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Blockchain Shows Potential for International Trade

Blockchain technology is moving from theory and discussion into real-world applications. The technology has already shown promise when it comes to facilitating cross-border transactions.

Many stakeholders in the finance and investment arena have coined blockchain as the “next revolution after the internet,” said James Sinclair, marketing manager of London-based Trade Finance Global.

“Blockchain has the ability to create a secure immutable record (of any type of information), resulting in no central point where the information can be corrupted,” according to a Total Technologies and Solutions FZ-LLC press release. The firm released the first blockchain application—an eVoting management solution—for the MENA region.

A Juniper Research study released in August notes that venture capital investment in blockchain and bitcoin technologies totaled $290 million in the first half of 2016. And the technology is also gaining interest with global traders.

It began as a decentralized, public ledger that records the details behind each Bitcoin transaction. “Interest in the technology exploded when it became clear that blockchain can be used to document the transfer of any digital asset, record the ownership of physical and intellectual property, and establish rights through smart contracts, among other applications,” according to a White & Case LLP whitepaper, Beyond Bitcoin: The blockchain revolution in financial services. “By reordering and automating complex, labor-intensive processes, the technology can enable organizations to operate both faster and more cheaply.”

As a distributed ledger, blockchain has promise, said Karen Webster, CEO of PYMNTS.com, in an interview. “Figuring out how to move money has been the easy part,” she said. Data, however, has to move with the payments. “The ledger is the software layer that moves the actual message. That strikes me as an interesting way to leverage this new technology—especially across borders. It also is being adapted for the movement of legal contracts between parties. It’s an interesting technology that still has a long way to go.”

Trade finance “is in dire need of this type of technology, said Kevin Cullen, of Volante Technologies, in a Finextra blog, Applying Blockchain Technology to Trade Finance. “Long reliant on complex banking correspondent relationships, the issuing and tracking of documentary letters of credit, and prone to the risks of delivery of payment and goods on a global basis, trade finance can benefit from blockchain's peer-to-peer connectivity and lower transaction costs.”

Blockchain offers transparency as each party of the sale can see a transaction as it moves from beginning to end, Webster said. As a distributed ledger, blockcain has to run on some kind of rail. “It’s extremely hard to build a new global set of rails,” she explained. “It’s a long and expensive process. The question becomes, whose rail is it riding? Is it open or closed? Is it a private network that not everyone has access to?”

Innovators are finding ways to adapt the ledger technology. For example, Visa is using the message protocol, but the rails that move the data are part of Visa’s network, which makes the transactions global and secure, Webster pointed out. Rails such as these are regulated, she added.

Visa “will pilot one of the first major B2B commercial products based on the technology—a challenge to the SWIFT messaging network for cross-border payments,” notes an O'Melveny & Myers LLP blog, Blockchain and Financial Services: Hype or Herald? The product, developed in collaboration with San Francisco-based Chain, Inc., will allow for real-time high-value international transfers, minimizing risk, complexity and intermediary cost. “There’s no argument that there’s a better way to secure payments,” Webster said. However, “I think the jury is still out on what that is.”

Sinclair states in a blog he recently wrote that blockchain has potential in trade and supply chain finance for the following reasons:

  • Parts of the supply chain process can be digitally time stamped.
  • Settlement of the payment can be streamlined.
  • Several peers in a network can verify when digital assets are transferred from party to party.
  • Contracts can be automated
  • The truth becomes a single real-time source held simultaneously across the blockchain network.

Meanwhile, blockchain has seemingly gained even more interest based on the number of news reports and other articles covering the electronic ledger technology. Several mention the partnership between blockchain provider, Fluent, and trade credit insurer Euler Hermes to offer real-time single transaction credit insurance. The program allows users to instantly purchase credit insurance against nonpayment of a given invoice within the Fluent Trade Asset Marketplace. A recent NACM eNews story covers the first block chain trade finance transaction.

FCIB will offer a session at the next Credit Congress (June 11-14 in Dallas) that looks at blockchain technology as well as other emerging payment systems.


Global Reaction to Trump Win

Chris Kuehl, Ph.D.

The U.S. is about to see a major shift in terms of its alliance structure. The global reaction to the outcome of the U.S. presidential vote has been highly varied with traditional allies concerned and new allies emerging. The story of the last year has been about the rise of populism worldwide. It has manifested on both the left and the right. The Brexit decision shocked Britain, while fringe political parties surged to the forefront in Greece, Spain, France, Iceland, Germany, Austria, Netherlands and elsewhere.

The rise of nationalism in Asia has been pronounced as well—the Duterte regime in the Philippines, Modi in India, and even in Japan. Motivation for these changes has been linked to some degree to frustration with traditional policies that seem to leave out sectors of the population and to anger at the sense of corruption in government. The left has been most concerned about the power of the corporation. The right has been most concerned about “cultural” issues. This is more often than not a thinly disguised bigotry that focuses on some unwanted group. Anger toward the refugees and Islam in particular has driven much of the populism in Europe. That has been a driver in the U.S. as well.

The global leaders most concerned about what is happening in the U.S. are generally traditional allies. Concern has been expressed by the Canadian prime minister and the Mexican president. There have been very lukewarm congratulations offered by Germany’s Angela Merkel and Britain’s Theresa May. Japan’s Shinzo Abe has been silent thus far. In contrast, there have been very warm and enthusiastic reactions from Marine Le Pen of the National Front in France as well as from the pro-Brexit leaders in the U.K. The U.S. position is expected to shift in the populist direction for the next few years at least. That changes expectations radically.

The Russian response has been muted, but it is expected that Vladimir Putin will be pleased to see a U.S. policy that is far less interventionist as it will give Russia the freedom it seeks in its own foreign policy. The Chinese are distressed as they now expect a far more hostile U.S.; but at the same time, U.S. allies in Asia now wonder if the U.S. will come to their aid if there is an intervention by China or some other state. Japanese Defense Minister Tomomi Inada has been asserting that her country must take responsibility for its own defense as the U.S. can’t be relied on. The Trump win only reinforces this opinion. Japan may very well elect to abrogate the constitutional restrictions on their military and could even elect to build nuclear weapons capability.

Frankly, the world has not been preparing for this, and the leaders are starting from scratch when it comes to relating to and understanding Trump. None of them have met with him, and he has no track record on foreign policy to speak of. The problem all year has been one of unexpected development. Nobody was prepared for the Brexit vote, and nobody was prepared for the rise of leaders like Rodrigo Duterte. Relationships are strained and confusion is the order of the day. The Trump of the campaign may well be the Trump in office, but it also may not be. There is no history to work from as he has never held any elected office at all. The first year of this term will be fraught with tension as some countries will elect to test the U.S. with policy moves designed to see what his reaction will be.


Barking Up the Wrong Tree

Dr. Hans Belcsák

Both the Clinton and Trump camps had argued that low tariffs and open trade have harmed the U.S. economy; in particular, that they have caused U.S. jobs to flee the country to destinations such as China and Mexico. That this line of argumentation is in sync with a global trend has just been underscored by the difficulty associated with the provisional signing of the long-delayed Canadian-European trade deal, known as CETA, an accord that was considered a done deal two years ago. Protests against the pact were led by Wallonia, at one time Belgium’s economic heartland, but now hard hit by years of industrial shutdowns. Similar feelings are easily drummed up in what in the U.S. is often called the “rust belt,” in the Great Lakes region and much of the Midwest.

One consequence of this line of thinking is that enormous question marks are now hanging over the officially much-vaunted Transatlantic Trade and Investment Partnership (TTIP), as well as over the 12-nation Pacific Rim Pact called Trans-Pacific Partnership, or TPP, which both candidates said they opposed and which Congress has yet to ratify. So far since the 2008 crisis, leaders around the world have been fairly successful in avoiding a serious new cycle of protectionism (although “below-the-board” defenses against imports such as buy-local provisions and special rules for labeling have mushroomed). But now this appears to be changing as populists on both sides of the political spectrum are gaining ground and middle-of-the-road politicians have to talk their language in order to get elected.

There is, of course, no denying that America has been running foreign trade deficits every year since 1976 and that a part of the heavy job losses in manufacturing states such as Michigan, Ohio and Pennsylvania must be attributed to the shift of industrial capacity to other countries. But to say that this has been due to free-trade arrangements like NAFTA and that renegotiating such accords will solve the problem is far too simplistic an argument to be taken seriously. In fact, even a brief look at history shows that only countries open to trade do well, while closed economies struggle and wither.

There are many reasons why manufacturing and jobs are being moved offshore. Taxes can be an important incentive as well as the behavior of labor unions—so can ridiculously complex and politicized regulation. The cost of health insurance can be a key consideration and so is a location’s access to key markets, not to mention the international strength or weakness of the U.S. dollar. The U.S. government should not make it more difficult for companies to leave (the larger ones cannot be fenced in, anyway). Instead, it should make it more attractive for them to stay. At least nine major automotive assembly plants have migrated from the U.S. to Mexico in the last few years. Certainly, lower wages were one consideration. But another one was that Mexico has free-trade agreements with more than 40 other countries, which is more than double that of the U.S. It does cost, on average, USD 1,200 less to build a car in Mexico rather than the U.S., but Mexico also has tariff-free access to nearly 50% of the global new-vehicle market, which is a not inconsiderable plus.

Even so, the U.S. automotive industry still easily outweighs Mexico’s. The auto parts supply chain is stronger here than south of the border, and vehicles produced in Mexico have a U.S. content of upward of 35%. Volvo and Daimler Vans just established in South Carolina two new plants, which are designed to export at least half of their output. As for China, while that country has been the recipient of much U.S. manufacturing capacity, the movement seems to be coming to an end. There are signs that more jobs are now returning to the U.S. from China than are going the other way. Meanwhile, an increasingly affluent middle class has sprung up in the PRC—larger than the entire U.S. population–that demands foreign-made goods, especially goods made in America. And Chinese are investing in the United States in record numbers. Back in 2010, such investments came to just USD 4.6 billion. In 2015, the total was up to USD 15.3 billion, in 171 projects, and in the first two quarters of this year alone, the aggregate was valued at USD 18 billion. If one adds up all the acquisitions, expansions of existing industries and new greenfield operations, foreign investment from all sources amounted to a whopping USD 420.7 billion in calendar 2015, for a 68% increase from 2014. More than half of this was manufacturing-related. Foreign companies established in the U.S. employ close to five million American workers.

Our trade deficit notwithstanding, the U.S. last year was the second-ranked exporter, worldwide, behind only China. And nearly 50% of all our shipments abroad went to countries with which we have free trade agreements, to wit, Australia, South Korea, Israel, Singapore, countries in Central and South America, and, of course, Mexico and Canada. With these markets, the U.S. racked up a trade surplus in industrial goods of about USD 12 billion last year. With the others, which include Europe, China and Japan, we incurred a deficit of some USD 500 billion. The shortfall with China was USD 334.1 billion, that with Germany USD 77.3 billion, and that with Japan USD 55.4 billion. As Mr. Reynolds of the Cato Institute put it succinctly, you can’t renegotiate trade deals that were never negotiated.

None of this is to suggest that the U.S. manufacturing sector is not hurting. While the American economy, overall, gained at an annual pace of 2.9% in the third quarter, with one of the chief drivers having been stronger exports, manufacturing remains in an extended period of stagnation. But trade agreements have not been the culprits. And one should also point out that openings for manufacturing jobs this year have averaged 353,000 a month, up from 311,000 in 2015. The trouble for many of those having a rough time trying to find well-paying jobs is that companies have heavily invested in advanced machinery requiring an altogether new set of skills, which the unemployed frequently do not have.

The conclusion from all this should be that protectionism is not the answer. When President Obama in 2009 slapped punitive tariffs on tires imported from China, the annual cost to American consumers was USD 1.1 billion. According to the Peterson Institute for International Economics, this works out to over USD 900,000 for each of the 1,200 jobs that were “saved.” What the government should do is to put considerably more money into helping working Americans cope with the job churn that inevitably results from shifts in trade and technology. Much more could and should be done with education and retraining, especially as colleges and high schools have drastically reduced their focus on technical education. Too many people have lost manufacturing jobs paying a solid wage plus health and retirement benefits and have been able to replace them only with jobs in the service sector, without benefits and paying not even half as much. Finding ways to cushion such downsides is where government efforts should be concentrated. Closing borders will cause great harm and do hardly anything to address economic inequities.


Global Roundup

China unveils three major decisions within three minutes. As the world was focusing on the race for the White House, China unveiled three major decisions within three minutes of each other Nov. 7. Among a raft of statements issued by the Standing Committee of the National People’s Congress, Beijing named a new finance minister, effectively barred a pair of elected Hong Kong “localists” from office and passed a cyber security law that may hamstring foreign companies in Asia’s biggest economy. (Bloomberg)

China seeks Latin America free trade. Chinese President Xi Jinping will pay a week-long visit to Latin America this week, a trip that experts said will promote a free trade agreement and further implement a framework that was proposed by Xi during his visit to the continent in 2014. The establishment of the Asia-Pacific Free Trade Area (FTA) is expected to be discussed, which is particularly significant against the backdrop of a anti-globalization drive in developed countries and the EU. (Global Times)

TTIP's future in Trump's hands. It is up to the new American administration to decide if it wants to continue the EU-U.S. free trade talks, EU officials said on Nov. 9, highlighting the deep uncertainty about U.S. president-elect Donald Trump's policies. "We frankly don't know," EU trade commissioner Cecilia Malmstroem said about the future of the TTIP talks. (EU Observer)

Eurozone says more debt relief for Greece ‘impossible’ for now. Eurogroup head Jeroen Dijsselbloem and German Finance Minister Wolfgang Schäuble, in a move likely to anger Athens and the IMF, warned last week it would be impossible to draw up fresh debt relief for Greece by year’s end. (EurActiv)

Uncertainties surrounding South Korea’s economic outlook remain high. Uncertainties about the South Korean economic prospects continue to be high due to challenges faced by the automotive, smartphone and shipping industries, noted Scotiabank in a research note. South Korea’s export sector continues to be impacted by subdued global trade. Furthermore, the nation continues to be affected by developments seen in China. (EconoTimes)

Euler Hermes: The truth about Africa: 10 myths debunked. Africa is lagging behind the rest of the world, but this is paradoxically an advantage for the region—it approaches development differently and has already taken concrete steps to address the backlog. With the help of 10 myths, Euler Hermes decrypts reasons why Africa is a special continent of many resources, which will find its way of growing and becoming a key player in the global economy. (CNBC)

Kenya gleams as Africa's bright side. There’s been nothing but trouble for much of Africa as the price of oil plummeted 55% during the past two-and-a-half years. But, there’s a brighter side to the sub-Saharan continent. Unlike Nigeria, where oil accounts for more than 90% of exports, or South Africa, which never recovered from the 2008 financial crisis amid weak global demand for commodities, Kenya, the No. 3 economy measured by gross domestic product, is turning the oil debacle into a bonanza. (Bloomberg)

Trade as we know it could change. Donald Trump’s presidential victory in the early hours of Nov. 9 was a shock to financial markets, and will certainly represent a dramatic shift in the way the world conducts trade. (Global Trade Review)

 

Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations