Global supply chain revolution

Other than a bit of fanfare following the joint US-China statement on tackling the climate crisis in April, the US-China conflict shows no signs of abating. The trade war continues as the tariffs the US imposed on products imported from China in 2018 remain in place. Meanwhile, the technology war has escalated even further: US President Joe Biden's $1.7 trillion infrastructure plan supports R&D and manufacturing of electric vehicles and semiconductors, while China's new five-year plan focuses on the development and rapid rollout of artificial intelligence, big data, blockchain, cloud computing and 5G.

China began piloting the world's first digital sovereign currency in April. And in May, the country introduced its Blockchain-based Service Network, which acts as an operating system for developers to use standardized templates to develop blockchain applications. These two major technological developments received limited coverage in the US media, but their potential impacts are far-reaching.

China's digital renminbi, backed by its central bank, the People's Bank of China, has the potential to not only displace unregulated cryptocurrencies, but also to internationalize the renminbi. A month after its launch, China banned financial institutions and payment companies from providing services related to cryptocurrency transactions, due to concerns over covert financial transactions. The digital renminbi can be easily transacted via smartphone without the archaic SWIFT system, and it has the potential to facilitate cross-boundary and cross-border payments in the future. Currently, the central banks of China, Thailand and the United Arab Emirates are exploring a digital currency cross-boundary payment system.

While a coherent US policy on blockchain is still lacking, President Xi Jinping declared in 2019 that China should take the lead in blockchain technology. One of the main objectives of the BSN is to establish a common platform so that different blockchains can interact with each other. This "interoperability" would have wide-ranging benefits. For instance, it would enable different supply chain parties to gain instant visibility, interact simultaneously and transfer assets securely.

Currently, most global supply chains are vulnerable to disruptions because they suffer from limited visibility. In fact, many companies do not even know who their distant suppliers are. A survey conducted by Deloitte revealed that 65 percent of more than 500 procurement leaders from 39 countries have limited or no visibility of their suppliers beyond tier-one suppliers. As such, each company can only coordinate with its immediate suppliers based on local information. This kind of fragmented supply chain operations was partly responsible for the prolonged shortages in the United States of personal protective equipment such as masks, gloves, shields, and ventilators during the novel coronavirus outbreak.

As a decentralized and distributed digital ledger, blockchain can provide supply chain visibility and information transparency for all involved parties. However, many blockchain projects are unsuccessful partly because the value to each participating party is unclear. For example, international ocean freight operations are based on paperwork that is error-prone and tedious because the process involves more than 30 parties including factories, customs, banks, insurance companies, inspectors, ground logistics service providers, shippers and port operators. To reduce errors and the time taken to verify information, Maersk partnered with IBM to develop a blockchain-enabled platform so that all parties can enter, share and verify all relevant digitized information simultaneously and conduct transactions securely. This blockchain platform offers time- and cost-efficiency, but few competing shipping companies joined the platform because of a fundamental concern that Maersk can exploit the information provided by its competitors for itself.

To overcome this concern, blockchain projects based on a top-down approach appear to be more successful. For example, Walmart China launched a blockchain traceability platform in 2019, requiring mandatory supplier participation. This blockchain platform also enabled consumers to gain product traceability information about the test reports and other details of the product at all stages throughout the supply chain, simply by scanning a QR code.

In the same vein, China's BSN can be a powerful platform because it is not industry specific. Also, the Chinese government can use the BSN to develop blockchain pilots for its public services such as health and education, before rolling them out nationwide to manage various domestic supply chain operations across China.

Because of the country's market size and the economic planning system, China's BSN has the potential to lead blockchain technology. Once this technology becomes mature and once cross-boundary and cross-border digital payment systems are established, China can truly digitize its Belt and Road Initiative by establishing a digital platform for coordinating the seamless flows of physical goods, information and money throughout its global supply chain network.

Christopher S. Tang is a distinguished professor at the University of California, Los Angeles. Gerry Tsoukalas is an Associate Professor at Boston University, Questrom School of Business, and a Fellow of the Luohan Academy. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.