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.

What does London’s new mayor mean for Brexit?

London has elected its first Muslim mayor. It’s a development that many see as reflective of the city’s tolerance and capacity to embrace differences. Will the election of the pro-trade and pro-Europe Sadiq Khan ultimately prove a crucial turning point in the Brexit debate?

LondonAndTheBrexit

The city’s citizens have good reason to vote for openness. London is built on trade. Trade has largely contributed to today’s wealth and the rise of many cities, regions and nations. Although trade growth has been moderate since the Global Financial Crises, reestablishing trade barriers might lead to significant negative effects.

The United Kingdom has its own currency and enjoys a high degree of economic sovereignty, which would hardly be enhanced by Brexit. Whether the wave of refugees seeking save harbour in the UK would slow down post-Brexit remains a question mark. What’s more certain is that trade barriers regularly increase the price of imported consumer goods, the prices of materials and parts to local production as well as industrial assets, and consequently the prices for goods produced in-country, for internal consumption or for export.

Four scenarios for Brexit

What would Brexit entail? Answering this means formulating the possible positions the UK could take after an exit from the European Union (EU). The scenarios include: (1) complete independence, (2) loose association with the EU, and (3) broad harmonization with the EU – the exit could also be structured in a gradual and staged way. Finally, (4) the UK could join another zone, such as the North American Free Trade Agreement (NAFTA).

The choice between these options would determine the extent and nature of future trade barriers and the level of impact on society and economy within the UK, in respect to the exchanges of goods with EU members, with countries and blocs the EU has agreements with and finally with other blocs and nations.

If the UK stayed largely harmonized or associated with the EU, little change would occur. Under all the other scenarios, procurement, manufacturing and distribution networks would possibly need to be adjusted – immediately or over time, partially or even drastically.

How would Brexit impact business?

Looking at the cross-border movement of goods, the costs of trade to the economy as well as the impact on cost structures and consumer prices depend on the conditions in four key areas of trade facilitation: (1) border administration, (2) market access, (3) telecom and transport infrastructure, and (4) the business environment. Brexit would affect three of the four areas, namely border administration, market access and business environment.

Tightened border administration extends the time goods travel, slowing down deliveries while increasing the cost of transport. In addition, border controls reduce the reliability of the supply chain as the time required for possible inspections is unpredictable. In time-critical industries, this would force companies to hold buffer stocks and re-design logistics systems.

State investments in hyper-efficient customs clearance facilities, combining technology with smart procedures, can smooth away some of the negative effects. These approaches include pre-clearance processes based on pre-submitted customs information, or ensuring goods carry digitally and instantly retrievable information which can be used to let them clear customs while passing the border – probably a longer shot.

A curb on innovation?

The second area affected by the potential Brexit would be market access. Controls and regulations to structure which companies can sell and operate on the national market is often linked to the protection of local industries. This protection eases the pressure on local companies to innovate and drive serious programs to improve competitiveness.

Third, the business environment would be affected too: changes could occur in the area of investment policy and the hiring of foreign workers. The UK government would potentially need to negotiate trade terms and agreements with many partners – a costly process which can take years. In the meantime, the local and foreign companies operating in the UK might be faced with significant uncertainty.

In order to compensate for the cost and price increase, the UK government could consider tax cuts and subsidies to ease the pressure on consumers and manufacturers. Otherwise, the rising cost of production could trigger the gradual migration of UK manufacturing towards lower cost locations and increasing dissatisfaction among consumers and citizens.

Uncertainty, reduced competitiveness and job cuts

Uncertainty, reduced cost competitiveness and potential measures to protect local industries can lead to the gradual retreat of foreign players. Job losses and increasing dependency on imports would be the consequences. Over time, protected UK industries might fall behind the foreign players due to reduced cost optimization and innovation pressure and hence competitiveness.

In the short run, some sectors would be able to reap some short-term benefits. Logistics for example would be under pressure to redesign logistics concepts and build new distribution centers. However, this short-term revenue booster is to be considered economic waste. Instead of making the supply to the local economy and society easier and more fluid, investments would flow into efforts to cope with additional administration, regulation and procedures.

Logistics – in common with many sectors – would suffer in the end. For example, as the customers of the logistics and supply chain service providers put pressure back on suppliers, the effect would be shrinking margins. This is particularly challenging at a time when cash and financing needs for newly required investments would be well on the rise.

Referendum

It remains unclear what position the UK would take in the event of a Brexit. What is clear is that the additional layers of work and cost caused by tightened border administration, regulated market access and a deteriorating business environment would result in additional burdens and disadvantages for companies, and especially for consumers and citizens.

While initially, some industries would reap benefits, soon the negative repercussions risk spreading across all stakeholder groups – government, business and society.

Let’s hope that the election of Sadiq Khan will be followed by more enlightened public sentiment towards globalization, the importance of stress-tested trade blocs and the accomplishment of new agreements like the TPP and TTIP.

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