Globalization 2.0: Technology-enabled trade that's free, fair and democratic

Apr 12, 2017

Global trade is in trouble. For five straight years, growth in world trade has declined - from 12.4% in 2010 to a mere 1.9% last year. More importantly, the model of global trade that has been pursued for the last 25 years - globalisation, enforced by binding trade agreements - is facing a backlash. The Brexit slogan of “take back control” reflects a deep unease with the established international order. Similar sentiments have driven electoral shifts across Europe and the US, with President Trump’s withdrawal from the TPP trade negotiations an obvious consequence.

This has prompted a joint call from the World Bank, International Monetary Fund and World Trade Organization to defend free trade against the forces of protectionism:

Fears that Donald Trump’s arrival in the White House is threatening a new era of protectionism have prompted a joint defence of trade from the International Monetary Fund, the World Bank and the World Trade Organisation.

Warning that the role of trade in the global economy was at a critical juncture, the three multilateral bodies said the opening up of markets had been good for growth but admitted that action was needed to help “left behind” individuals and communities.

The IMF and the World Bank will hold their spring meetings in Washington next week, when both organisations are expected to stress the importance of combating protectionism and of ensuring the benefits of growth are more evenly distributed.

Few can argue with the idea of “ensuring the benefits of growth are more evenly distributed”. But the suggested approach - continued integration of world markets through the harmonisation of law and regulation, with local redistribution to compensate those who lose out - is the same one that has been available for decades. Redistribution, education, training and other government assistance to those who lose out from increased competition have all been tried, to greater or lesser extents in various countries. The problem is more fundamental than that. At stake is the ability of citizens to influence trade policy in their own country, an ability that current trade agreements require states to give up.

One person who has clearly articulated this is Dani Rodrik, Professor of International Political Economy at Harvard University. His book The Globalization Paradox argues that there’s a fundamental problem with the idea that our economies should be governed by international treaty rather than local law, at least where there is no meaningful democratic input into those treaties. Citizens rightly question why their governments no longer seem able to pass laws governing trade that are responsive to their democratic mandates. Rodrik challenges the idea of “global governance” in a world without global democracy; the contradictions inherent in this system have given us the current backlash, and the backlash cannot be tamed without addressing the problem head-on. We should accept greater freedom for nation states, especially democratic ones, to make their own rules even if these diverge from each other.

But wouldn’t this lead to a reduction in trade? Globalisation is predicated on the assumption that only by aligning national laws with international or global standards can we achieve integrated economies and maximise economic growth. In my recent piece for Harvard Business Review, I argue that this is mostly a practical problem: managing supply chains over multiple jurisdictions is hard if those jurisdictions all have different regulations, with the result that opportunities for trade remain on the table. In the 20th century, these problems were insurmountable; the paperwork alone added sufficient burden that complex trade networks could not form without some degree of harmonisation.

At the World Government Summit in Dubai, Hexayurt Capital published a paper outlining the Internet of Agreements (IoA), a thesis explaining how recent innovations - blockchains, AI, and automated logistics - give us new tools to solve these problems. We described, albeit briefly, a “Globalization 2.0” model: global trade, local regulations, and computers handling the task of reconciling them. Various startup technology companies have begun creating the building blocks for this reality, and naturally we hope to invest in them and others to accelerate the process. If the overheads of regulation can be reduced, we can resolve many of the conflicts between the twin aims of global trade and democratic self-determination. As we have seen many times in the past, the ability of technology to drive transaction costs down to fractions of their previous size can do more to enable commerce than any other force, without requiring a choice between democracy and greater trade.

The technology we need to solve these problems is just beginning to appear. Blockchains - decentralized databases that provide tamper-proof, secure and permanent records - are highly suited to the problems of trade facilitation. As Jeremy Wilson, Vice Chairman of Barclays Corporate Banking remarked, “At the risk of overstating this, it looks as if it has the makings of a new operating system for the planet”. Data stored on blockchains can be easily shared, for instance with customs officials and other third parties. Digital signatures ensure that documents stored on the blockchain are authentic. “Regulatory oracles”, software programs which can inspect contracts to ensure compliance with regulations, will ensure that vendors can verify their compliance with local laws before shipping their goods, at a negligible cost. Consumer confidence and safety can be promoted by making the history of goods traceable from farms and factories to supermarkets and shopping malls. Software, including AI, can help to optimise supply chains to ensure regulatory compliance, consumer satisfaction, and cost control. Over time, complex value networks can form which enable just-in-time manufacturing and more equitable value distribution between consumers, retailers, resellers, manufacturers and raw materials producers. All of this can be achieved by using technology to lower transaction costs and work smoothly with local laws rather than against them.

This approach is not being ignored. At the same time as Britain’s withdrawal from the EU and the US withdrawal from TPP negotiations, the World Trade Organisation ratified the Trade Facilitation Agreement, a deal focused on practical measures to facilitate trade. The WTO estimates that trade facilitation can add a trillion dollars to global trade, an effect “bigger than the elimination of all existing tariffs around the world”. Internet of Agreements startups can provide the innovations necessary to make this happen.

These opportunities are impossible to ignore for other reasons, too. The UK’s future post-Brexit is dependent on finding a way to maintain the benefits of trade outside of the fully-harmonised model of the EU. The practical issue of tracking the origin of goods becomes critical for nations that belong to overlapping trade zones as Norway does and the UK may well end up doing should it conclude multiple trade deals outside of the EU. Low-cost or automated compliance with the different regulations of the UK’s potential trading partners would be necessary, and this requires innovation in several areas, such as the digitisation of regulation, supply chain management, and proof of compliance. A return to queues at ports waiting for paperwork to be signed or stamped would impose catastrophic costs for exporters and importers alike.

The Internet of Agreements is, at least, our contribution to addressing these issues. From our vantage point in London, a city that is more closely associated with globalisation than any other, the need to make the global economy work is a pressing one. To be trapped in a 20th century trade-off between economic growth and democracy would be a costly mistake. A new Globalization 2.0 would use the technology at our disposal to give us more of both.