Blockchain's Killer App? Making Trade Wars Obsolete

On Hainan Island, China's Hawaii, in the shadow of sanctions, tit-for-tat tariffs and a looming trade war, China's paramount leader stood up for globalization last month by launching a surprise defense of world trade.

A confluence of technologies is poised to dramatically reshape the world of manufacturing and, in the process, render obsolete the existing international trade regime.

Instead of pitting their smokestack, 20th-century factories and armies of workers against each other, governments should apply blockchain's 'Don't Trust, Verify' approach to trade arrangements, using it to reduce trade friction and improve cross-border relations to the betterment of their societies.

What might the roadmap look like? That's what an ad hoc group of Hong Kong's leading strategists and business thinkers set out to define when they started meeting privately in late 2016 to explore how to fully digitize trade among the 65-plus countries involved in China's 'Belt and Road Initiative'.

By combining legal certainty with cryptographic certainty, the Belt and Road Blockchain will not prevent trade disputes from occurring - they will - but when they do the cost and complexity of having them will be dramatically reduced.

One exciting, highly disruptive outcome of blockchain integration into global manufacturing and trade is the prospect that businesses will move from "Push" supply chains to "Pull" demand chains.

Demand chains exploit that fact that digital trade dramatically changes cost equations and economics.

It's unclear how the existing trade rules under the World Trade Organisation's Rules of Origin will apply in such cases or whether countries will strategically hoard raw materials such as rare earth elements.

Given the glacial rate of WTO negotiation rounds, measured in multiple years, it is hard to see how the existing regulatory regime will adapt to a world where manufacturing, trade and retail are "All digital," even less so to a world where smart containers and packages automatically route themselves to their most profitable market.

This emerging paradigm suggests that divergences in manufacturing processes and costs - and the nation-state-led trade wars they trigger - will have decreasing economic relevance, relative to the impact of digital innovation.