Smaller shippers likely beneficiaries of WTO Trade Facilitation Agreement

Smaller shippers likely beneficiaries of WTO Trade Facilitation Agreement

It takes an average of 11 days to move a container through customs in a typical country of West Africa, and in the world’s developing nations, some 60 percent of perishable goods are lost because of red tape that prevents those shipments from being delivered in a timely fashion. Those are two findings from a recent study by the International Road Transport Union, the Geneva-based global federation representing over-the-road operators in 74 countries.

But that’s just the beginning of the time and money lost because of inefficiencies in the global supply chain. In the developing world, 75 percent of a truck’s time is typically spent waiting, according to IRU Secretary General Umberto de Pretto. “How can you have economic development and social equity when trucks are just sitting there wasting fuel?” he asked.

All too often, Pretto said, the biggest challenge isn’t dilapidated roads, ports and other physical infrastructure, but the multiplicity, diversity and complexity of international customs processes and procedures.

Although the 21st century is supposedly the age of growing free trade, a recent study by the U.N. Conference on Trade and Development found that the average customs transaction involves 20 to 30 parties, 40 documents, 200 data elements — 30 of which are repeated at least 30 times — and the re-keying of 60 to 70 percent of all data at least once. Tariffs continue to decline as a result of a multitude of international trade agreements, but the cost of complying with customs formalities often exceeds the cost of duties to be paid.

In a global economy based increasingly on just-in-time production and delivery, traders need fast and predictable release of goods, trade economists and policymakers agree. They would welcome initiatives that simplify and harmonize the flow of trade information from shippers and other supply chain partners into customs agencies, and among those agencies and other bureaus responsible for monitoring and regulating trade.

With those goals in mind, World Trade Organization members concluded negotiations on an innovative Trade Facilitation Agreement in December 2013, and then adopted a protocol last November that will incorporate the new TFA into the overall WTO agreement once two-thirds of all WTO members ratify it.

This is “a historic opportunity for everyone to get involved,” said Kristin Isabelli, director of customs and trade facilitation at the U.S. Council for International Business. Although some of the TFA provisions will become mandatory following ratification, others will remain “just best practices” that the new pact strongly recommends.

“There is no deadline (for the pact to take effect), but my hope is that by the end of 2015, they will get (enough letters of ratification) to enact the agreement,” Isabelli said. 

Feedback from attendees at the USCIB’s February conference on the TFA was positive, not only among representatives from industry, but also governments, the WTO and the World Customs Organization, she said. The TFA will “help cut corruption, help create transparency,” and “cut red tape” by allowing customs and industry to cooperate more easily with each other, Isabelli added.

With the creation of a “single window” — an integrated electronic platform that funnels information directly into customs agencies and other bureaus — “customs will be able to share electronic data with other agencies,” thus simplifying global trade, speeding up processes, and reducing supply chain costs, said Candace Sider, vice president of regulatory affairs at Livingston International, a Chicago-based customs broker and freight forwarder.

In addition to containing provisions for expediting the movement, release and clearance of goods, the TFA establishes measures for the effective cooperation between customs and other appropriate authorities on matters of trade facilitation and customs clearance, and contains provisions for technical assistance and capacity building in this area, a critical concern for many developing nations.

According to a study by the 21-nation Asia-Pacific Economic Cooperation, these trade facilitation programs likely will generate gains for APEC countries equal to about 0.26 percent of their aggregate real GDP, or almost double the expected gains from any further tariff reductions. The study estimated the savings would be 1 to 2 percent of import prices for developing countries in the region.

As Pretto noted, a country can have the best roads in the world that allow trucks to speed through the country with cargo, but if those trucks have to wait for hours at the border, “you haven’t solved much.”

“Customs agencies love paper,” he said, “but if they went electronic, it would go a long way to cutting down on time wasted at the border. Internationally accepted customs systems that are the same across countries would also help.”

Measured in percentages, less-developed countries and shippers selling their goods there will enjoy the biggest gains from the TFA. The potential reduction in trade costs from the TFA will amount to 14 percent for low-income countries and 12 percent for high-income countries, according to Evdokia Moise-Leeman, senior trade policy analyst at the Organization for Economic Cooperation and Development. Countries that implement the TFA only partially won’t accrue as many gains, she said.

To date, only 62 countries have signed the agreement, so “we have a long way to go” to reach the 108 members needed to ratify, Sider said. Although customs agencies in countries such as South Korea and Canada are advanced, other countries don’t have the regulatory infrastructure or experience with best practices to implement the agreement effectively after it’s enacted. Vietnam, for example, has no system that formally recognizes which companies are legally entitled to act as customs brokers in that country.

“For developing nations, there is a lot of capacity building that has to be done” to participate, Sider said. In the absence of such a certification system for customs brokers, for example, shippers run the risk of hiring non-professionals to expedite their shipments. This could lead to inadvertent noncompliance with customer requirements, and result in significant fines and penalties.

With full implementation of the FTA, customs brokers in all WTO member states presumably will comprise only certified professionals who have the full range of knowledge and expertise to represent their clients in all aspects of trade compliance.

That’s only part of the problem. There will be numerous other challenges to implementing the TFA, including national traditions about how to do business, protectionist policies that are antithetical to the spirit of trade facilitation, bureaucratic corruption and the proclivity of China and other countries to change their regulations on a dime in response to changes in their public policy, according to Ty Bordner, vice president of solutions consulting at global trade compliance software provider Amber Road. “There are some things that people don’t want to give up,” he said.

Moreover, customs agencies are hardly the only agencies involved in trade compliance. In the U.S., for example, some four dozen agencies — including the Food and Drug Administration, the Environmental Protection Agency, the Department of Transportation and the Federal Communications Commission — define the highly technical regulations that U.S. Customs and Border Protection is responsible for monitoring, Bordner noted.

Thus, Customs must administer regulations made by other regulatory agencies that have their own priorities and expertise. “You need input from each of these agencies” in formulating how the TFA will work most effectively, not just in the case of the U.S., but also around the world, Bordner said. And in China, Canada and elsewhere, provincial governments may play an important regulatory role.

Many companies are struggling to comply with multiple customs regimes in various countries at the same time, noted Darcy Price, director of value chain applications at software giant Oracle. “The effect of countries’ regulations and controls is that a single transaction can subject businesses to the rules of multiple agencies in multiple countries,” she said. Price segmented the regulatory challenges for companies into four categories: visibility, compliance, analysis and protection. The TFA is designed to mitigate each by providing greater harmonization and simplicity.

Regarding visibility, many companies are uncertain about what’s controlled or regulated in each of the countries where they do business. Regarding compliance, they are unable to prevent their assets from being delayed in foreign ports and by foreign customs. Regarding analysis, companies need to know more about the root causes of delays.

Yet as global supply chains expand, many of their customs and logistics activities are occurring well outside the U.S. (or wherever else their company is based), where their supply chain partners and subsidiaries often have “diverse business processes (that) increase complexity and risk,” Price said.

For companies such as Amber Road and Oracle, the Trade Facilitation Agreement likely will spur demand for their cloud-based, on-demand trade compliance products, which enable even smaller companies to manage transportation and trade compliance at home and abroad on a single electronic platform, without implementing expensive hardware and software.

The TFA, Moise-Leeman noted, promises to provide even greater benefits for small companies that have been more reluctant to adopt cutting-edge technologies.

“Trade facilitation isn’t just about simplifying and harmonizing customs procedures, said Maritza Castro, vice president and head of customs and regulatory affairs in the Americas for DHL Express USA. “It involves new topics like how we can help SMEs (small and medium-sized enterprises) into international trade. For most countries, small businesses are the economic engines.”

According to a recent study conducted by the Economist Intelligence Unit on behalf of DHL Express, in 12 countries and 20 industries, “severe obstacles still remain for smaller businesses with global aspirations,” Castro noted.

What can shippers, carriers and logistics providers do to pave the way for the smooth adoption of the TFA? Some major companies already are partnering with governmental organizations to educate their customers about the opportunities. Eugene Laney, head of international trade affairs at DHL Express USA, said his company is developing webinars and seminars to educate the public and improve market access and compliance, which, in turn, will help DHL improve its supply chain.

With the expanding role of e-commerce in global trade, there is a growing need to “recognize the citizen trader” and the impact of e-commerce companies such as Uber, which allow individuals to provide transportation services independent of established companies, Laney said. “We are seeing more individual packages associated not with a corporation but an individual, and much more person-to-person shipping,” he said. “Trade used to be business-to-business. Now it’s business-to-consumer or consumer-to-consumer. The challenge now is how to educate such citizen traders.”

Added Bordner: “Around the world, postal organizations have some exemptions from customs,” but e-commerce is playing a growing role in world trade, and the WTO is trying to harmonize trade that takes place via postal packages, so that postal organizations are in sync with customs and with one another for the first time.

Laney recommends that companies depending on a postal service to ship their goods analyze the cost-effectiveness of their customs operations, establish groups to advise their e-commerce and other small customers, and pursue ways to simplify how they manage the flow of low-value, low-risk entries. He advised such companies to develop programs for certified low-risk importers, which enable corporations to opt in and provide information that customs uses to certify those companies as recognized “good actors,” much like fast-lane, preferred customers are treated in other business sectors.

Denise Coutinho, senior manager of global trade strategy for Global Tax Customs at Cisco Systems, urged companies to develop partnerships with the public sector, through which those companies can share valuable technical expertise they have developed. Cisco, she noted, provides training sessions and road shows for customs authorities, training them about how to identify illicit, counterfeit products.

Coutinho recommends companies work with customs authorities to establish consistent packaging and labeling practices across different product areas, which make it more difficult for illegitimate sellers to copy their products and pass them through customs as if they were legitimate.

Although the issue of counterfeit products may not be relevant for every shipper, this sort of program conforms to the principle of uniformity and harmonization that is a bedrock of the WTO’s ambitious new Trade Facilitation Agreement.

Companies searching for fresh ideas may want to consult the OECD’s trade facilitation pages at www.oecd.org/trade/facilitation. The OECD has developed a tool that measures the impact of trade facilitation on trade flows and trade costs, with the goal of helping public- and private-sector managers prioritize their trade facilitation initiatives, and mobilize technical assistance programs in a more targeted way, according to Moise-Leeman.

Although OECD countries generally perform better on trade facilitation than non-members, OECD tools can be useful “in helping countries see where their strengths and weaknesses lie,” she said. Such information also can be valuable for shippers and other private-sector supply chain partners venturing out into new and unfamiliar foreign markets that offer all sorts of surprises.   

Contact Alan M. Field at alanfield0@gmail.com.