Blockchain technology: A tool to accelerate free trade in Africa - Part I
Published in partnership with the African Centre for the Study of the United States (ACSUS), this series of articles is intended to create knowledge and awareness about the possibility of applying a continent-wide technology approach towards building a digitised platform for supporting Africa’s free trade. It will also examine how other efforts currently underway may assist this process.
he landmark African Continental Free Trade Area (AfCFTA) agreement will be the largest free trade area in the world measured by the number of participating countries. It connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion.
The AfCFTA could, among its many other objectives, potentially uplift 30 million people out of extreme poverty. As the World Bank has noted, achieving its full potential will depend on putting in place significant policy reforms and trade facilitation measures. With the global economy in turmoil due to the COVID-19 pandemic, creation of the vast AfCFTA regional market is a major opportunity to help African countries diversify their exports, accelerate growth and attract foreign direct investment.
Africa currently contributes to approximately 3% of global trade, while intra-Africa trade stands at 13% share of trade in imports and 20% for exports. The African Union is hopeful that the AfCFTA will help boost both the continent's global trade contribution and level of intra-Africa trade in order to realise greater economic growth.
However, there are many challenges to implementing the AfCFTA, which include trade inefficiencies in accessing and processing trade support documentation, accessing trade information and seamlessly accessing trade finance between the various African countries. Blockchain, with its secure distributed ledger, has the potential to enhance intra Africa trade by alleviating the above-mentioned bottlenecks.
Recent research has explored whether and how blockchain offers many potential trade-related applications that can transform international trade. These include trade finance, customs and certification processes, transportation and logistics insurance and intellectual property management. Using blockchain technology in Africa will see trade move from paper-based trading systems, which are fraught with myriad problems including corrupt alteration, time consuming verification and high costs to traders, towards more secure and efficient, automated digital systems of interaction.
I expound on this theme continuously throughout the series of articles.
What is blockchain?
Blockchain as an institution lowers our uncertainty about one another in our exchanges of value. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across an entire network of computer systems.
Blockchain is a method of recording information so that it is near impossible to alter, hack, or cheat the system: basically an immutable digital ledger. Anyone can write to, and read from the blockchain, and no one can delete it. With the blockchain, data is stored in blocks that are then chained together sequentially.
This ledger is based on a mathematical idea of the hash, which is a digital signature that ensures that any changes to the ledger changes the hash. If this hash changes, the Blockchain rejects it meaning record alteration is near impossible. This cryptography is the same technology that is used to ensure the security of credit card numbers on e-commerce websites.
Different types of information can be stored on a blockchain, but its most common use so far has been as a ledger for transactions.
Contracts, transactions, and the accounts relating to them make up some of the central pillars in our economic, legal, and political arrangements. They protect assets and set organisational boundaries. They establish and verify identities and chronicle events. They govern interactions among nations, organisations, communities and individuals. They guide managerial and social action. Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.
The essence of the blockchain concept is that it ensures the data held by different actors is, and remains, consistent as operations are applied to update that data, and that this forms the foundation on which reliable transactions are built - from simple monetary payments to sophisticated smart contract transitions. The sanctity of the blockchain is endorsed and secured by a community of users, rather than any specific central authority. These concepts will be expanded in subsequent articles in this series.
Blockchains can be public, private or managed by a consortium of companies. It can be accessed by everyone (permissionless) or restricted (permissioned).
Analyst firm Gartner estimates that blockchain will provide $176 billion in value to businesses globally by 2025 and a $3.1 trillion by 2030.
How can blockchain help boost free trade?
The AfCFTA was founded in 2018, with trade commencing from 1 January 2021. It was created by the African Continental Free Trade Agreement by 54 of the 55 AU states. The AfCFTA, headquartered in Accra, Ghana, is a stepping stone to an African Economic Community and Customs Union, as envisioned two decades ago under the 1991 Abuja Treaty. At the time of writing this, 37 of the AU’s 55 member states have ratified the agreement and all AU member states have signed it.
As per the World Trade Organization (WTO), "the intrinsic characteristics of the technology also make it a potentially interesting tool to help implement the WTO Trade Facilitation Agreement (TFA) and to facilitate business-to-government (B2G) and government-to-government (G2G) processes at the national level". Blockchain and smart contracts could help administer border procedures and national single windows (a single point of entry through which trade stakeholders can submit documentation and other information to complete customs procedures) in a more efficient, transparent and secure manner, and improve the accuracy of trade data.
All of these viewed together strengthen the proposition that while individual African countries go about the process of digitalising their trading systems, it would seem economically prudent that African countries adopt a common digitised platform that would facilitate continental free trade.
Ganne, E. (2018). Can Blockchain Revolutionalize International Trade? World Trade Organization.
Iansiti, M. and Lakhani, K.R. (2017). The Truth About Blockchain. Harvard Business Review.
Tapscott, D. and Tapscott, A. (2018). Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World (Paperback).
The opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of SAIIA.
(Main image: Getty Images)