Transforming the Architecture of Global Trade Systems
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In the decades since the Uruguay Round of negotiations ended and the World Trade Organisation (‘WTO’) began operations in 1995, the contours of a new technological architecture for the global trade system have been taking shape.
The legal foundation for this new global trade system architecture was formally laid in 2013 when the Doha Round of negotiations concluded with the WTO TFA, which is the first multilateral trade treaty to be concluded since the creation of the WTO itself. Unlike other multilateral trade treaties, the WTO TFA focuses on issues related to the operational efficiency of cross-border trade, rather than economic relations between member states.[1178] As the WTO/GATT framework generally rests on consensus decision-making—albeit there are periodic lapses into organised hypocrisy, as needed to hold the system together—the WTO TFA framework for rationalising and modernising the operations of trading nations builds incrementally on current practice.[1179]12.41
On 17 February 2017, the WTO TFA entered into force following its ratification by two- thirds of the WTO’s 164 members. The WTO has defined trade facilitation as the ‘simplification, modernisation, and harmonisation of export and import processes’.[1180] Countries that ratified the WTO TFA commit to streamlining processes for clearing goods through customs; publishing information about their import and export procedures; increasing the use of electronic payments and electronic documents; increasing the transparency with which fees are set and penalties imposed; providing a single point of contract for dealing with government agencies; and permitting consultation for proposed customs rules, and a right of appeal for customs administration decisions.
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The roots of the WTO TFA can be traced back through decades of work by the World Customs Organisation (‘WCO’) to standardise and harmonise customs administration processes around the world and the work of United Nations economic development agencies, such as the United Nations Economic Commission for Europe (‘UNECE’), to develop consensus standards for electronic commerce.
The WTO TFA requirement that countries set up a single point of contact for traders’ interactions with government agencies is often referred to as a ‘single-window’ requirement. In 2004, UNECE issued ‘Recommendation 33’ urging all trading nations to develop a single window, namely, a ‘facility that allows parties involved in trade and transport to lodge standardized trade-related information and/ or documents to be submitted once at a single entry point to fulfil all import, export, and transit-related regulatory requirements’.[1181] Advanced economies with the capacity to move their own government operations in this direction began providing technical assistance in support of this recommendation to emerging economies that often lacked that capacity.12.43 Before countries can establish a successful national single-window system, they must engage in the public sector equivalent of business process reengineering in order to bring different government agencies working with processes and technologies under a single, unified framework designed to be easy for importers and exporters to understand. In the 1990s, the US Treasury led the development of an ‘International Trade Data System' (‘ITDS') that would serve as the foundation for a single-window system. In addition, US Customs launched its own Automated Commercial Environment' (ACE') to integrate all the information being collected by various government agencies for analysis and tracking. In the face of Congressional reluctance to fund both systems, the decision was taken to merge them and run the combined program on US Customs computer systems. The decision was also taken not to run the ITDS/ACE system as a separate computer system, but instead to require all forty-eight federal agencies within its scope to modify their existing computer systems to conform to ITDS/ACE standards.
12.44 While US Customs made steady progress towards creating a single window, it was not particularly successful in persuading other federal agencies to make the same effort to ensure the success of the single-window project.
In 2006, the US Congress noted the slow progress and included in the Security and Accountability for Every Port Act (‘SAFE Port Act') a mandate to the Secretary of the Treasury to get all forty-eight federal agencies engaged in clearing goods across US borders into the ITDS/ACE system. After that proved to be an insufficient incentive to get laggard agencies on board, President Obama issued an executive order setting a deadline of 31 December 2016 for all relevant government agencies to participate fully in the ITDS/ACE system.[1182]12.45 US Customs staggered the deadlines for different agencies to comply in an effort to minimise the disruption to traders, but some agencies still failed to meet their deadlines. For example, the Department of Homeland Security (‘DHS') was rumoured to be $1 billion over budget and woefully behind schedule, just weeks before its own February 2016 deadline to connect to the ITDS/ACE system.[1183] Although nominally the newest major federal agency created in almost half a century, DHS was actually an amalgamation of pre-existing agencies, each with their own legacy IT systems, so it is not surprising that DHS was struggling to demonstrate its compliance with ITDS/ACE standards. As some agencies fell behind schedule with their implementation plans, US importers, exporters, freight forwarders, and customs brokers were left struggling to ascertain how they were supposed meet the deadline to comply with ITDS/ACE requirements.
12.46 In the 1980s, Singapore began work on its national single-window system known as ‘TradeNet'. The Singapore government established a private firm, CrimsonLogic, to host the TradeNet system, which went live in 1989.[1184] Since its inception, TradeNet has been a model of efficiency and transparency.
Other countries that have successfully launched singlewindow systems with less controversy and foot-dragging than the US include Finland, Mauritius, Germany, and Sweden. In 2005, the Finns summarised with disarming frankness the challenges they faced when they began constructing their system in the 1990s:The first system operated with a central database and dumb terminals, it was very rigorous and nothing could be changed without huge cost. There were no [single-window] interfaces to replace at that time. A Windows SW interface was added later, without great success, because it was exceptionally badly designed... [When the SW system was first launched in] 1992 nobody knew what we were doing; hence the solution was left to the state-owned software company VTTK to resolve. The result was a rather clumsy, inflexible and expensive system. It was, however, a useful learning experience. The pressure to build a completely new system mounted and when it was realised, in 1998, that the system was not Y2K proof, we had a good excuse to make a fresh start. We now knew what we wanted and the design phase involved everybody who wanted to have a say. The present system is easy to learn and use, but its age has started to show.[1185]
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Once a government has brought all of the computer systems it uses in connection with clearing goods for import and export into a single, integrated system and created a singleuser interface for traders, it does not require much of a leap of imagination to think of such a system as a ‘platform’.[1186] For example, much of the information required by government agencies is the same information that intermediaries handling logistics or financing require to provide their services to trading parties. While the first priority for single-window systems remains making it easier for traders to work with governments, countries whose efforts to launch single windows were successful soon turned to trying to make those single-window systems attractive to private intermediaries as well.
In the 2000s, Hong Kong launched its ‘Digital Trade & Transportation Network, South Korea launched its ‘u-TradeHub, and Singapore launched its ‘TradeXchange’ to draw private parties, such as transportation, warehousing, trade-finance and insurance companies, into their national single-window systems.[1187]12.48
class=21>Comparing the costs and benefits of trade-finance reform based on blockchain with that based on building out from a national single-window system, it quickly becomes obvious why the national single-window systems are a more attractive option for most parties involved in international trade. For most parties, the cost of coming into compliance with national single-window standards represents a sunk cost. Expanding the range of activities that can be streamlined and modernised using national single-window technologies is a low-cost, high-benefit strategy for many parties, even though this usually requires continued use of legacy computer systems. Any attempt to implement a blockchain trade finance system would be a very risky investment, even if the cost to one organisation of making such a move is relatively small, because the investment would have little or no value if few other parties involved in trade made similar investments.12.49 Both the appeal of national single-window systems and the failure of blockchain systems to gain enough momentum to take off reflect the economics of standards and networks. According to Metcalfe’s Law, services delivered over computer networks become more valuable to each user as the total number of users increases.[1188] The benefit that network users derive from others also using the same network is described as an ‘externality’ in economics because neither the network operator nor any individual user will compensate other users for the contribution that they make to the value of the network.
The externalities associated with computer networks are referred to as ‘network effects’.[1189]12.50 Network effects may have a negative, as well as positive, effect on users of a network. Efforts to create a network for the first time often suffer from a chicken-and-egg problem because users will be reluctant to j oin until they feel certain that everyone else will j oin the same network. Private sector sponsors of new networks may have to create a bandwagon effect to inspire prospective users to j oin. Public sector sponsors of new networks may have the luxury of simply mandating participation—a ‘taxation by regulation’ strategy.[1190]
12.51 Once a network achieves widespread adoption, then its users may become ‘locked in’ to that network if their fear of losing the positive network externalities that the existing network provides makes them unwilling to join a newer, better network. The tendency of network users to want to participate in the same network as everyone else in order to enjoy positive network externalities, and then to become locked into the first network that they join, may confer an economic benefit on the operator of that network known as a ‘first mover advantage’.[1191]
12.52 One way that regulators and users can reduce the risk that a network operator will benefit unfairly from lock-in is to favour networks based on open standards that ensure interoperability across the network and competition among network service-providers at the same time. Government agencies involved in national single-window systems would have few incentives to invest the time and effort in developing standards open enough to level the playing field between conventional trade-finance parties, on the one hand, and disruptive innovators offering trade-finance services based on blockchain technologies, on the other. Therefore, once a national single-window system is in place and conventional tradefinance parties, such as banks, factors, and trade- credit insurance companies, have joined it, something like a public sector ‘first mover advantage’ sheltering the incumbents is likely to make it very difficult for disruptive blockchain trade-finance services to gain any traction in trade-finance markets.
12.53 The current systems of trade finance operate as a kind of virtual global network because the legal system of every trading nation will enforce obligations growing out of common
trade-finance mechanisms, such as letters of credit, prepayment, open account, and factoring and because employees of financial institutions and trading parties understand how to use those systems. Blockchain innovators are in effect challenging a ‘first mover advantage' that accrued to traditional trade-finance sources, even before national single windows began operation. In the case of letters of credit, this ‘first mover advantage' was established centuries ago. The network is embodied in the tacit and explicit knowledge of millions of bank employees, carrier staff, and trading party staff working in trading nations around the world.[1192] Each prospective adopter of a blockchain solution must not only be convinced that a critical mass of other participants will make the same move, but they must also be willing to write off the tacit and explicit knowledge that permits them to manoeuvre in the old system and must also commit to creating new forms of tacit and explicit knowledge of blockchain systems to replace their prior knowledge.[1193]
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Migration from an existing network to a new challenger can be accelerated by subsidising the use of the new network. The theory of platforms explains how such a subsidy can be created by the organisers of a ‘two-sided platform' who can divide prospective users into different ‘sides' and find a way to get one side to subsidise the participation of the other. For example, when the Visa and MasterCard payment card networks were established in the late 1960s, the network operators were consortia of banks: one side of the ‘two-sided platform' was the cardholders and the merchants were the other side. Card networks, such as Visa and MasterCard, tend to charge merchants relatively high fees for access to their networks, and they turn over part of those fees to cardholders in the form of frequent flyer miles, cash back, or other incentives to use their cards more often.[1194] In a similar way, Google, as a platform operator, charges advertisers high fees that it then uses to subsidise user access to search results.
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No blockchain innovators have yet uncovered a strong enough value proposition to generate the surpluses required to convince one ‘side' of a two-sided trade finance platform to begin subsidising new users of their systems. By contrast, when governments commit to expanding the operation of their national single-window system to include the participation of private trade intermediaries, offering an interface that is easy to use could help increase the rate of voluntary, private sector participation.
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Cross-border trade today takes place within a complex, diffuse ecosystem populated by millions of participants, including exporters, importers, carriers, customs brokers, banks, and government agencies in every country around the world. At some point in the future, all the different national single windows for trade facilitation may be linked together into a global single-window network or platform. If an integrated global trade facilitation emerges through the development of open standards, then trading parties would enjoy the benefits of competition among private trade intermediaries in the form of reduced risk of lock-in to proprietary trade facilitation standards, as well as lower prices for better service from private trade intermediaries. But in the absence of a global platform operator capable of setting up a two-sided platform and compelling one side to subsidise the participation of another side, progress towards a globally interoperable trade facilitation system may be slow.
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