As New Zealand’s primary sector becomes more internationally competitive and valuable, we are seeing a trend towards a higher number of smaller, bespoke trades.
We’re no longer sending shiploads of refrigerated lamb to a single market. Instead of marketing to countries, we’re often marketing to cities or even businesses. We’re flying small consignments directly to restaurants, complete with certificates of provenance, rather than filling containers.
One big hurdle to this approach is the information technology behind international trade. After several hundred years, letters of credit and other tools remain essentially unchanged.
The opportunity ahead of us
Game-changing infrastructure like roads, rail, shipping and airways all changed the nature of farming. They improved speed to market and profitability. We’re now on the cusp of another infrastructure change. This time, it will revolutionise international trade.
Blockchain or Distributed Ledger Technology will improve the efficiency and speed of global trade transactions. It replaces paperwork with electronic transactions across the internet, securing and storing trade details instantly.
It’s faster, simpler and more transparent. Small consignments become much more viable.
It can also reduce cost and risk, making trade finance more accessible – currently, a critical hurdle for many New Zealand producers.
Paperwork: the curse of trade
Trade is built on co-operation and trust. Unfortunately, both are hard to come by in international trade processes.
Trade Finance tools create trust, through trusted third parties. Hundreds of years ago, that meant letters of credit and bank guarantees. Today, surprisingly it still means letters of credit and bank guarantees.
This reliance on old systems makes trade the last bastion of paperwork and manual processing. It also creates big challenges, especially for small operators.
- So much paperwork. Most automated systems only help to create paperwork more efficiently. They don’t try to replace paperwork.
- Moving parts create friction. No matter whether a consignment is big or small, a single transaction can involve entering about 5,000 separate data items in 30 document stages. Something can go wrong at each step, and it’s a confusing, technical process for new exporters and importers.
- Delays are inevitable. In 2014 Maersk found that a typical shipment from Kenya to the Netherlands involved 100 organisations, 30 people and 200 interactions. The shipment took 34 days. Ten of those were spent waiting for documents. These delays slow down the delivery of goods. They also slow down the payments for those goods, which can be crippling for smaller players.
- Errors are common. They’re often picked up by experienced operators within the trade chain who use their “That doesn’t look right” filter. Sometimes they’re simply fixed on the spot. But often, it’s back to square one to update everyone’s copies of the paperwork.
At the moment, familiar documents and processes give international traders the trust they need. That’s why it’s hard to make changes. But just as email replaced faxes, and metric replaced imperial, change is inevitable. The big questions are what system will emerge? And how long will it take?
Blockchain: a replacement infrastructure
Blockchain is a way of recording transactions in a distributed ledger.
It uses global information systems to update everyone’s copies of the ledger in real time. It permanently records every new transaction and every change to those transactions.
Each transaction is time-coded and locked using high-level encryption. That means transactions can’t be tampered with or changed retrospectively.
It has applications in many areas. Cryptocurrency was the first big user. But it can be used in any activity involving commercial or informational transactions.
For international trade, this tamper-proof, real-time infrastructure makes trust and co-operation accessible, reliable, convenient and simple.
The benefits help all businesses, especially smaller ones.
- Everyone involved in a trade can deal directly with each other, using shared, reliable information. That’s not just the buyer and the seller. It can also include suppliers, distributors, transporters and insurers. Everyone can stay “on the same page” and contribute to the trade without creating a new wave of paperwork at each step.
- Electronic systems create opportunities for smart contracts. These can trigger payments automatically, speeding up much needed cashflow back up the trade chain.
- Improved workflow efficiency and visibility makes smaller, bespoke consignments more profitable. Authorities can review a blockchain record to check a shipment’s ownership, provenance, customs compliance, authenticity and price.
- Connectivity with associated technology can be used to bring together a powerful story of the supply chain journey, from farm gate to plate. This can be used to manage food safety risk, protect brand equity and leveraged for marketing activity.
Perhaps most importantly, exporters can overcome the challenges of financing or guaranteeing their overseas sales. This lets New Zealand-owned businesses, including our many small producers, grow internationally by trading overseas.
But switching to a new system takes a huge amount of co-operation and agreement.
Collaboration: the gateway to change
Creating a new system for international trade is a mammoth task. Partnership remains essential.
It’s a bit like the introduction of the fax machine. It only offers a business benefit when a critical mass of business partners also have a fax.
Moving international trade to blockchain faces the same problem, but more so. It’s not enough for several parties to use Blockchain. All of the many parties involved in a trade have to use it.
That means success can’t happen if all parties stand back and wait for the dust to settle before adopting.
It’s clear that such an enormous change can’t be driven by a single organisation, industry or even government. It will almost certainly take a consortium.
Globally, we’re already seeing these consortia emerge. There are many, but four large players are emerging as well as one local challenger. They are we.trade, komgo, Marco Polo, Contour, and locally TradeWindow. Comparative notes on these businesses can be found below. 
Locally, large organisations are investing in new technology to digitise trade. For example, ASB is collaborating with Trade Window, a digital blockchain trade platform that has successfully delivered pilots for agribusiness customers. This proves that a New Zealand based group can do the same as larger offshore consortia, using a single platform for digital trade administration, enabling communication, documents and data insights to be shared in real-time via blockchain-based technology.
We believe all of these new consortia will agree that a siloed “winner takes all” strategy won’t succeed. Instead, they’ll ensure their platforms share clear standards, so they can operate seamlessly together. Eventually they will either merge to create a few key platforms, just as we have in payments, or settle into a dynamic environment of small operators using a shared framework.
We also think a hybrid system could accelerate adoption. For example, a blockchain system could offer direct electronic access at a low cost. It would also offer a transition approach, where others can upload or download standard trade paperwork for manual entry at a fee. Errors will persist in the uploads, but correcting them will become simpler. Over time, the appeal of the electronic system will win out.
A win for New Zealand’s primary sector
However we make the change to Blockchain, it’s inevitable that the change is coming. The advantages to New Zealand will be enormous, especially in the primary sector.
The sooner we introduce this capability the better. But it can’t happen if we all stand back and wait for someone else to act. We need leadership and action, even when we know we might take three steps forward and one back.
Streamlining trade gives our producers more flexibility for small, value-added consignments. It cuts the costs, opens markets to more producers, and reduces the reliance on trade finance credit.
We’re so excited about this future that we’ve invested in it. We also want to engage across the export sector, including government, intermediaries, producers, distributers, logistics and supply chain partners to explore how we can work together.
If we build momentum behind the uptake of digital trade in New Zealand we can make great gains for kiwi businesses.
To join the movement behind Digital Trade or for more information, reach out to Paul Gestro, ASB’s International Trade Consultant.
- Active since January 2019.
- Standalone legal entity backed by 17 banks in 16 countries and growing.
- Focus on financial transactions, and now expanding to logistics and credit insurance.
- Active since December 2018.
- Independent entity backed by 12 banks, 100+ corporates and 35+ developers.
- A large number of trade and anti-money laundering functions, with aggressive global expansion plans.
- Commercial launch planned before June 2020, successful pilots completed.
- Open network with a complex governance structure, backed by over 30 banks and corporates, with partners such as Mastercard, Accenture, Microsoft and R3.
- Offers three Trade Finance products, and is open to all trade actors.
- Has completed 14 successful pilots, and plans to launch in the second half of 2020.
- Legal entity governed by its network of seven major banks, many based in Asia.
- Offers a letter of credit service, which it views as a complex “back-breaking” option from which it can easily expand to other trade instruments.
- Active since 2019, commercially launched in Jan 2020, successful pilots completed
- New Zealand based entity with ties into Australia, Taiwan and Singapore, backed by ASB
- Initial offer includes full digital trade administration, enabling communication, documents and data insights to be shared in real-time with aggressive expansion plans to develop solutions across the supply chain.