In 2016 the world was surprised by the passing of Brexit and Trump winning the US Presidential election. Looking to 2017 from a global trade perspective, these events make one prediction certain: trade barriers in the Western Hemisphere will not be lowered. To what extent there will be an increase in tariff and non-tariff barriers is unclear, but there is no time like the present to speculate a little.
An interesting year is ahead, and it’s being kicked off on January 1 with the 2017 Harmonized System (HS) Nomenclature overhaul per the latest World Customs Organization (WCO) directions. These changes to the HS Nomenclature will be one of the largest in recent years, with more than half of the changes impacting codes in the agricultural and chemical sectors. In total, there will be 233 sets of amendment revisions. These revisions are meant to address growing global concern around environmental and social issues as well as the importance of collecting HC trade statistics.
With customs professionals expressing a growing concern about their supply chain compliance/Global Trade Management (GTM) challenges, the recent political events in the UK and US have led to increasing uncertainty in the industry. Be prepared for an exciting 2017!
The average global rates have decreased over the years, yet the question is whether 2017 will buck that trend. Will the USA walk away from bilateral or multi-lateral Free Trade Agreements (FTAs), ban countries from General System of Preference (GSP), or increase duty rates for certain countries of origin to protect domestic manufacturing? Will Brexit have an effect on the UK – European Union (EU) duty rates? How will the UK re-create their own external tariff and will it be able to break off UK FTAs from the current EU FTAs? A step further, it is to be seen if any of these events will affect duty rates (initially) on a unilateral basis, if there will be repercussions, and whether a tit-for-tat culture will initiate a tariff war? It’s all not too likely. Negating FTAs is not easily done, and the UK will be cautious to create any economic upheaval that may negatively affect their status as a financial leader in the market.
However, the prospect of an increase in duty rates is realistic as a number of large economic forces will be closely reviewing their trade agreements and tariff structures. Who would have thought the General Agreement on Tariffs and Trade/World Trade Organisation (GATT/WTO) bound rates books would ever have to be dusted off to check possible rate increases would not violate these agreements?
Additionally, two other events could impact duties in 2017. It can be expected that the US will increase pressure on low cost manufacturing, which would lead to a significant number of new Anti-dumping duties/Countervailing Duties (ADD/CVD) cases as unilateral duty increases are possibly too obvious. Lastly, China’s growing debt may threaten current economic stability, but the association with duty rates will likely not be seen in 2017.
Most likely there will be additional paperwork required for goods to move between the UK and the EU, and equally likely there will be UK FTA specific documentation requirements once it is clear how the UK will rearrange its trade relationships with the current EU FTA partners.
On the artificial side of trade barriers, some token reactionary measures may be taken to hamper certain trade lanes (read: importing from China), but expect additional non-tariff barriers to be more in the security, trademark, and consumer marking areas, specifically security around additional compliance measures for dual-use goods (a global trend), a stricter enforcement of trademarked goods, and closer reviews of consumer marking where safety of products containing certain materials is concerned. For example, ‘simple’ accidents like smart phones catching fire will pave the way for more agencies ensuring all imported products are safe for handling.
Some 2017 predictions
And now the unofficial 2017 predictions:
One thing is for certain, 2017 will prove to be an interesting year in the Global Trade Management space.
Twist or turn it, compliance issues in global trade are a component of non-tariff barriers. With duty barriers ever decreasing, average duty rates went down from 8.55% in 2000 to 4.74% in 2014,[i] it is difficult to substantiate claims that non-tariff barriers have been put into place instead. However, the international focus on trade compliance, ranging from import facilities to export licenses for dual-use goods, has increased over the years, with more countries following the United States regarding the export compliance side and the European Union when it comes to simplified import facilitation.
A wide variety of legislation applies to the shipment of goods. An export shipment from the US going into the EU seems innocent enough, but at the very least a restricted party check has to be performed. If a dual-use item is shipped, product screening and possibly export licenses have to be applied. Shipping documents are required. Import and export declarations need to be filed. Customs value and HS codes need to be declared or identified. Not complying with these (inter-)national customs requirements results in delays at the very least to time in prison at the most, with financial penalties and export restrictions in between.
Often times, complying with customs legislation is complicated as some facets, such as license requirements, will be different based on the tradelane, and different types of licenses or compliance issues may arise based on the exact country of export and import combination.
Enforcement of export legislation has become particularly strict. A few simple rules will reduce the risks of non-compliance:
Having a compliance program in place does not ensure smooth sailing. Trade compliance is a collaborative effort, especially in the supply chain, where you are dependent on partners for certain data. Their efficiency will affect your programs. Getting your supply chain partners in sync with your compliance programs will result less issues and fewer delays, as well as faster resolution should compliance issues occur.
While it can be a challenge to get all supply chain partners on the same page, it is recommended to review opportunities for the following:
Prepare for the Unexpected
While it may be an over-used cliché, it applies to well-oiled supply and compliance chains. Run a mock audit. While not necessarily a fun exercise, it will point out the weaknesses in your compliance program. Ask your supply chain partners for support documentation on some invoices or customs values, ask a supplier for verification of an origin statement, challenge a logistic service provider with a few ‘what-if’ scenarios (‘what –if’ we have to change routing of a shipment or need to use a truck instead of a plane – will these chances affect paperwork needed and therefore our capability to be in compliance?).
In summary, it may not be as much about the risks associated with global trade management as it is about how to anticipate and deal with them. Identify the compliance requirements you are subject to, set up programs that make you compliant, and create a common understanding internally and externally about the importance of compliance. It can save you time in multiple ways: valuable time wasted in the supply chain or even time in prison.
[i] The World Bank, Tariff rate, applied, weighted mean, all products (%). http://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS
Take a moment to contemplate Murphy’s Law: everything that can go wrong in your supply chain (SC) will go wrong. You have a team of experts and partners that know what they’re doing, but sometimes things happen beyond your control. A data source system goes down, a tornado hits, a conflict breaks out, a labor dispute forces a port to close down, or an oil spill shuts down a larger ocean area. On the legislative side, what if a country where you source raw materials is suddenly embargoed, a supplier makes a misstep and can no longer export their products, a semi-finished goods’ supplier changes its strategy and is now sourcing in a country subject to new and very strict license requirements? On the positive side, how do you maximize profit from an unexpected resurgence of a long-forgotten product or from a new sales partner that opens new, yet remote, markets at lightning speed? Lastly, which risks are you and your partners’ IT systems subject to? Are there security concerns? Is system downtime an issue?
You do not know what the event will be, and you cannot wait, unprepared, for it to arrive. Consider it almost like in a fire drill. You hope you never need it, but you want to know where the weak spots of the plan are. There are four key components to consider as you examine both your readiness, and your SC partners’, to deal with adversity.
Your supply chain has to be adaptable to changing circumstances, and sometimes to rapidly changing situations. You want your supply chain to shift focus as needed, to be agile without losing focus on the bigger picture. This means the team has to keep its eye out for changes, and to solicit input from legal, sales, and IT to be better prepared. Be in tune with legislative proposals, with sales forecasts, with IT developments, and even with weather forecasts. It will be difficult to justify having a full time weather expert on your team, but reviewing where delays have occurred over the last 2 years due to the weather is not too much work. In similar fashion, work with your SC partners to ensure they are capable of adapting to new circumstances as well. Ask your Logistics Service provider about rerouting options when a port closes down, agree upfront on volume discounts in emerging markets, find out if your supplier has a compliance team that can obtain the necessary licenses should the export requirements change.
Configurable mostly applies to the applications used in the supply chain: why use a one size fits all if you like different sizes? But take care not to mistake configurability with customization. Typically, any and all applications can be customized; however, costs and timelines will likely not be in sync with your expectations when it comes to risk mitigation or a necessary change in the supply chain process. Configurable should mean that your systems can be adjusted by you and your vendors on short notice, without months or even years of development. For example, if you have a dropdown with possible ports of transit, you want to be able to change the dropdown on the fly when the usual port of transit is closed due to a strike and you have to reroute. Or if you want to change the warehouse picking location of a popular product to a more convenient picking location, you want to be able to make that change right away, and vice versa when the hype surrounding that latest novelty subsides.
If volumes, destinations, number and location of suppliers, etc. fluctuate, so should the bandwidth of your supply chain. From a systems perspective, scalability is a key element; ensure the solution offered is scalable, whether that means it is in the cloud or otherwise. From a partner perspective, you do not want to get stuck with logistics routes that are forced upon you because the provider does not have the right fleet on lanes important to you, with unnecessary inventory, or with suppliers that cannot meet your demands. It is vital that you not only consider scalability issues, but also contractually determine them. It is a hidden cost for many businesses. First, prioritize where to be scalable – is it tradelanes, volumes on particular lanes, or in a broader sense ‘options’? Then work with your SC partners to test capabilities, by volume testing, analyzing production capacity at the supplier’s various locations, and verifying inventory levels. Finally relate your findings in contractual parameters.
If nothing else, you want your supply chain and the applications you use to be stable. Downtime costs money as every SC is now 24/7. So be aware of your providers Service Level Agreements (SLAs), whether it is uptime, delivery time, or handling time. Ensure KPIs and metrics are available to proactively monitor the numbers. Add clauses to the contract with penalties and/or opt out clauses in case SLAs aren’t met. Be prepared for calamities by working with your vendors on unified Business Continuity & Disaster Recovery Plans, have a backup plan for vendors and partners, and never take stability for granted. Coordinate with your vendors on penetration tests to ensure your data is safe. The preventative money spent will be worth it to sleep better every night knowing you are prepared. And now and again, throw some coffee on a pc to see what happens.
In the end, it is clear that despite the randomness of nature, legislative proceedings, or sales driven events, preparation goes a long way. It is difficult enough to be great when it is business as usual, but when you document scenarios and scripts on how to deal with the unknown, work with your buyers, manufacturers, logistics service providers, and sellers to discuss potential scenarios and create a cross company team to anticipate the steps to take in a crisis situation, you can be great even when adversity hits.