indirect labor costs. According to Bain and company estimates, if the distributed ledger technology is adopted by all participants of global trade ecosystem, it could lead to 50-70% reduction in trade finance costs and also improve the turnaround times three to four folds. There is no doubt the distributed ledger technology when applied in conjunction with other technologies can revolutionize global trade.
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