Why blockchain should be global trade’s next port of call

This paper examines the suitability of blockchain and blockchain-based distributed ledger technology (DLT) to the port, harbour and terminal industries. DLT has the potential to drastically change the world of asset transfer, asset movements and security of data movement. Testing of various DLT applications has already started – first in 2009 with the emergence of Bitcoin in the financial services industry, then subsequently in various other fields, including within the supply chain.

Blockchain1

Anyone working in the port, harbour and terminal industries needs to understand the potential impact and implications of blockchain – in business, in respect to government interactions and along the supply chain. The technology has the potential to change the way parties operate and interact along the value chain as well as to open doors for new players. Some intermediaries might be impacted, others may be left out of the game.

What is ‘distributed ledger technology’?

Also known as DLT, this data-sharing system allows for distributed and real-time multi-party tracking, digital “bills of lading” and letters of credit, machine-to-machine interactions, and better visibility of assets and liabilities. Smart contracts, digital wallets and secure digital asset and information transfer could ease maritime operations, unlock new opportunities for all parties and reduce risk. With this, significant amounts of paper could be cut out of processes.

Capturing the potential of DLT and blockchain requires not only an understanding of the technology and its implications for the port, harbour and terminal industries, but also pioneering and collective efforts to develop the applications and a new gold standard in business to jointly bring the traditional industries to the next level.

Blockchain for ports

The port, harbour and terminal business sits at the crossroads of the majority of global trade routes, making the sector one of the key enablers of the global supply chain; however, I believe it can also sit at the crossroads of blockchain.

The supply chain is about processes from design to the extraction of raw materials, to production and the movements and storage of goods down to repurposing, including the related flows of capital and data. The fluidity of flows across the supply chain ecosystem determines time required and cost incurred. In turn, fluidity depends on the seamlessness and integrity of the processes – seamlessness means the least number of steps and the highest level of digitization and automation. Most importantly however, it stands for integrity and authenticity of information as the basis of trust among all parties involved.

Image: IBM

An introduction to blockchain

Blockchain became known as the core technology behind bitcoin – the first decentralized crypto-currency – launched in 2009. Although blockchain has initially been thought about mainly from a financial services perspective, the technology can serve as a basis for many useful applications and manage information far beyond monetary transactions. Blockchain technology is a leapfrog technology intended to reinvent markets. Jeremy Wilson, vice-chairman of Barclays Corporate Banking, said blockchain could even become a new operating system for the planet. That is the level of technology about which we are talking.

Blockchain is a cloud-based kind of global spreadsheet or distributed ledger of transactions. Blockchains run on computers provided by volunteers around the world. Therefore, there is no central database to hack. The blockchain is public and encrypted. Although nothing is unhackable, it is extremely difficult to remove, duplicate, manipulate, tamper or copy records. Therefore, blockchain means that we can collectively trust what happens online.

Blockchain is one type of distributed ledger. But distributed ledger technology (DLT) stands for blockchain-based DLT, and both terms are used simultaneously.

New source of trust

What if information such as the provenance of goods, tariff codes, classification data, import/export data and certificates, manifests and loading lists, customs values, status information, and all other information about goods within the supply chain ecosystem was available for all parties involved at any time and everywhere? Then, the vision of a transparent, secure, paperless supply chain would have become a reality. It is blockchain and DLT that can bring track and-trace, visibility and transparency to the next level.

DLT is suited to logging and monitoring data, such as parts in the automotive supply chain or containers moving in ships, planes and on other transport devises around the world. Today, customers and buyers have limited visibility and, even more so, ability to validate the true value of products and services they wish to purchase.

Lack of transparency along the supply chain causes various concerns, including that the prices paid might be an inaccurate reflection of the true value. On the other hand, limited transparency also causes risks for manufacturers and brands resulting from illicit practices and the environmental impact that comes with certain forms of production.

DLT and blockchain can help to reassure consumers, mitigating and eliminating risks around food security, conflict minerals, counterfeit goods, forced and child labour, corruption and so forth. In the world of DLT, everyone can watch what is happening, whether they’re consumers, business partners, governments or watchdogs.

Pioneering names

There are many pioneers in the field of DLT and blockchain. Provenance, for example, applies DLT to help companies to build trust across the supply chain by making it transparent where products were made, by whom and with what environmental impact. The company BlockVerify also helps companies to fight product counterfeiting.

Everledger assists companies in recording and tracking the movements of diamonds from the mine to the store. Traditionally, buyers rely on paper, which can be changed or tampered. DLT allows the recording and accessing of unchangeable information and history – any time and everywhere. Everledger is one of the first users of IBM’s blockchain platform aimed at the supply chain. IBM’s partnership with Walmart to track lettuce, steaks and snack cakes from farm and factory to the shelves is one of the biggest practical tests to date, while Maersk has teamed up with IBM.

The goal for both is to develop a blockchain solution to help manage and track goods and the paper trail of millions of shipping containers by digitizing the supply chain process to enhance transparency and the highly secure sharing of information among partners – shippers, freight forwarders, ocean carriers, customs authorities, and ports. The solution, which is expected to be available later this year, has the potential to save the global economy billions of dollars.

The whole world of commerce and trade is about to be rethought and redesigned. Barclays reported the first blockchain-based trade-finance deal in September 2016. The process, from issuing to approval of the letter of credit, usually takes between seven and 10 days, but could be reduced to less than four hours. Flexport, a provider of software to manage global trade might one day help businesses to monitor re-order cycles and plan future shipments, which would allow them to instantly replenish their inventory when they run low – even through placing orders from M2M.

Smart contracts and e-wallets

When combined with other advanced technologies, such as the internet of things (IoT) and artificial intelligence, DLT and blockchain unfold their full potential. Combining DLT with IoT allows ships to autonomously contact suppliers and place orders for example when low on energy to schedule cycles to take advantage of electricity prices.

Thanks to DLT, machines can do business with machines. Blockchain brings automation to the next level. Electric vehicles can pay recharging, truck parking, tolls and fuel fees based on smart contracts with a blockchain-enabled digital wallet. E-wallets can also collect fees for equipment-sharing. Smart contracts are agreements between parties stored on a blockchain. Smart contracts work on the basis of standard templates and can, for example, refund deposits and perform instant collection of taxes as well as take over the burden of regulatory reporting.

Paperless and high speed

Putting documents on the blockchain brings significant advantages. Maersk has been participating in a proof of concept, with blockchain expertise from the IT University of Copenhagen, to digitize the bill of lading. Eliminating piles of papers speeds up processing and reduces costs and risks. A shipment of roses from Kenya to Rotterdam can generate a pile of paper 25cm high, for example.

Furthermore, prior to arrival, ships can send digital, autonomous and secure papers, documents and information to port authorities, security departments, customs, terminal operators and all other parties involved in port operations. At the port, artificial intelligence-based tools, such as auto-document verification tools can speed up the processing of the submissions.

Improved security and asset control

Facial recognition technology can improve and accelerate access controls and crew checks in ports and save time and money, while raising the level of security, as DLT contributes the digital identity. Terminal operators and other asset operators can log and monitor assets and devices such as trucks, chassis, scanners and any kind of equipment on the blockchain, which offers in this way attractive cost savings, through security and efficiency gains. Sharing of assets in the port will become safer and easier.

New players, new business

Blockchain-based open and secure platforms can also bring smaller businesses to the port, either to perform tasks in the terminals or as customers operating in the port. They can easily access the port services and connect with others via the digital port platform. Digital peer-to-peer collaboration tools and payments ease doing business.

D-printing facilities operated by ports might offer a new form of safe production and an additional revenue stream. 3-D printing combined with blockchain allows the creation of secure digital memories for each product and each part of the product. The immutable records from the source of the raw materials used, to where and how products were manufactured, to their distribution, maintenance, repair, recall and recycling histories can be a vital component of the new source of trust.

Standardization is crucial

The joint development of standards is critical, whether on industry, national or global level to avoid conflicts between different standards and ensure the optimal outcome. Standardization of blockchain involves terminology, development, deployment and security. In the supply chain and transport industries, the consequences of missing standards are well known. For example, the desired smooth exchange of data – which eases collaboration, allows instant and better responses to disruptions, and drives optimization and security throughout the supply chain – is hampered by the lack of shared data formats and technical transfer options.

In times where many physical products are digitized and almost every physical process is replicated on the digital layer that has largely taken control over the tangible world, cybersecurity has become vital for businesses, governments and the security of our lives. Boards have to take action. Companies need to recruit C-suite experts who take the board onto the journey of cybersecurity – starting with setting the board agenda. The supply chain, logistics and transport industries, including the ports, need to play an active role in the process of standardization and security.

Towards a digital future

Blockchain offers the opportunity to create a global platform of performance and trust; however, scaling the technology still requires overcoming some hurdles. First, blockchain protocol(s) used to secure the ledger of global trade and manufacturers must be trusted by all users. Technical capabilities to handle very large transaction volumes need to be enhanced and the costs of maintaining the protocol need to be lowered.

Gateways to bringing on board ordinary companies and individuals into the M2M economy are also required. The liability model of business conducted on the blockchain will need to be reviewed as the appropriate treatment of liability may differ from current models. Last but not least, standard skills are required to easily and smoothly interface with legacy systems to overcome concerns and doubts of the conservative forces in business and government. Collective effort and engagement is required to make DLT and blockchain the new gold standard in business.

Independently from the time to realization, the final shape, form of the distributed ledger and blockchain technology, ports, harbours and terminals might significantly benefit just from exploring this central tool of the digital economy. Alone, the knowledge gathered and new relations built along the road – for example, with fintech and other tech companies – should justify the industries’ effort.

 

This article was originally published at Port Technology and republished at the World Economic Forum Agenda.

How blockchain can restore trust in trade

containerInternational trade is under pressure. Fears fuelled by the global refugee situation and terrorist threats have led to tighter border controls – and these come at a cost. Every inspection of goods, every stop along the supply chain, eats up time and drives up prices. It harms businesses and consumers alike. Those involved in international trade – whether manufacturers, trading houses, transportation companies or banks – are seeking ways to ease the situation and cut time and costs.

Blockchain technology can help. The cloud-based ledger ensures that records can’t be duplicated, manipulated or faked, and increased visibility in parts of the supply chain promotes an unprecedented level of trust. It means governments can better protect citizens, while business partners can be certain trading documents are real. Consumers can check the quality and provenance of products, and banks can reduce processing time. And it’s all paperless.

Thanks to blockchain, all kind of legal, financial and product-related information can be made available. This allows even the least trusting parties to comfortably conduct business. With further investment and experimentation, blockchain could potentially hide confidential information to protect the interests of trading parties – pricing information, for example.

Does it work in the real world? Barclays reported the first blockchain-based trade-finance deal in September 2016. The transaction guaranteed the trade of almost $100,000 worth of cheese and butter between Irish agricultural food co-operative Ornua and the Seychelles Trading Company. The process – from issuing to approval of the letter of credit, which usually takes between seven and 10 days – could be reduced to less than four hours. Other banks are also exploring ways blockchain technology can improve processes along the supply chain. In August 2016, banking consortium R3CEV reported that 15 of its members had joined a trade finance trial to test its distributed ledger protocol, named Corda. Also in August, Bank of America, HSBC and the Infocomm Development Authority of Singapore (IDA) revealed that they had built a blockchain application to improve the letter of credit (LC) transaction process between banks, exporters and importers.

It’s not only banks: Maersk, the world’s largest container-shipping line, has been participating in a proof-of-concept initiative, using blockchain expertise from the IT University of Copenhagen to digitize the ships’ cargo inventories. These so-called “bills of lading” require an enormous amount of paper. A shipment of roses from Kenya to Rotterdam, for example, can result a pile of paper 25cm high. And the cost of handling it can be higher than the cost of transporting the containers. Maersk’s aim is to optimize the flow of information while raising visibility along the supply chain.

Often when making a purchase, buyers don’t know where the goods they ordered are coming from, or even whether they have been shipped at all. With blockchain, consumers can be informed of every step in the process. Combined with the internet of things, this could also extend to the care with which a product is transported. Swiss start-up Modum, for example, uses blockchain as a way of assuring recipients that pharmaceuticals have remained within an acceptable temperature range while in transit.

Trust and transparency

Citizens are worried that reduced barriers at the borders, as well as trade agreements, increase the risk of terrorism and illicit trade. Blockchain technology can in fact provide the backbone of a system of authorized trusted participants, bringing everything into the light, whether it’s a product, the party selling it or the path it takes to reach the buyer. Consumers and watchdogs, public and private, can trace every item moved through the authorized blockchain-backed channel and validate or reject both product and party. Customs clearance, too, can be optimized using blockchain. Parties that are part of the group can act quickly and efficiently, while others face scrutiny.

Immutable records on every aspect of a transaction – from the source of the raw material to where and how the products were manufactured, to their distribution, maintenance, repair, recall and recycling histories – are the new basis of trust. Information about ownership, provenance, authenticity and price are all held in the blockchain. Digital product memories connected to smart devices along the supply chain will provide secure proof of everything from manufacturing processes to quality controls. This will reduce the cost of compliance, i.e. the adherence with laws and regulations. Furthermore, this will open doors for replacing current product labelling practices to protect consumers and accelerate customs-clearance processes. Customers and consumer-protection organizations, as well as customs authorities, will have all the information they need to decide to buy or not to buy, to let goods through the border or to block them.


Blockchain has the potential to become the new gold standard of business and trade. But first, all nations need to accept the new technology. There are technical hurdles to overcome too. First, blockchain protocol(s) used to secure the ledger of global trade and manufacturers must be trusted by all of its users and be effectively un-hackable. Technical capabilities to handle very large transaction volumes will also need to be enhanced and the cost of maintaining the protocol may need to be lowered. Ordinary companies and individuals will need to be onboarded into the machine-to-machine (M2M) economy. The liability model of trade conducted on the blockchain will need to be reviewed as the appropriate treatment of liability may differ from current models.

Blockchain can help to reinforce trust in today’s complex and globalized world – giving citizens and governments fresh confidence in the global exchange of goods.

Image: Erwan Hesry

This blog was originally posted on the World Economic Forum Agenda.

Don’t Blame China For Taking U.S. Jobs

The problems are more complicated than that.

Where have all the manufacturing jobs gone? If you ask Republican presidential candidate Donald Trump, the answer is clear: China! But there is another, more plausible explanation. To paraphrase Democratic presidential candidate Hillary Clinton, “It’s the robots, stupid”.

The U.S. has lost 5 million factory jobs since 2000. And trade has indeed claimed production jobs – in particular when China joined the World Trade Organization in 2001. Nevertheless, there was no downturn in U.S. manufacturing output. As a matter of fact, U.S. production has been growing over the last decades. From 2006 to 2013, “manufacturing grew by 17.6%, or at roughly 2.2% per year,” according to a report from Ball State University. The study reports as well that trade accounted for 13% of the lost U.S. factory jobs, but 88% of the jobs were taken by robots and other factors at home.

If not China, what then explains these jobs losses? It’s simple: factories don’t need as many workers as they used to, because robots increasingly do the work.

manufacturing1Investment in automation and software has doubled the output per U.S. manufacturing worker over the past two decades. Robots are replacing workers, regardless of trade at an accelerating pace. “The real robotics revolution is ready to begin” writes BCG and predicts that “the share of tasks that are performed by robots will rise from a global average of around 10% across all manufacturing industries today to around 25% by 2025.”

With increasing automation, the manufacturing industry is becoming more productive. From 1998 to 2012, all sectors experienced a productivity growth of 32% when adjusted for inflation – the production of computer and electronic products rose 829%. The researchers at Ball State University calculated: If 2000-levels of productivity are applied to 2010-levels of production, the U.S. would have required 20.9 million manufacturing workers instead of the 12.1 million actually employed.

Many of today’s customers demand fast products, such as fast fashion with quickly changing models. Producing far away is only then still an option when margins are high and able to absorb high transport cost for air transportation. Moving closer to markets means more distributed manufacturing which reduces also the impact of disruptive events, such as the tsunami in Japan and the flooding in Thailand.

Focus on manufacturing pays off. One example is Greenville, South Carolina. Greenwille was for decades the state’s heart of the textile industry till its gradual decline when confronted with competition from Mexico and South East Asia. “In 1990, 48,000 people still worked in textile manufacturing in the Greenville area, according to the U.S. Bureau of Labor Statistics. Today fewer than 6,000 do” we can read in MIT Technology Review.

The U.S. needs to aim at leading the adoption in robotics. According to the BCG report, manufacturing labor costs in 2025 are expected to be 33% lower in South Korea for example and only 18% to 25% lower in the U.S. Therefore, South Korea is estimated to improve its manufacturing cost competitiveness by 6 percentage points relative to the U.S. by 2025. Focus need as well as skilled workers due to the fundamental shift in competences and because programming and automation talent will replace low-cost labor as key drivers of manufacturing competitiveness.

The focus on China is diverting energy from the real challenge. This is not only misleading but puts at risk the future of the U.S. economy.

Read my full article on Fortune.

Wildlife crime: a $23 billion trade that’s destroying our planet

Between 2007 and 2013, rhino poaching in South Africa increased by 7,700%. Rhinos, which are poached for their horn, aren’t the only victims of this illicit trade, which is driving many species of wild animals and plants to extinction: elephants are poached for ivory, tigers and leopards for their skin, pangolins for meat and scales, and iguanas are caught for the pet trade. Rare timber is targeted for hardwood furniture.

wildlifecrimeWith a value of between $7 billion and $23 billion each year, illegal wildlife trafficking is the fourth most lucrative global crime after drugs, humans and arms. Trophy hunting is estimated to create around $200 million in annual revenue. Only 3% of the fees paid for the hunts reach local communities.

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Image: African Wildlife Foundation

In 2015, the United Nations General Assembly unanimously adopted a resolution for tackling illicit trafficking in wildlife. The Sustainable Development Goals specific targets to combat poaching and trafficking of protected species. That’s quite some progress, but more action is urgently needed, because more than 7,000 species, in 120 countries, are at risk.

Fighting this type of corruption requires civil servants, including park rangers, who are properly paid, trained and equipped. Along the entire supply chain, awareness needs to be raised and measures must be increased.

Commitment and collaboration to break the chain

Transportation and logistics is not only the backbone of a modern economy but also a key enabler for trafficking wild animals and wildlife products. Therefore, the transportation and logistics sector plays a critical role in identifying and eliminating risks along the supply chain. In light of the surge in wildlife crime, the industry has been taking a range of actions to break the chain between supply and demand.

At the end of January 2015, TRAFFIC and the World Customs Organization (WCO), with the support of the United States Agency for International Development (USAID) and the Wildlife Trafficking Response, Assessment and Priority Setting (TRAPS) Project, convened a two-day consultative workshop. Delegates from shipping and logistics companies, airlines and courier and transport associations were seeking solutions to deter wildlife smuggling activities.

In March that same year, representatives from logistics and transportation companies operating in China made a public declaration pledging their zero tolerance towards illegal wildlife trade. The 17 companies, which include EMS, DHL, FedEx and SF Express, account for 95% of the Chinese courier market.

The same month, the Declaration of the United for Wildlife International Taskforce on the Transportation of Illegal Wildlife Products, which outlines 11 commitments to help bring an end to the illegal trade in wildlife, was signed by some 40 corporations, agencies and organizations, including Maersk Line, Kenya Airways, IATA and the World Customs Organization (WCO).

Many airlines have banned hunting trophies: Air Canada, Air France, British Airways, Brussels Airlines, Emirates Airline, Etihad Airways, Iberia, KLM, Lufthansa, Qantas, Qatar Airways, Singapore Airlines and Virgin Atlantic Airways. Following the killing of Cecil the lion in early July 2015, Delta Airlines banned all lion, leopard, elephant, rhinoceros and buffalo trophies in the cargo holds; United Airlines and American Airlines later followed suit. US embargos are important. The person who killed Cecil, Walter Palmer, is one the estimated 15,000 American tourists who visit Africa on hunting safaris each year. Although he had a permit and was not charged with any crime, Cecil was an illegal kill.

In June 2016, the International Air Transport Association (IATA) adopted a resolution on the illegal trade in wildlife at the 72nd IATA Annual General Meeting. IATA denounces illegal trade in wildlife and wildlife products, and calls upon the member airlines to consider the adoption of appropriate policies and procedures that discourage the illegal wildlife trade.

Modern technology can stop the crime at the root

Breaking the chain is important. However, it would be better to stop wildlife and forest crime at its root. Satellites, drones and internet live-streaming enable solutions which capture the crime taking place to inform law enforcement agencies and the general public in real time. Solutions like this could not only protect wildlife and forests, but also support important initiatives in many fields and areas, such as deforestation, illegal fishing and natural disasters.

The development has already begun: Global Forest Watch is providing data and high-resolution alerts. Witness, established in 1992 by Peter Gabriel with the help of Human Rights First and its founding executive director Michael Posner, trains and supports activists and citizens around the world to use video safely, ethically and effectively to expose human rights abuse and fight for human rights change.

Building new tools requires support from the private and public sector, international organizations and consumers. Until new high-tech solutions arrive, collaboration in fighting corruption and wildlife and forest crime along the supply chain needs to be tightened and strengthened.

This month, leaders and experts are in Johannesburg for the 17th meeting of the Conference of the Parties to CITES. The participating parties are discussing a dedicated resolution on prohibiting, preventing and countering corruption facilitation activities.

As Yury Fedotov, the executive director of the United Nations Office on Drugs and Crime, said: “We all share a responsibility to act where we can.” Hidden in fashion or furniture, as food or pets, the products of wildlife and forest crime find their way into our homes and lives, so we all have a responsibility to act.

This blog was originally posted on the World Economic Forum Agenda.

What does Hanjin’s collapse mean for world shipping?

hanjin2The world has just witnessed “by far the largest container shipping bankruptcy in history”, writes the JOC. But the collapse of the South Korean shipping line Hanjin, the world’s seventh-largest container carrier, should not come as a surprise.

The shipping industry is ripe for an overhaul. In the past quarter alone, 11 of the 12 shipping companies to publish results have announced heavy losses. Freight rates have been under pressure for some time, due to a combination of slow global trade and surge in capacity created by new cost-effective mega-ships.

So how can the industry find a route out of the crisis? While alliances between shipping companies have failed to reduce overcapacity, mergers might achieve this goal. Data-based systems, which improve interaction between ship and shore, offer cost reductions of up to 30%. But is it enough to significantly change market dynamics?

This chart shows the alliances created among shipping companies, and their share of worldwide capacity.

hanjin3Image: Thomson Reuters

A lot is at stake: $14 billion in goods are currently marooned at sea on Hanjin ships. Container ships and bulk carriers are being denied access to ports and several vessels have been seized (or are likely to be seized) by charterers, port authorities and other parties. Around the world, Hanjin cargo ships are dropping anchor at sea to avoid losing more ships to creditors waiting on land.

South Korea’s maritime ministry expects cargo exports to be affected for another two or three months.

The collapse comes at a critical moment in the year, as retailers prepare for the holiday shopping season. The National Retail Federation in the United States fears a potential ripple effect throughout the global supply chain that could cause significant harm to both consumers and the US economy. British retailers, too, have voiced concerns about pre-Christmas supply.

Hanjin Shipping filed for bankruptcy protection on 31 August, after a long struggle to raise liquidity and restructure debt. Should shippers have seen it coming? In 2009, the container industry posted operating losses of close to $20 billion, but none of the shipping lines went under.

The shipping industry is a complex network of maritime alliances and relationships. Importers and exporters are currently finding their freight blocked on Hanjin ships – even though they booked with other lines. And Hanjin’s membership of the CKYHE alliance – which includes China COSCO, Yang Ming Marine Transport Corp and Evergreen Marine Corp Taiwan Ltd – has now been suspended. What this situation shows is that globalized trade requires new legal mechanisms to protect carriers, shippers and consumers.

What does this mean for global trade?

Short-term impact on the global supply chain will depend on the time needed to unload Hanjin ships. In the meantime, customers will have to seek alternatives while rolling out their contingency plans. Competitors will take on the additional cargo – but at a price. Hyundai Merchant Marine, for example, will deploy at least 13 of its ships to two routes once exclusively serviced by Hanjin, while the South Korean government plans to reach out to overseas carriers for help, writes Reuters.

Mid-term, the shipping industry might see healthy rates and revenues coming back. Prices have already surged upwards – by up to 50% for a 40-foot container from China to the US. The surge may be partly due to the forthcoming China National Day on 1 October, as well as the number of vessels made idle to reduce overcapacity. However, the Korea Maritime Institute has estimated that, in the near term, shipping rates will rise – by 27% between Busan and the US, and by 47% between Busan and Europe.

In light of these increasing risks and their impact on the global economy, there are two likely outcomes. First, the market and existing legal mechanisms will be left to clean up the failure. Alternatively, the South Korean government will find a way to support its struggling shipping industry.

For decades, South Korea’s shipping lines were engines of the nation’s export-driven economy. Their role going forward might depend on the assessment of their ability to significantly reduce costs and become competitive in the global market.

This blog was originally posted on the World Economic Forum Agenda.

Is this the key to successful global trade?

“Logistics performance – both in international trade and domestically – is central to the economic growth and competitiveness of countries, and the logistics sector is now recognized as one of the core pillars of economic development.”
Key2Trade

So reads a 2016 report by the World Bank titled Connecting to Compete 2016: Trade Logistics in the Global Economy. The report features the Logistics Performance Index, which ranks Germany as the world champion in logistics. The country scores even higher than it did the last time it topped the index, two years ago.

In today’s interconnected and interdependent global economy, where consumers and citizens benefit from the global flow of goods, we need to collectively ensure that all parts and pillars across the globe can carry the heavy loads coming through the supply chain.


Logistics Performance global rankings 2016


The path to prosperity

Logistics is the key enabler of the world’s supply chains, which bring resources, seeds, fertilizers, materials, parts, machinery and equipment to farms and factories, as well as goods to shops, supermarkets and households.

Without logistics, today’s global procurement, manufacturing and distribution would not exist. Logistics connect sellers and buyers across the globe and provide companies with access to domestic and international markets. Related services influence the cost of goods and determine the competitiveness of economies. Their integration in global trade and value chains adds value to the worldwide networks of procurement, production and distribution so important for job creation, national economic development and wealth.

In short, when logistics function as they should, they are the basis upon which economies are built.

In the top 30 of the Logistics Performance Index we find 22 OECD countries and 14 members of the European Union. China moved from 28 in 2014 to 27 in 2016. India, currently the world’s fastest-growing large economy, did not make its way into the top 30 this time but has jumped 19 places to rank at number 38.

Strong nations depend on and benefit from buying and selling in foreign countries. Competition is what drives them, collaboration is what helps a nation to capture its full potential.


Asia rising

Globalization, logistics and trade have had a significant impact on global wealth levels. In 2013, the Economist wrote that in 20 years nearly 1 billion people had been taken out of extreme poverty. In 2015, the World Bank announced that global poverty was likely to fall below 10% for the first time.

This reflected the entry of China, India and other developing countries into the global procurement, manufacturing and distribution system, as increasingly powerful players in the world economy. Still, many developing countries remain on the margins of world markets, requiring helping hands to improve their logistics capabilities.

Between 2007 and 2014 the gap between top and low performers was slowly shrinking – driven by the logistics sector’s continuous improvements in infrastructure and service quality, as well as customs clearance processes. In 2016, logistics performances converge at the top and the gap between high and low performers widens.


Landlocked logistics

How fast the picture can change. Take the Philippines: it ranked 44 in 2010 but has fallen to 71 in 2016. The drop is largely driven by two factors: transport-related infrastructure and the competence and quality of logistics services, including transport operators and customs brokers. The online publication Supply Chain Digital writes: “Stalwarts of the Philippines’ logistics industry have voiced concerns over a series of Bureau of Customs directives instigated in the past year.”

Logistically constrained countries – landlocked nations without direct access to the oceans and global waterways, for example – are regularly struggling with trade and transport facilitation and reforms. Beyond political will, the disadvantaged countries with weaker logistics (often today’s suppliers and definitely tomorrow’s potential customers) require and deserve attention and support from the international community.


Reliability over speed

In high-performing nations, slower global trade after the 2008 global financial crisis, as well as environmental concerns, create a pressured environment for the logistics industry. The sector – itself estimated to contribute 23% of total global greenhouse gas emissions – faces concerns over jobs, land use and urban planning. In the interests of economic inclusion and peace, all nations need to further advance trade and transportation facilitation, whether individually or collectively, while safeguarding the citizens against harmful activities.

According to the World Bank report, “supply chain reliability continues to be a major concern among traders and logistics providers”. And indeed, reliability is more important than speed. And critical for reliability is efficiency at the borders. The current global trend towards disintegration, such as Brexit or the erection of fences at the Hungarian border with Serbia and Croatia, are not helping.

In economies where infrastructure and skills are no longer the key concern, governments might need to invest more money and time in explaining to the citizens the benefits of trade and logistics.

This blog was originally posted on the World Economic Forum Agenda.

The world is building fences. Here’s why we should worry

Long forgotten seem the walls, fences and barbed wires at all borders. Therefore, the understanding of the benefits of open borders might be fading. Of course, with terrorist attacks and waves of migrants concerns are rising. However, I wish that we are mindful and clear about the effectiveness, consequences and cost of the new global disintegration tendencies.

Fences

In December 2015, the BBC wrote: “EU border security becomes new mantra“. Not only Europe but larger parts of the world are going through a phase of increasing disintegration: the Brexit referendum, discussions about the exclusion of Greece from the Eurozone and the beginning of the construction of fences along the green borders of barrier-free Schengen.

Near Schengen, on 14 June 1985, the picturesque town in Luxembourg, five European countries signed the agreement which led to the creation of Europe’s borderless Schengen area. In light of mass flows of migrants seeking asylum in Europe, Hungary blocked migrants from onward travel to the rest of Europe and constructed a four-metre-tall fence along sections of the border with Serbia – a country not part of the Schengen area.

Also, Austria has begun building an anti-migrant barrier across the Brenner Pass at the Italian border. Putting an end to hope on one side and reducing fears on the other. However, it’s not only in Europe that countries are raising the bar. US presidential hopeful Donald Trump wants to build a wall at the Mexican border. Increasing fear of terrorists in the US has led to the reintroduction of a visa for “certain Europeans“.

EconomistBorders

Image: The Economist

Click here to see other regions in the Economist’s interactive map

The hidden cost of disintegration

What would be the impact of reestablishing barriers? Citizens would face long-forgotten burdens: the northern Europeans, for example, would experience long traffic jams at the Brenner Pass on the way to the holiday destinations in the south. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Consumer prices would rise due to the forced slowdown and necessary adjustments along the supply chain. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the changes required to the highly cost-optimized just-in-time concepts – largely applied in global manufacturing in the automotive industry – and the efficient goods supply out of the distribution centres. Many of the products made available by bilateral and multilateral agreements would disappear from supermarket shelves.

Disintegration would affect the competitive position too. Europe, for example, might find itself in a very disadvantaged situation given that Asia is continuing to integrate. What if TTP arrives and Schengen leaves? There might also be explosive geopolitical risk involved, with Crimea, Ukraine and new Chinese islands in the South China Sea heating up the debate. As new fences go up across Europe, what tensions could result from countries such as Spain, Italy and Greece being left more or less alone with new waves of migrants?

How effective are visas and border controls?

Looking back: how safe has the world been with more barriers? Did borders protect Italy from the onslaught in the 1970s of the Red Brigades, Spain from the ETA, Germany from the Red Army, and France from GIA? Did borders protect the US from attack on 9/11? How effective have been the high metal fences and walls, barbed wire, alarms, anti-vehicle ditches, watchtowers, automatic booby traps and minefields along the inner German border from 1945 to 1990? The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote.

Tightening up security

The world has experienced decades of advancing global integration. Increasingly open borders and many trade and investment partnerships have strongly contributed to the prosperity and wealth of people and nations. International organizations and agencies have not only supported global growth but also established institutions in charge of dealing with the risks of reducing national barriers. Organizations have developed international ties and many platforms of collaboration to fight crime and terror have emerged.

Interpol – the International Criminal Police Organization – has strong links with Europol, the organization coordinating the local police forces across Europe. Within countries, ministries and agencies are increasingly working together. Germany, for example, has established the GTAZ – the Joint Counter-Terrorism Centre – an autonomous authority and co-operation platform used by 40 internal security agencies.

The private sector has launched initiatives to protect staff and assets against terrorism and other threats across the globe. Since the attacks of 9/11, security measures have been tightened. Today, individuals and companies are checked against the sanction lists of the US and Europe. Employees appearing on the lists are no longer allowed to be paid a salary, and companies are excluded from doing business. Though, as the Panama papers show, we have not yet closed all the back doors.

Battle on the internet

Social media helps terrorists organize itself and recruit new fighters. On the other hand, the FBI uses internet surveillance software like Carnivore to identify and stop attacks. Organizations such as the Search for International Terrorist Entities are scanning propaganda material and training manuals, and sharing the insights with other organizations. Technology trumps. The internet has the potential to flatten borders while reducing risks. The more people are active on the net, the better economic value can be extracted and (potential) terrorist activities monitored. Which also does not come without concerns and complexities – as the discussion between Apple and the FBI shows.

Governments have the obligation to protect citizens and the right to control borders. However, what are the effects of the potential disintegration on citizens, migrants and the economy? The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

We need to understand and be mindful of the impact of our decisions on the economy. All the same, should we apply economic reasoning to a decision on whether or not to offer a helping hand to people in severe need?

Image: REUTERS/Marko Djurica

This blog was originally posted on the World Economic Forum Agenda.