Opportunities and challenges for blockchain in trade: the case of the Paraguayan organic products

• Adriana Espés Pizarro (Spain) and Carolina Iris Mayen Huerta (Mexico)
• 22. August 2020

Blockchain technology appeared for the first time in 2009. Since then, its popularity in several industries has increased due to its disruptive nature. In the context of trade, blockchain enables transparency and certainty in transactions. In the case of organic trade, where traceability of produce is essential, blockchain is particularly useful. One example where this technology could be successfully applied is the organic trade between Paraguay and the European Union (EU). Nevertheless, it is important to keep in mind that its application comes with major potential institutional and legal challenges.

Since 2009, blockchain has become a key element in the technology conversation, with the ability to disrupt more than 30 industries, such as banking, health, voting, and education, amongst others. But what specifically is blockchain? As its name indicates, a blockchain is a chain of blocks, containing information that allows structuring of data without the need for a central authority and therewith diminishing transaction costs.[i] The information in the block is not added to the blockchain until 51 percent of the distributed database’s members verify the validity of the transaction and approve it, making it a secure and trustworthy system. This digital ledger contains all previous transactions; it is accessible at any time, and it can be verified by all the members in the network.[ii] Blockchain transactions do not necessarily have to be related with digital currencies – the blocks can also contain files, or the so-called “smart contracts”.3

Source: Authors’ representation based on European Parliament Research Service, European Commission (2018)

Blockchain can be introduced in contexts where decentralized systems are necessary to ensure the involvement of stakeholders, guaranteeing transparency, compliance with processes and reliability between parties.4 This technology can be particularly important for international trading value chains, where different companies from diverse countries must exchange information and track assets across borders as efficiently as possible. International trade usually faces bureaucratic problems which diminish the potential for growth and efficiency. It is estimated that the cost of operating value chains makes up two-thirds of the final cost of traded goods.5 Multinationals are aware of this problem and are working on trade-related ledger technologies.6 The potential benefits of introducing blockchain have also encouraged governments to take an active role in promoting its adoption. The EU has been working on public policies to stimulate blockchain and plans to invest EUR 300 million in projects supporting the use of blockchain by 2020.7 But blockchain policies must take into consideration the social impact that they entail. The following case study argues that blockchain is an inclusive technology which, if used properly, could also empower small farmers in Paraguay.

Case Study: Organic products trade from Paraguay to the EU

Blockchain data is accurate, timely, complete, and accessible to all participants. Therefore, its potential use in trade comes as no surprise. It can serve as an alternative cost-efficient method to improve transparency in cross-border trade between EU and the Latin America-Caribbean (LAC) region. For example Paraguay, a country highly dependent on agriculture and exports, could boost its organic trade with the EU. In 2017, almost 89 percent of total EU imports from Paraguay consisted of agricultural products.8 Meanwhile, the EU has more than doubled its demand for organic agricultural products over the past decade, with a market currently worth an approximate of EUR 26 billion.9

Over the past two decades, the shift in consumption patterns in the EU, from non-organic to organic products, has brought more attention to international quality standards. The EU has established strict regulations to provide the organic stamp certification.10 Despite the growing demand, the rigorous process has prevented an increase in organic trade between Paraguay and EU.11 Paraguayan small farmers often lack training in product handling, processing, and storage, as well as direct channels of communication with retailers.12 This prevents them from awareness concerning the requirements they need to follow. Consequently, farmers are highly dependent on middlemen, who are their main link to trading companies. Often, smallholder farmers do not know the final price of their product, and they are given limited information about their final buyers. In addition, most of the trade is made informally, and the use of contracts is not widely spread. Smallholder farmers also face the absence of effective traceability systems that allow retailers to have confidence in the origin of the products bought. Farmers in Paraguay rely on traditional record-keeping systems that manually register the movement of crops, which decreases trust amongst buyers, particularly international ones.

Due to these challenges, organic trade from Paraguay to the EU can benefit greatly from introducing blockchain technology. For example, blockchain helps to remove false labelling, providing costumers in the EU with certainty about the source and journey of produce, while improving the chances of smallholder farmers to comply with organic certification standards. Moreover, blockchain would also reduce transaction costs by providing farmers the chance to trade directly with exporting companies, avoiding the use of middlemen. Without intermediaries, farmers would know the final price of their product and receive a better sum for it, ensuring fair trade and direct accountability.13 The tool could also help to establish capacity building mechanisms due to the key information shared on the chain. Additionally, blockchain could be used as a mechanism to strengthen social safety nets and formalize the economy, by keeping records of the transactions made by smallholder farmers who are currently part of the informal economy.

Even though resistance to change is a factor that needs to be taken into consideration, as blockchain relies on existing telecommunications for its use, it has a high probability of success for adoption. Small farmers in Paraguay have already access to cell phones and are familiar with their use. By 2020, it is projected that mobile phone unique subscribers in LAC will reach 524 million people.14 According to the World Bank, 98 percent of the population in the continent has mobile cell signal15, so adopting a blockchain tracking and payment systems will not imply incurring significant additional costs. If accountability amongst actors along the value chain increases, then the volume of goods sold can grow as well. Paraguay, as well as other LAC countries that are highly dependent on agricultural exports, could incorporate this technology to promote better organic agricultural trade with the EU.

The challenges

Blockchain’s real consequences for global trade will take time to materialize. In the meantime, it is important to stay ahead of its developments and recognize the potential challenges. The introduction of smart contracts translates into more complex businesses, increasing the risks associated with the “one-to-one mapping of these arrangements from the physical to the digital framework’’.16 Additionally, there are risks associated with data and identity theft. Every ledger that holds personal data needs to comply with the applicable data protection laws. Therefore, it is necessary to educate the future blockchain operators about how to process data and possible security breaches.17 In a similar vein, the legal status of a blockchain-enabled organization is still uncertain. The legal framework of the entity should determine the liability system. Parties must define in advance if the entity is contracting in their own name or through a tailor-made business organization. If there is a malfunctioning blockchain service or a contract is not fulfilled, customers should know to whom they address claims and complaints.18 This problem gets more complicated when cross-border transfers take place since it becomes difficult to identify the governing jurisdiction and what happens in case of litigation or dispute resolution.

Considering the above, it is clear that blockchain technology will change the way we know transactions. But before it is completely implemented, governments should be aware of their institutional accountability and legal responsibility to exploit this technology in an efficient way. In Africa, for example, governments like Kenya and Uganda have started to apply the technology in the provision of education certificates, land management services and financial services, putting a special emphasis on creating secure platforms, as well as robust legal frameworks that incorporate the use of this technology.19 EU and LAC should consider the inclusive possibilities of blockchain and react before it ends as an exclusive resource for multinational businesses with technological power. The article gave an example of how blockchain might also benefit communities of peers with technological and logistical limitations. Finally, to encourage blockchain means to be aware of the potential problems that could come with it. A proportional regulatory response should take care of blockchain’s organizational uncertainties without obstructing innovation.

References

[i] Dhanji T. et al (2017). Overview of blockchain for energy and commodity trading. Ernst & Young http://www.ey.com/Publication/vwLUAssets/ey-overview-of-blockchain-for-energy-and-commodity-trading/$FILE/ey-overview-of-blockchain-for-energy-and-commodity-trading.pdf [Accessed 18 May 2018].

[ii] Botton, N. (2018). Blockchain and Trade: Not a Fix for Brexit but Could Revolutionise Global Value Chains (If Governments Let It). ECIPE (January) http://ecipe.org/publications/blockchain-and-trade/ [Accessed 15 April 2018].

3 Gupta, V. (2017). A Brief History of Blockchain. Harvard Business Review (28th February) https://hbr.org/2017/02/a-brief-history-of-blockchain [Accessed 22 March 2018].

4 Pinna A. and Ibba S. (2017). A Blockchain-based Decentralized System for Proper Handling of Temporary Employment Contracts. arXiv (23th November) https://arxiv.org/abs/1711.09758 [Accessed 15 April 2018].

5 International Finance Corporation (2017). Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains. World Bank (September) http://documents.worldbank.org/curated/en/585671507179758957/pdf/120260-BRI-PUBLIC-EM-Compass-Note-45-final.pdf [Accessed 15 April 2018].

6 Green A. (2017). Will Blockchain Accelerate Trade Flows? Financial Times (10^th November) https://www.ft.com/content/a36399fa-a927-11e7-ab66-21cc87a2edde [Accessed 15 April 2018].

7 European Parliament (2018). Blockchain technology: “We aspire to make the EU the leading player” (16th May) http://www.europarl.europa.eu/news/en/headlines/economy/20180514STO03406/blockchain-technology-we-aspire-to-make-eu-leading-player [Accessed 17 May 2018].

8 European Commission (2018). European Commission, Countries and Regions. http://ec.europa.eu/trade/policy/countries-and-regions/countries/paraguay/  [Accessed 15 April 2018].

9 International Federation of Organic Agriculture Movements (2017) Organic Regulations IFOAM EU. http://www.ifoam-eu.org/en/what-we-do/organic-regulations [Accessed 14 April 2016].

10 Idem 9.

11 European Commission (2018). European Commission, Countries and Regions. http://ec.europa.eu/trade/policy/countries-and-regions/countries/paraguay/  [Accessed 15 April 2018].

12 We took information from a qualitative analysis consisting of 62 interviews with smallholder chia and sesame seed farmers in Paraguay. These are part of the findings made by a team of 4 students of Columbia University for a Capstone Project. The Capstone had the objective of increasing the volume of chia and sesame seeds traded by the company Irupé; however, useful information of this project was extracted for writing this article (https://sipa.columbia.edu/academics/capstone-projects/small-agribusiness-competitiveness-working-small-farmers-paraguay-reach).

13 The World Fair Trade Organization (2017). 10 Principles of Fair Trade. https://wfto.com/fair-trade/10-principles-fair-trade [Accessed 19 May 2018].

14 Global System for Mobile Communications Association (2016). The Mobile Economy Report. London: GSMA.

15 The World Bank (2014). Financial Inclusion Data/ Global Findex. http://datatopics.worldbank.org/financialinclusion/region/latin-america-and-caribbean  [Accessed 14 April 2018].

16 Ryan, P. (2017). Smart Contract Relations in e-commerce: Legal Implications of Exchanges Conducted on the Blockchain. Technology Innovation Management Review (October) http://www.timreview.ca/article/1110  [Accessed 22 March 2018].

17 Osborne Clarke: Sector Insights (2017). An introduction to Blockchain: the key legal issues. Osborne Clarke (11^th August) http://www.osborneclarke.com/insights/an-introduction-to-blockchain-the-key-legal-issues/  [Accessed 14 April 2018].

18 McKinlay et al. (2018). Blockchain: background, challenges and legal issues. DLA Piper Publications (2^nd February) https://www.dlapiper.com/en/uk/insights/publications/2017/06/blockchain-background-challenges-legal-issues/  [Accessed 18 May 2018].

19 Matinde, V. (2018). 5 blockchain use cases in Africa. IDG Connect (8^th June) https://www.idgconnect.com/blog-abstract/30700/blockchain-africa[Accessed 3 July 2018].