James Cooper

— The trade war between the People’s Republic of China and the United States is on hold — at least for the time being. The Chinese and U.S. governments have spent the past few months threatening to impose various tariffs and other protectionist measures on the other, only to retract much of them after intense negotiations in Beijing and Washington, D.C.

While the trade war was ramping up, businesses in both countries got caught, China placed a regulatory hurdle in front of Qualcomm, slowing their planned takeover of NXP Semiconductors. Around the same time, China announced a 179-percent import charge on sorghum from the United States, a crop that is used to feed livestock and make a popular liquor product.

This was after the U.S. government announced it was halting sales of U.S.-made components to ZTE, China’s largest smart-phone manufacturer, which announced it would close its operations. President Donald Trump then tweeted that the U.S. would help ZTE get its business back online; China retracted the sorghum tariff in response.

Barriers to Trade

If implemented, these huge tariffs would make many products from each country more expensive in the other country. Such tariffs and other charges are just barriers to trade, which only result in injuring consumers’ pocketbooks and producers’ bottom lines — from both countries. 

No country wins as distortions in trade proliferate, inefficient domestic producers are rewarded, and the rest of the world knee-jerk reacts with its own protectionist stances. The International Monetary Fund has warned that the growing trade war could disrupt the global financial outlook.

As international trade and global economic growth are injured, a coming technology that should mitigate these losses: the blockchain. A universally transparent and distributed ledger that eliminates the need for the usual trusted intermediaries, blockchain technology is highly disruptive. The monopoly-like centralized services of commercial banks, social media giants, and search engines will be supplanted by computers and the programmers who write code for them.

With the blockchain, buyers and sellers conduct business directly with great efficiency and transparency for their purchase and sale of their products and services. In short, blockchain is a threat to the largest corporations’ hold on global finance, corporate information sharing, and social intermediation. Trade and payments processes are distributed among many, not a few privileged institutions that maintain a stranglehold on international finance.

True peer-to-peer transactions will be cheaper, and our data will belong to us — not for others to sell. More importantly the blockchain will facilitate higher productivity and more robust economic growth.

Blockchain’s Evolution

The blockchain industry has gone through three distinct phases: The first phase, related to digital and financial assets, has been the Bitcoin phenomenon, in which the popular media, law enforcement, and protectors of central and commercial banks have shown a great interest.

In the second phase, smart contracts have emerged through blockchain-based derivative applications like Ethereum. Smart contracts contain computer coding that automatically applies penalties when agreement terms are violated, reducing the need for courts and judges.

The third phase, in which we now find ourselves, blockchain technology has begun to be utilized in the business world. IBM and Maersk have established a joint venture to use blockchain to improve global trade by digitizing supply chains. The blockchain is being used for remittances, food security, health records distribution and micropayments of intellectual property rights for artists.

As Blockchain 3.0 technology comes on line, there may be less need for some of the public goods that states provide — currency creation, monetary and fiscal policy, and even the enforcement of contracts. Smart contracts, cryptocurrencies, and more efficient ways to facilitate trade are coming.

It is not surprising then that states erect barriers to trade with a view to protect domestic industries, shield investors, and shore up their respective national interests. Yet, states also want the economic growth that will come with the efficiencies of the blockchain.

Comparative Advantage

Tit-for-tat tariffs, export bans, and import charges between China and the U.S. will not benefit the two countries or their consumers. The ballooning U.S. trade deficit will not magically go away with the imposition of extra duties and taxes on Chinese goods. Nor will tariffs and surcharges on sorghum improve the Chinese economy, which is starved for the high-quality merchandise that Chinese consumers demand from United States producers.

In 1817, British economist David Ricardo gave the world the theory of comparative advantage, which posits that all countries, big and small, can benefit by engaging in international trade. If Ricardo were alive today, he would be a computer coder, providing access for manufacturers and other producers to connect directly with consumers.

Blockchain technology will be the underlying platform on which such trade facilitation and commercial expansion will take place. It is time for blockchain, not a trade war — for both China and the United States.

James Cooper is Professor of Law at California Western School of Law and an advisor to TrueChain, a global blockchain company.