Technology and smart ledgers are the key to averting a global trade crisis

 
Douglas McWilliams
GERMANY-SHIPPING-CARGO
Smart ledgers could reduce the frictional cost of shipping each container by $46 (Source: Getty)

When I presented on the prospects for trade to the meeting of the Atlantic Council in Washington DC last summer, the mood of the assorted diplomats was gloomy.

The Trump tariffs hadn’t happened yet but the administration was gearing up for them.

Meanwhile, fears about the consequences of Brexit exercised the minds of not only the Europeans, but the US-based multinationals.

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All feared that trade could collapse, and worried about a repeat of the 1930s, where comparative protectionism was associated with a fast engulfing depression, leading to tens of millions out of work around the world with few means of support – and of course eventually to war.

But so far, it hasn’t quite turned out like that.

Most economists use the Dutch Central Planning Bureau’s data for world trade. The Bureau’s latest report says that “2017 turned out to be a remarkably good year for world trade with 4.5 per cent year-on-year growth”.

The most timely data for trade is for air freight (30 per cent of world trade in goods by value), and the latest IATA report for February shows its volume up 7.7 per cent year-on-year.

Meanwhile, the World Trade Organisation estimates that trade in services is rising at an annual nominal rate of seven per cent.

So world trade is actually doing pretty well, and is certainly growing as a share of the world economy in real terms, despite the opposition of some politicians and electorates. Why?

Essentially, the answer is technology.

First, digital and creative technology is boosting the growth of trade down telephone lines. The latest estimate from the Creative Industries Federation shows that the actual levels of exports of digital and creative services are more than 40 per cent higher than officially estimated, and growing annually by nearly 25 per cent.

But second, companies are increasingly using technology to reduce trade frictions.

Michael Mainelli, master of the Company of World Traders, said this week at a reception in parliament that a shipment of avocados from Mombasa to Rotterdam involved about 200 communications with over 30 parties.

On Tuesday, he and I launched the Cebr report for Long Finance and Distributed futures, showing that smart ledgers (roughly what most of us think of as the blockchain technology) could reduce the frictional cost of shipping each container by $46 – about 2.5 per cent of the total frictional cost of trade. Our analysis showed that this would increase world trade in goods by $35bn, boosting world GDP by $20bn.

This is the tip of the iceberg. When IBM first put electronic point-of-sale terminals into pubs, we hadn’t realised that the biggest change would be a huge reduction in so-called “spillage” (in those days, stuff got nicked) which had often previously amounted to as much as 50 per cent. Similarly, the use of smart ledgers in trade is likely to bring in many unexpected benefits – such as less corruption – so the real gains to trade could well be as much as four times the $35bn predicted.

In the UK, we have particular reasons for wanting to take best advantage of technology. To start with, as a small island with less than one per cent of the world’s population, we depend disproportionately on trade. The direct UK GDP gain from smart ledgers is estimated at £800m.

But more importantly, we have voted for Brexit. One of the potential problems generated by this is likely to be increased documentation requirements. Smart ledgers are the obvious way to manage this with the least cost and damage to the economy.

So far, it looks as though the push from technology to eliminate trade frictions is beating back the political forces in the opposite direction. Let us hope this will continue.

The full report is available here.

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