The countries of Latin America and the Caribbean (LAC) have an incredible opportunity within their reach. By leveraging blockchain technology, they could increase trade within the region and with the rest of the world and help shore up the economic recovery.
To help more countries and users understand blockchain better, the IDB’s Integration and Trade Sector and its Institute for the Integration of Latin America and the Caribbean (INTAL) launched the report “Blockchain and International Trade: New Technologies for a Bigger and Better Latin America International Insertion” (available in Spanish). The publication analyzes blockchain’s benefits and challenges from different perspectives and examines its use at different stages in international trade.
Throughout six chapters, experts on different aspects of foreign trade[1] introduce and discuss the opportunities that blockchain has opened up in cross-border flows of goods and the challenges it poses, with a particular focus on trade in LAC.
How does foreign trade benefit from blockchain?
Blockchain enables data to be recorded in a secure digital format by providing real-time information on transactions between different parties, be they corporations, supplier networks, investment pools, or an international supply chain.
It provides all parties with a record that is secure, encrypted, transparent, easy to access, and impossible to tamper with. Although blockchain emerged within the financial system with the launch of cryptocurrency Bitcoin, today it is used in a wide range of activities, including ones that are directly or indirectly related to foreign trade.
The long value chain tied to international trade includes vast, complex areas like logistics, transportation, customs administration, financing, and administrative procedures between firms, all of which could be streamlined by adopting this technology.
Blockchain optimizes processes, makes goods traceable, guarantees the security of payments and financing, facilitates the verification of digital quality and origin certifications, enables real-time sharing of information on the different stages of trade, and helps improve how related public and private services operate, among other benefits.
Blockchain provides solutions for trade operations by simplifying cross-border trade, contributing to competitive improvements, and reducing transaction costs. Although blockchain has been used within foreign trade for several years, its significance has increased since the start of the COVID-19 health crisis and it is expected to play an even more prominent role in the post-pandemic world.
A concrete example of how blockchain is being used today comes from French retailer Auchan, which has implemented an international food traceability system using blockchain throughout its supply chain. After piloting this solution in Vietnam, it has applied this technology to track goods and services originating in France, Italy, Spain, Portugal, and Senegal, working in partnership with Te-Food. The system enables the tracking of different products from farm to fork and the recording of food quality data (and related logistical information) via QR codes.
Six benefits of blockchain
In the publication, the authors highlight several ways in which trade can benefit from this new technology. Blockchain can be used to:
- facilitate the traceability of traded goods, which helps reduce logistics costs and safeguard operations from start to finish (chapter 2);
- contribute to the digitalization of the entire rules of origin process at every stage, which is key to streamlining certifications and customs clearance (chapter 5);
- address the challenges of cross-border data exchanges between public agencies or authorities and private companies. Through the CADENA initiative, which the IDB is facilitating as part of its LACChain[2] program, eight customs authorities in LAC are now sharing data from firms that have been certified as Authorized Economic Operators (AEOs), as stipulated in their mutual recognition agreements (chapter 4);
- modernize Single Windows for Foreign Trade (VUCEs) to streamline operations and reduce transaction costs by increasing interoperability between players and facilitating access to information for all parties involved (chapter 3);
- transfer payments more quickly and cheaply than is currently possible through the SWIFT network. As well as reducing transaction times, blockchain commissions are lower and without maximum limits, which is especially advantageous for exporting SMEs (chapter 6);
- reduce the time needed to issue a letter of credit from seven to 10 days to as little as four hours (chapter 1).
Blockchain: the challenges facing governments
To make these benefits a reality, the governments of LAC countries need to tackle the challenges that implementing blockchain implies.
These challenges fall into three groups. The first concerns technical issues, which include the difficulties associated with developing technological infrastructure. The second relates to administration and governance, including the need for open standards and the creation of sector and business coalitions in different LAC countries to develop interoperability and economies of scale. The third issue is large-scale implementation, which includes data quality, the participation of all players involved in the transaction, the development of inclusive systems, and secure interfaces with legacy systems.
Through its Integration and Trade Sector, the IDB provides LAC countries with different technical and financial support programs to help spread blockchain technology and its use in international trade, drawing on the lessons learned from the development and implementation of the CADENA initiative.
This is a major new opportunity for international trade, one that is described in detail in “Blockchain and International Trade: New Technologies for a Bigger and Better Latin America International Insertion”. LAC cannot remain on the sidelines when it comes to increasing the quantity and quality of trade flows between countries in the region and with the rest of the world.
Magdalena Barafani is a consultant at the Institute for the Integration of Latin America and the Caribbean (INTAL). She investigates issues related to 4.0 technologies adoption for productive development in the region and the relationship between gender and trade.
Pablo M. Garcia is a long-experienced development economist. He is currently Head of the Integration Unit at the Inter-American Development Bank (IDB)
Ricardo Rozemberg, economista, especialista en comercio e integración. Desde principios de 2020 es Consultor del BID INTAL.
To read the original commentary from IDB Beyond Borders, please click here.