How to avoid a brick wall

How to avoid a brick wall

Imagine yourself as the chief executive of a trucking company. Since Sept. 11, 2001, you've worried that terrorists could use one of your trucks to deliver a weapon of mass destruction. You decide that investing in new security is the right thing to do. But your board of directors has a different take: The government has not required the company to improve security. Your competitors have not taken the same measures, so any money spent on security may put the company at a competitive disadvantage.

Even worse, if you've secured your assets, and your competitor has not, maybe terrorists will launch an attack with one of his trucks. After all your effort, you haven't prevented another terrorist incident. Then, after the attack, the government imposes new standards that invalidate your original security measures. Now you have to double your investment.

That's the scenario facing many companies as the U.S. enters the third year after the terrorist attacks.

In the months following the attacks, the government quickly began developing programs to tighten cargo security. Now the discussion is entering a new dimension. There's a growing realization that any workable security effort must offer commercial as well as public benefits - and that the two aren't mutually exclusive.

Some of the leading authorities in trade security are taking that view, one with major long-term implications for the direction of cargo security in coming months and years. Stephen E. Flynn, Jeane J. Kirkpatrick Senior Fellow for National Security Studies at the Council on Foreign Relations, said that until now, the relationship of economic benefits to security has been only a minor part of the public discussion. " 'All security is a cost

that undermines efficiency' - that's the debate we have right now," Flynn said. "This is an immature discussion."

Until the government acknowledges that economic benefit for the private sector must be a central element in any long-term cargo-security regime, further development of the regime will be slow and futile.

One obstacle to a discussion of the benefits and costs of security is that both are still unknown - and possibly unknowable. Cargo security may be expensive, but compared to what? If it avoids or minimizes a shutdown of ports after a future terrorist attack, spending on security could prove to be a bargain for companies as well as the public at large.

Flynn said the private sector "has not done a good a job as it needs to do to educate people" about the economic necessity for security. Meanwhile, he said, the government must devise security measures that ensure maximum private-sector cooperation, and create a level playing field so no company gets a competitive advantage from compliance. That is especially important since Washington has made it clear that it won't foot the entire bill for cargo security.

"When you don't get private-sector benefit, it doesn't bring about change," Flynn said. "Ultimately, improved security is in everyone's interest, but it's difficult for companies to commit to a lofty public goal if they're going to pay a price that will hurt them commercially. It can't be security for its own sake."

If businesses don't see economic benefit, they will find ways to neutralize government regulations or work around them. An example: Two decades ago, the government proposed rules to curb money laundering that would require financial institutions to report large cash transactions. Perceiving no benefit, the industry resisted, and the final version of the rules was ineffective. What's worse, money launderers turned to other channels that bypassed the banking rules altogether.

Flynn said the government can't allow the private sector to regulate itself, because many companies will be unwilling to act beyond their immediate self-interest and that would scuttle any chance of achieving a uniform security system.

But he warned that whatever new regulations the government might consider, the private sector must be part of the discussion and the solution. In that sense, the Customs-Trade Partnership against Terrorism, or C-TPAT, might be seen as a model for dialogue. "We don't need closed rooms in Washington, with a cone of silence because they're talking about security." If bureaucrats concoct new security rules without considering the market effect, the private sector won't embrace them and "the environment will be less secure, and less efficient as well."

How to pay for security is an issue that industry and government have struggled with since Sept. 11. "Overall, the market will benefit from greater visibility and accountability," Flynn said. But some people will resist, because they see a threat to their jobs brought about by greater efficiency - or because they believe their companies can't bear the burden of additional costs.

Transportation providers, their services largely commoditized by shippers who have forced down rates among competing carriers, have little leverage to pass down the added cost of security. Without government regulations, carriers have little incentive to invest in security on their own.

"It will cost a lot of money that won't be fully recoverable," said Dennis Reimer, vice president of health-care solutions for freight forwarder SEKO Worldwide in Itasca, Ill. "There's a payback, but it's still such a tremendous cost."

Many shippers also are reluctant to unilaterally invest in security systems unless the government requires them to do so. Managers are under heavy pressure to reduce inventories and minimize supply-chain costs. If they see costs but no direct benefit, companies will be inclined to provide only half-hearted support to government-imposed security measures, Flynn said.

The economic impact of supply-chain security is impossible to quantify from the scant existing data. The problem is similar to that faced by underwriters who have difficulty establishing pricing for terrorism insurance; there's little history to go by. The amount of inventory on company shelves may be a bellwether of the costs that companies have sustained to offset uncertainties in the supply chain - the cost of "just in case" supply-chain management.

Robert Delaney, vice president of Cass Logistics, estimated that the cost of inventory for all companies in the U.S. shrank by $4.2 billion last year after growing by $1.6 billion in 2001. But David Closs, professor of marketing and logistics at Michigan State University, said there are too many variables to get a clear picture. "As we change to more intensive Customs restrictions and delays, we're going to see costs increase, but they haven't shown up yet," Closs said. "People will need higher levels of inventory to offset the greater uncertainty and lead times. There are opportunities for improvements, but companies haven't figured them out yet."

That is where opportunities arise to create information about shipments in transit that can then be used for security and logistics purposes (Story, page 14). A longtime drag on corporate logistics efficiency has been the lack of cargo "visibility" stemming from poor availability of data on in-transit shipments. If that information can be made more accessible for security, many believe, it could have a bona-fide commercial benefit as well. The question is how.

Since Sept. 11, the federal government has embraced the notion of trade facilitation, acknowledging that trade is too much of a force in the U.S. economy to disrupt. Officials of the Department of Homeland Security have told countless audiences that they are committed to the dual goals of increased security and facilitation of legitimate trade. It's a delicate balancing act, and until a host of new supply-chain security rules go into effect later this year, no one will know how successfully Homeland Security has balanced the two.

In the two years since Sept. 11, the federal government's response may be divided into three stages. In the first few days and months, the federal government threw up ad-hoc security measures to protect the country and contain any additional threats. Aviation came to a standstill when the Department of Transportation grounded all flights for three days. On the busy trade corridor between Windsor, Ontario, and Detroit, a line of trucks backed up 10 miles while Customs inspectors opened trailer after trailer for close inspection.

By the end of 2001, both the executive and legislative branches had swung into action. Customs began developing the C-TPAT program, and the Container Security Initiative (CSI). The Coast Guard announced new notice-of-arrival rules for inbound ships. Crew manifests came under greater scrutiny and shore leave, in many cases, was denied. Congress passed the Aviation Security Act, which created the Transportation Security Administration.

Throughout 2002, the list of legislation designed to improve supply-chain security grew longer. Lawmakers passed the Maritime Transportation Security Act, which among other things launched port

vulnerability assessments and provided legal authority for a national transportation worker identification card. The Trade Act of 2002 called for importers and exporters to electronically report essential cargo-manifest data before they ship their goods. The Bioterrorism Act included provisions to protect food imports from contamination. Then there was the biggest change of all, when Congress created the Department of Homeland Security.

This year has been the year of regulation, as federal agencies promulgated rules to implement security measures that Congress required. Through the rule-making process, the trade community has grumbled and worried about the heavy hand of government. Most of those regulations will be implemented before 2004. Until then, the ultimate effect of the regulations is a matter for speculation.

Often overlooked is the international dimension to cargo security; after all, the U.S. is just one country in a vast network of trade relationships around the world, and concerns about security are global in nature. Any security regime must ultimately be accomplished within the global trading system, Flynn said. CSI has been successful because exporting countries don't want to be perceived as a security problem. "Those countries that have been proactive, they want to be seen as forward-leaning," Flynn said. If an attack occurs, the greatest danger is that the U.S. will react unilaterally. Border controls may "switch on or off" in response to a threat, and that would sow seeds of uncertainty among foreign trading partners.

The government and the trade community ultimately must build public confidence in a system that has the resilience to recover from a catastrophic event. During the recent blackout in the Northeast, there was no panic, because "people can be pragmatic when things go wrong, if they have the underlying confidence that things will work themselves out," Flynn said.

Without similar public confidence in the safety of the transportation system, the shipping industry and those who depend on it will pay a heavy toll if the system is used in a terrorist attack. The response to another terrorist attack may be more economically devastating than the event itself.