When it comes to international shipments or international trade, there are various steps and documentation stages that need to be completed for a trade to be successful. To give you a clear picture of how international trade works, let’s walk you through the whole process in detail.
The first step is export haulage that involves the movement of goods from the shipper or exporter to the freight forwarders’ warehouse. A Freight forwarder is a connecting link or an intermediary who is responsible for transporting goods from one destination to another. Export Haulage usually takes place with the help of a truck or a train or in some cases both. The export haulage can take from few hours to few days depending upon the distance between the exporter’s premises and the freight forwarders’ warehouse. When goods reach the warehouse of a freight forwarder, he inspects and ensures that everything is transported without any damage.
Now before the good can be shipped off from the country, they need to receive customs clearance from the export country. This process is generally performed by customs brokers and requires submission of cargo details and various other important documents like: Bill of Lading, Commercial Invoice, Packing List, Certificate of origin statement, Packing Declaration Form and Manufacturing Declaration.
Next is inspection and loading of the cargo on the ship. This is coordinated by the freight forwarder. Once the shipment arrives in the importer’s country, the authorities in the destination country check the import customs documents. It is the responsibility of the freight forwarder or the nominated customs broker to perform this clearance by the time cargo arrives. Once the shipment cargo arrives in the importer’s country, the cargo is handed to the destination warehouse along with the carrier bills and handling bills of the shipment.
Next step is the transportation of the goods from the warehouse to the the final destination of the intended receiver. This can be facilitated by a freight forwarder or in some cases the consignee or the importer can also choose to collect the cargo himself. This process is followed in both ocean and air freight. Now let’s see what are the challenges faced by this sector and how can blockchain help in making international trade a lot smoother: Tracking the progress of any shipment is a complex process that is prone to human error, fraud and smuggling.
But with blockchain, this issue can be resolved. Blockchain will record all the transactions of shipping in an immutable encrypted format. This information can then be shared with all the stakeholders involved in international trade including exporters, importers and customs authorities and that too in almost real time. Thus through blockchain, all the stakeholders will have real-time access about the status and the whereabouts of the shipment. At each stage of the transaction, the relevant participants will update the blockchain, and that information will instantly be available to all the parties. This instant availability of information would eliminate documentation delays.
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For example customs clearance delay can be eliminated through blockchain. If you want to learn more about how blockchain can facilitate customs clearance we have a detailed lecture for that as well in this course. You can refer to the lecture Blockchain Application in Customs for this purpose. Certain perishable items like pharmaceutical drugs, vaccines, chemicals, dairy products remain effective only if kept at the desired temperature throughout their journey. Any fluctuations in the temperature can decrease the effectiveness of these goods and can even make them unfit for consumption.
For this purpose, IOT sensors will be installed on the cargo that can measure its temperature and record the same on the blockchain. Any fluctuations in the temperature will also be recorded on the blockchain. Thus, it will help the buyer to ensure that the goods he received were maintained at the desired temperature according to the manufacturer’s guidelines and are effective. With the implementation of smart contracts, payment cycles will be reduced and manufacturers will get paid for their shipments much faster. An international trade involves a lot of complexity owing to various factors such as distance, different set of rules and regulations in different countries, and difficulty in knowing the other party personally.
Due to this complexity involved, the use of letter of credit has become a common norm in international trade. A letter of credit is a letter from a buyer’s country bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event, when the buyer is unable to make payment for the purchase, the bank will be required to cover the full or remaining amount of the purchase.
For instance a company in USA seeks to import goods from a supplier in Australia. The importer needs to pay for those goods, but he is hesitant to pay in advance as he wants to assure that the goods he will receive will be as good as he ordered. At the same time, the exporter is also hesitant to ship the goods, as there is no assurance that payment will be received for the goods supplied. In such cases, the importer’s bank issues a letter of credit promising to pay exporter once all the documents of shipment are provided by the exporter. Thus letters of credit (LC) provide effective risk mitigation for the trading parties.
But still, there are few challenges that leads to delayed payments to the exporters. For instance, letter of credits are evaluated on the basis of trade documents and not on the actual delivery or quality of goods, therefore any error in terminology or interpretation of the compliance requirements often lead to disputes between trading parties. Further, the letter also mandates the bank to ensure that the documents presented by the seller completely adhere to the Letter of Credit terms and conditions. Thus, the issuing bank must carefully evaluate whether the documents submitted by the seller comply with the letter of credit. Therefore, payment delays occur
if there is any error in the data entry in the letter of credit contracts. But this can be simplified with a blockchain based system.
Using blockchain, a letter of credit can be issued as a smart contract between the bank and the seller to guarantee payment to the seller. The network consensus mechanism of blockchain ensures that there is only a single version of the letter of credit draft, at any given time, and that all parties are able to view and work on this version based on their access rights.
After being reviewed and accepted by the exporter, the Letter of Credit is finalised as a contract between the issuing bank and the exporter.Now, all the relevant stakeholders will have visibility into the letter of credit process and they can easily highlight and resolve discrepancies if any. Since all the shipment & related documents will be available on the blockchain, therefore if all the conditions defined in the smart contract are met, smart contract gets executed and an automatic payout will be triggered to the exporter without any delays. Cargos that move internationally either by sea or air, are insured against losses that can occur during their transportation. Though, even today this process of cargo insurance has many challenges around it.
Blockchain can provide a number of benefits to cargo insurance and can make it a better experience. The global blockchain platform will connect all the stakeholders and insurance companies to shared distributed ledgers that will capture data about the loss of cargo and exposure of cargo to unfavourable conditions that can make it ineffective.
For this, IOT sensors will be attached to the cargo that will upload the information about any loss on the shared ledger. For example, in case a ship sinks or the temperature fluctuates above the desired range that can spoil the cargo, this information will be recorded on the blockchain. This recorded information will then help the insurance companies in better assessment and calculation of the insurance claim coverage.
Through blockchain, all the stakeholders involved including the insurers will have access to all the documents related to the shipment. Therefore in case of any claims for insurance, this will reduce the time taken to receive the relevant documents from the concerned parties.
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