Author Article List

Free Trade: FAQ and Talking Points

Published on Saturday, January 01, 2005

FAQ: What are the theoretical benefits of free trade?

Talking Points:

International trade theory has its roots in the 18th-century writings of Adam Smith. Not only did he refute arguments for restricted trade, which relied on the belief that material gains acquired by one nation were done so at the expense of the other, but he demonstrated the potential gains of free trade. Thus, trade among nations is not a zero sum game, but rather, a win-win situation.

Read more

Protectionism: FAQ and Talking Points

Published on Saturday, January 01, 2005

FAQ: What are the costs of protectionism?

Talking Points:

Although in some instances protectionism may help fledgling industries for limited periods of time, current and decades-old studies indicate that protectionism actually has severe negative consequences. Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers and results in net job losses.

According to the 2002 U.S. International Trade Commission report, The Economic Effects of Significant U.S. Import Restraints, if all U.S. trade barriers had been simultaneously eliminated in 1999, 175,000 full-time workers would have been displaced, with the textile and apparel sector incurring nearly 90 percent of that loss. This would have represented only one one-hundredth of 1 percent of the 1999 labor force of 122.1 million. However, the report indicates, 192,400 full-time jobs would have been created, resulting in a net gain of nearly 17,400 jobs. In addition, total output would have increased by $58.8 billion.

The WTO determined in 1988 that $3 billion was added annually to grocery bills of U.S. consumers to support sugar import restrictions. In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58 percent. And when the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41 percent between 1981 and 1984. The objective was to save American jobs. However, in the end, more jobs were lost due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Additionally, the report Trade, Jobs and Manufacturing contends that if import barriers on sugar products were eliminated, imports would surge by almost 50 percent and domestic production would fall by 7.2 percent. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs—a small number compared to an average of 235,000 net new jobs the U.S. economy created each month leading up to 1999, the year the report was released.

In December 2003, President George W. Bush announced his decision to remove the steel tariffs he had imposed 21 months earlier. Nevertheless, the damage was done. U.S. steel users incurred massive price increases as well as major supply disruptions, according to William Gaskin, president of the Precision Metaforming Association, as reported in a June 2004 CATO report. The higher prices caused many steel-consuming industries to shrink. In the end, more jobs were likely lost than gained.

Commenting on the costs of protectionism to consumers, Peter Sutherland, former Director General of General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), said, “It is high time that governments made clear to consumers just how much they pay—in the shops and as taxpayers—for decisions to protect domestic industries from import competition. Virtually all protection means higher prices. And someone has to pay, either the consumer or, in the case of intermediate goods, another producer. The result is a drop in real income and an inability to buy other products and services.”

FAQ: Does protectionism effectively save jobs in failing industries over the long term?

Talking Points:

No, it does not. Scholars and leaders of industry alike agree that even if a greater level of protectionism were implemented, low-technology jobs would still be replaced by technology or shifted to lower-wage locations over time. Robert Reich, former U.S. Secretary of Labor, stated that “Even if millions of workers in developing nations were not eager to do these [low-technology] jobs at a fraction of the wages of U.S. workers, such jobs would still be vanishing. Domestic competition would drive companies to cut costs by installing robots, computer integrated manufacturing systems or other means of replacing the work of unskilled Americans with machinery that can be programmed to do much the same thing.”

There are many examples of technology raising worker productivity and business efficiency, where output increased or remained the same while utilizing fewer, higher-paid workers. According to Trade, Jobs and Manufacturing, a 1999 CATO study by Daniel Griswold, “In the last two decades, tens of thousands of telephone operators and bank tellers have been displaced from their jobs, not by imports, but by computerized switching and automated teller machines.”

On this point, Sutherland says, “Maybe consumers would feel better about paying higher prices if they could be assured it was an effective way of maintaining employment. Unfortunately, the reality is that the cost of saving a job, in terms of higher prices and taxes, is frequently far higher than the wage paid to the workers concerned. In the end, in any case, the job often disappears as the protected companies either introduce new labor-saving technology or become less competitive. A far better approach would be to use the money to pay adjustment costs, like retraining programs and the provision of infrastructure.”

In the early 19th century, the English Luddites attempted to destroy textile machines because they replaced weavers. Modern-day “Luddites” want to do essentially the same thing—but they have mistakenly attacked trade instead of technology. Explaining the impact of technology and its relationship with protectionism, Michael Licata, a senior economic development executive, tells the following story:

Each day, 10 fishermen ventured to the ocean to catch their family’s food requirements. The task lasted all day. However, on one particular day, a fisherman brought a net he created by twining vines together. And in just six hours, he caught enough fish to supply all 10 families. Amazed, the other fishermen marveled over the new invention. One asked, “What are you going to do with all that fish? Your family can’t eat all of them.” “I guess you’re right,” said the net man. “I’ll tell you what,” said another, “I’ll keep your roof from leaking if you give me enough fish to feed my family.” Another said, “My wife has a garden, so I’ll trade you vegetables for fish.” And a third said, “I hate fishing. If you catch my fish from now on, I’ll hunt game and gather your firewood in the forest.” When the net man returned each day with his large catch of fish, he saw his wood chopped, vegetables near his door, and a brace of rabbits hanging on his fence. He even was able to sleep better since his roof no longer leaked during rainy nights. Others, too, benefited from various trades and ventured into other businesses. For example, one man learned to play an instrument he made out of wood and entertained villagers at night in exchange for goods and services. Another experimented with herbs and began curing certain illnesses. However, as specialization occurred and life improved for all 10 families, the fishing pole maker was not happy. His business worsened since fewer men now fished. Enraged, one night he sneaked over to the net man’s hut and destroyed the invention. In the morning, the disaster was discovered and the day’s allotment of fish went unmet. The next day all 10 original fishermen returned to their boats to fish. Leaky roofs went unfixed, firewood uncut, game uncaught, illnesses uncured and evening entertainment ceased. But, the fishing pole maker was happy at the expense of many.

FAQ: What is the protectionist worst case scenario?

Talking Points:

In the 1930s U.S. industrial production began to fall and U.S. farmers felt the effects of foreign agricultural competition. European agricultural recovery after World War I resulted in overproduction. As a result, international agricultural prices fell. The solution: on June 17, 1930, President Hoover signed the Smoot-Hawley Act that raised tariffs nearly 60 percent over their existing high rate of 44 percent. Although the act seemed like a good idea at the time, it effectively killed international trade. Within two years following the act’s implementation, U.S. exports decreased by nearly two-thirds.

In anticipation of Smoot-Hawley’s passage, France, Italy, India and Australia passed their own protectionist legislation. Others, such as Spain, Switzerland and Canada, followed suit. The result: export markets dried up and domestic industries slowed down. For the next eight years international trade declined. The unemployment rate in the United States rose to 25 percent in 1933. What began as a sincere attempt to aid U.S. industry made an international crisis of the highest order more severe.

Today, the potential negative impact of protectionism is no less severe. Larry Davidson, professor of Business Economics and Public Policy at the Indiana University Kelley School of Business finds that manufactured exports have been extremely important to economic vitality, manufacturing output and employment in 10 Northeast states analyzed in his recent report, Exports of the Northeast Region 1996 to 2004, prepared for the Council of State Governments Eastern Region. The report, co-authored by Benjamin Warolin and Lan Zhang, cites considerable strength in export growth from 1996 to 2004 of chemicals and pharmaceuticals to Germany and the Netherlands, and ever stronger gains of machinery sales to China and Mexico. When it comes to identifying hot spots of export growth in 2004, the report identifies reliable partners like Japan, the United Kingdom, Germany and the Netherlands, as well as newcomers like China and South Korea. “Clearly, if the U.S. and its key industrial regions are to continue to benefit from export growth to Europe and Asia, they cannot hope to do this while at the same time protecting their industries from imports from these countries,” said Davidson. As stated earlier, international trade has become an integral part of everyday life, accounting for 25 percent of U.S. economic growth in 2004. If the United States takes protectionist actions, our trading partners are sure to do the same.

FAQ: How do tariffs and non-tariff barriers operate?

Talking Points:

Tariff barriers—taxes or duties levied on imports of foreign products—originally were established to provide revenue for the federal government, predating income or property taxes. Today, however, they are viewed differently. In effect, tariffs increase the product price which discourages its demand and thereby insulates, to a degree, domestic producers from foreign competition. Each country places higher tariffs on goods determined to be import sensitive.

The most common form of duty or tariff is the ad valorem: a tax assessed on merchandise value. In addition, other types exist. Specific duties are those charged by weight, volume, length or any other unit (e.g., charging 10 cents per square yard on fabric). Compound duties call for both an ad valorem and a specific duty on the same product. Alternative duties are those in which the custom official calculates the ad valorem duty and the specific duty and applies whichever is higher. In addition to the above fees, an import processing fee, harbor tax, and other taxes, if further assessed, increase the exporter’s costs.

Non-tariff barriers, on the other hand, are often hidden, and are not necessarily quantifiable or measurable. They typically include quotas, boycotts, licenses, health standards, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls and subsidies, as well as formal and non-formal bureaucratic red tape. Like tariff barriers, non-tariff barriers often are used to inhibit the importation of products. In many sectors, environmental, labor and investment issues increasingly are being used in an abusive manner to discourage trade.

At times when it appears that foreign government subsidies for industry are decreasing, assistance by other means may be increasing. Many analysts believe the Europeans, Japanese, and even the emerging markets are investing more and more of their resources to do battle with U.S. companies. In a sampling of about 200 overseas competitive projects tracked during an eight year period, it was estimated that U.S. firms lost approximately one-half of these due in part to government pressure—a hidden and non-quantifiable barrier to trade.

FAQ: How do global trade disputes, which often arise out of an attempt to protect an industry, affect U.S. companies and workers?

Talking Points:

The United States always has been a leading proponent of free trade. However, many now believe this leadership position is at stake—especially since U.S. willingness to accept WTO rulings is questioned. For example, both WTO and NAFTA committees have ruled that Canadian lumber subsidization evidence is insufficient. Nevertheless, the U.S. continues to impose tariffs on Canadian softwood lumber exports to the U.S. This dispute has been unresolved since 1982.

The U.S. is not alone in terms of non-compliance with international trade rulings. And, if the number of global trade disputes is any indication of unfair play, the U.S., EU and several other countries share company. Since 1995, the year the WTO was established, the international body has accepted about 30 trade dispute cases annually. As of April 6, 2005, the U.S. alone has been charged with 86 trade disputes; the EU or member states have been charged with 54, according to the Progressive Policy Institute.

In today’s competitive world, national tax laws and subsidies have become extremely complex, resulting in numerous unintended consequences—including multiple trade disputes. For example, for decades, EU industries, such as aerospace and telecommunications, have been subsidized. This has boosted their international strength or shielded them from global competition. In addition, the EU has exempted its exporters from paying a value added tax, which, in effect, has reduced their tax burden.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its exports, its indirect tax system is technically WTO-compliant. To counter this, the U.S. crafted the Foreign Sales Corporation (FSC) tax code in 1984. This was designed to help U.S. exporters compete more fairly with EU companies, as well as others around the world. Many U.S. companies claimed it was a success. In fact, a National Foreign Trade Council report stated that 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. However, the EU challenged the FSC rule through the WTO, and won in 2000. To appease the EU and global trade body, the U.S. repealed the law. In its place, the U.S. Congress created the Extraterritorial Income Exclusion (ETI) Act of 2000. But this law still didn’t satisfy the EU. Consequently, the EU challenged it through the WTO and won.

To remedy the situation, on October 22, 2004, President George W. Bush signed legislation repealing ETI. The bill also reduced corporate tax rates for domestic manufacturers and simplified tax rules on overseas profits. Without this, it was argued prior to repealing ETI that approximately 6,000 U.S. exporters, who relied on ETI to compete, would have been hurt. Several years ago Boeing estimated that repealing ETI without a suitable replacement would result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Why? In 2002, Boeing’s heavily subsidized European rival, Airbus, was estimated to have received more than $30 billion in EU financial support. Boeing claimed this gave the EU conglomerate an unfair advantage. Furthermore, analysts believed this affected the entire U.S. aerospace industry that employed nearly 800,000 highly skilled workers in 2002. Nevertheless, for over a decade the Boeing-Airbus fight has continued to rage without a solution in sight. In fact, the heat was elevated in May 2005 when Airbus requested $1.7 billion subsidy in launch aid for its new A350 mid-range jetliner.

Should the number of trade disputes continue to climb resulting in retaliation, American exporters stand to suffer losses. Retaliatory actions, which typically come in the form of increased tariffs, raise the cost of American products in foreign markets. Often leading to decreased sales for U.S. companies, this can translate to fewer jobs for American workers. As a result, it is in the interest of the U.S., the EU and others to swiftly remedy disputes and focus on more profitable long-term trade relations.

Preparing for Changes: Five Action Points for Supply Chain Managers

Published on Saturday, January 01, 2005

What will global trends and likely U.S. Customs and Border Protection (CBP) actions mean to supply chain managers in the years ahead? And how should they prepare?

First, assuming a constant terrorist threat to commerce, the number of container inspections will increase significantly around the world. CBP’s goals of expanding CSI and making container targeting more effective also will place a greater informational burden on businesses. The agency’s dual objective of efficient trade, however, will depend in part on the capacity of world ports, an effective C-TPAT program, and long-term congressional spending for its initiatives—none of which are guaranteed at a level that will match U.S. import growth. As federal cargo security efforts evolve, shippers, importers, and logistics providers must take proactive steps to mitigate shipment delays and prepare for the filing of more detailed shipment data. Furthermore, companies of all sizes must take adequate steps now to avoid a logistics crisis in the event of a successful attack on America’s trade infrastructure. All spending and advance planning must be conducted under a prudent risk management framework, but action of some kind is vital. Those who choose to do nothing at all could be risking the very future of their business.

In addition to other, more general supply chain security practices and costs, U.S. companies should consider at least the following five action points relating to the 24-Hour Rule and the targeting of maritime containers:

• Join C-TPAT to reduce inspection risk;
• Divert trade to safer channels to reduce inspection risk;
• Adjust inventory management to prepare for inevitable disruptions;
• Prepare for shipment data reporting earlier in the supply chain; and
• Prepare for broader document and data reporting requirements.

Join C-TPAT to Reduce Inspection Risk

As CBP has refined ATS, the inspection rate for all containers entering the United States has increased from 7.6 percent before 9/11 to 12.1 percent just two years later, “and it is rising,” according to CBP Commissioner Robert Bonner. Sea container inspections have nearly tripled over the same period. (1)? Each new inspection adds time and cost to supply chains with little room for either.

Consider just one example at the Packer Avenue Marine Terminal in Philadelphia. There CBP inspects approximately 50 to 80 containers a week using non-intrusive VACIS technology. Depending on the arrival of the vessels and the availability of the VACIS equipment, these “quick” inspections could take several days. Holding a container for a full manual inspection can delay the release of the cargo an additional five days. (2)? Delays and costs at overseas ports can be even greater.

Projected trade growth and the practical need for more random inspections, as described above, will be the two primary drivers behind increasing inspections in the years to come. Also fueling the increase will be the fact that container inspections have become the easy political answer to questions of port security. Whereas CBP inspections rarely used to make news, with the exception of a record-breaking drug bust here or there, today lawmakers hold press conferences at major ports and talk tough on trade security. (During the 2004 presidential race, both President George W. Bush and Sen. John Kerry held such events. At one in Palm Beach, Fla., Kerry said that inspections should increase to a “significantly higher level.” (3)? Whether or not politicians have completely considered the logistics and funding demands of inspection increases is beside the point. As long as the idea lends itself so easily to sound bites, lawmaker interest will continue to foster an environment conducive to more inspections.

Businesses who want to reduce their exposure to targeting risk and more inspections can do so only by becoming a familiar, trusted, and prudent trader in the eyes of CBP and its ATS computer. That means establishing a good security track record and making sure that all supply chain partners have done the same. Currently the only way to achieve most of this at one time is through membership in C-TPAT. Although C-TPAT faces a number of long-term challenges, as discussed above, adherence to the voluntary program’s standards remains the primary way that businesses can reduce their targeting risk, outside of the unforeseen random inspection. In addition to receiving lower risk scores, members who subscribe to program standards may also receive breaks on penalties and damages for violations of the 24-Hour Rule. (4)? As long as these benefits continue, membership in C-TPAT only makes good sense, despite the costs. Furthermore, those companies who assume an active role in the program now may have increased leverage in steering the evolution of C-TPAT, including laying the groundwork for an international initiative based on the C-TPAT model.

But C-TPAT benefits are only the icing on the cake for companies who have invested in the security of their supply chains. Strong adherence to, and furtherance of, industry best practices of security also ensure against the ultimate risk: that a single security lapse in one company’s supply chain, if that lapse leads to disaster, could condemn all future shipments. An entire firm could become a pariah to both its trading partners and world customs authorities—a certain recipe for doom.

Divert Trade to Safer Channels

From its beginning in the months following 9/11, CSI focused on implementation at the 20 largest overseas ports, which ship around two-thirds of the United States’ annual incoming container volume. With that goal achieved, CBP has begun placing inspectors at smaller, high-risk ports throughout the world.

Despite original reservations about CSI from the European Union (EU), which feared that CSI ports in Europe would have an economic advantage over non-CSI ports, the EU and DHS signed an agreement in April 2004 outlining future cooperation in expanding CSI. DHS has received similar pledges from the G8 countries and the World Customs Organization (WCO), allowing ports in all 161 WCO member nations to develop programs along the CSI model—if they can afford the required infrastructure and non-intrusive inspection technology. As of October 2004, the number of CSI ports worldwide was 31 and counting.

CBP hopes to expand the program to cover more than 80 percent of all containers shipped to the United States. The question then arises: How will the other 20 percent be treated? Without a CBP presence or standard security measures in place at non-CSI ports, containers laded at those ports should receive higher risk scores in ATS. In other words, as CSI expands as both a U.S. and global initiative, containers originating outside the circle of “friendly ports” will be subject to higher targeting risk, increased inspections, and more shipping delays. Furthermore, in the event of a maritime terrorist attack anywhere in the world, seaports not participating in CSI will experience much longer delays in resuming cargo operations. (5)

Thus, U.S. importers currently working through non-CSI ports in any region of the world should consider diverting shipments to the nearest CSI port. While changing suppliers or altering land transportation overseas could add additional time and cost to a supply chain, these consequences must be weighed against the cost of routine delays, frequent inspections, and even an indefinite halt in trade that might occur with commerce through a non-CSI port. That being said, it should be noted that shipping goods from a CSI port does not alone offer any guarantee against delays. The very idea of inspecting containers overseas instead of in the United States, in fact, adds great uncertainty to product delivery, as a study cited below indicates. CSI merely offers the lesser of two risks.

On a related note, as of July 1, 2004, ports and vessels worldwide were required to be compliant with security plan regulations imposed by the International Ship and Port Facility Security Code. While compliance among the world’s more than 9,000 ports was only 69 percent as of July 1, that number had improved to 89.5 percent by early August, according to the International Maritime Organization. Compliance for affected vessels was well over 90 percent by August. (6)

In general, however, ports in Africa, the former Soviet Union, and Eastern Europe have been slower to implement the required security measures. In a September 2004 bulletin, the U.S. Coast Guard named 17 nations with noncompliant port facilities. (7)? Vessels that have visited one of the listed countries during their last five port calls will be subject to increased port state control actions upon arrival in the United States, the Coast Guard says. International pressure for compliance will be strong toward these lagging nations in the coming months. Nevertheless, U.S. importers should closely monitor the current and future compliance of foreign ports and vessels they use and divert trade as necessary. In addition to Coast Guard detention of suspect vessels, trade through noncompliant ports or noncompliant carriers also will increase container targeting risk and the likelihood of inspection.

Adjust Inventory Management

Always looming over world commerce is the prospect of a successful attack on intermodal trade and its effect on targeting and inspections. A worst-case scenario in which terrorists exploit a C-TPAT-member supply chain, a CSI port, and internationally compliant carriers could in one stroke discredit America’s entire security regime. “Since no shipment will be able to be viewed as low-risk” after such an incident, says Stephen Flynn of the Council on Foreign Relations, “U.S. authorities will have to attempt to inspect all shipments while it scrambles to then put a credible, verifiable security regime in place. In the interim we could bring the U.S. economy and the entire international trade system to its knees.”(8)

There is a simple inverse relationship between supply chain security and efficient trade—namely, the more we protect against worst-case scenarios like the one above, the slower trade becomes, while fast and loose trade translates into much higher probability of an attack. Each extreme brings its own risks of delays, stoppages, and costs to intermodal trade, but so does the gray area in between—the daily uncertainty under which most of us work today. Research indicates the uncertainty may be attributable, in part, to CBP’s strategy of targeting and inspecting containers overseas instead of inside the United States.

For example, if CBP delays a container abroad before lading, the shipment may miss its departing vessel and have to wait days before the next opportunity to sail. Delays at U.S. ports, on the other hand, are usually less severe because containers receive prompt truck and train service. Although no formal studies have been done, says Aaron Lukas of the Cato Institute, there is evidence that lead times at some foreign ports have risen by three to four days, or 30 to 40 percent, to counteract this uncertainty and ensure on-time U.S. delivery. (9)

As world trade volumes balloon in the coming years, increased cargo inspections and backlogs will make such preventive medicine for supply chains commonplace. To maintain supply chain efficiency on anything remotely resembling a just-in-time basis, firms may need to reexamine every aspect of inventory and logistics management. These measures might include:

• Greater automation of order processing;
• Location of factories, distribution centers, and warehouses in areas more strategic for security and disaster mitigation;
• Responsibility for shipments much earlier in the supply chain;
• Improved asset visibility and tracking;
• A domestic “mission control” for monitoring and directing international logistics;
• Larger emergency stock levels; and
• Diversion of some supply to stateside sources, or at least the plan for such a diversion in a crisis.

To be sure, all such options carry a quantifiable cost that must be weighed against trade risks. Companies must constantly assess current container targeting risk, future targeting and inspection potential, and current and future world security tensions when managing inventory. Such assessments also should weigh the effects of any changes made to the 24-Hour Rule and the way CBP processes advance cargo data, as discussed below.

Prepare for Earlier Shipment Data Reporting

Given the rising tide of imports and the corresponding increase in manifests being filed in advance to an increasingly overwhelmed agency, will the 24-Hour Rule ever become, say, the “36-Hour Rule”? Most likely, yes.

We can project the increase in U.S. imports with virtual certainty. On the other hand, suitable funding and staffing for CBP targeting functions, port operations, and other security-related programs much past the current fiscal year is decidedly uncertain. Because intelligence, targeting, and inspection remain dependent on human effort, despite high-tech computing also at work, the question arises: Will CBP targeters and inspectors eventually be unable to review all manifests and related data (and possibly new document types) a mere 24 hours before lading? If the answer is yes, the prospect of giving them more time—thus shifting the cost to industry—seems more likely than additional money from Congress.

Because ports overseas will not be able to accommodate such an increase in parked containers waiting for permission to load, as discussed earlier, it follows that carriers or other entities will have to file manifest data long before containers arrive at their port of lading. (In fact, this already can occur under the 24-Hour Rule, which does not stipulate that a container be present before a carrier transmits the manifest to CBP.) The farther in advance a carrier files before taking possession of a container, the greater the chance of inaccurate data and, therefore, less effective targeting. For example, the sea carrier has no way to include in his advance filing any information on container tampering, suspect seals, or route diversions or delays on land. A required shift beyond the 24-hour timeframe, however, would necessitate 1) that carriers have a more concrete way to verify a container’s contents; 2) the filing of advance cargo data by entities other than carriers (an idea discussed below); or 3) multiple filings of data during a container’s journey to give more of a real-time picture of its status. Regardless of when or how CBP receives the filed data, changes in advance filing would add lead time to supply chains, further increase the demand for greater supply chain visibility, and require investment in automation for other chain partners involved—all at a cost.

Although a change in the period of advance reporting would require businesses throughout supply chains to adapt, such a change could have a net positive effect on efficiency once containers made it to the port of lading. As suggested by Aaron Lukas of the Cato Institute, logistics experts contend that ports could better sort arriving containers if they had advance notice of which ones are likely to be scanned or inspected manually. “If Customs receives information about the contents of a container before that container arrives at the port, as opposed to 24 hours before loading on a ship, then they can send that container to what is more likely to be the correct staging area, avoiding costly repositioning delays,” Lukas says. (10)

And while the extension of the 24-Hour Rule may be years into the future, it would be wise for U.S. importers and their supply chain partners to consider changes on the way. Building a flexible approach to advance filing and lead times into supply chain management today will surely reduce disruption and costs when CBP enacts a rule change down the road. It also will prepare firms for changes in the recipient of filed data, in the case of a new international targeting regime under the WCO or a similar entity.

Prepare for Broader Reporting Requirements

It is no secret, as discussed earlier in this report, that vessel manifest data does not present the most complete picture of a container’s history prior to delivery to the carrier, who currently files the manifest under the 24-Hour Rule. The 14 data points required by the Rule, derived from a carrier’s bills of lading, most often are not precise enough for the best possible targeting. For example, the information most needed by CBP is the identity of an importer’s vendor, supplier, or manufacturer, though a carrier’s bill of lading may often list a freight forwarder or other middle party as the shipper. This has presented a major problem to CBP from day one.

“Currently, the information CBP receives about the shipper is not helpful in making risk determinations,” the agency says. “For example, identifying the shipper as a carrier, bank, or importer does not provide CBP with useful information.” (11)? CBP went so far as to change the definition of “shipper” in the Trade Act of 2002 to match its goal of learning the manufacturer’s identity, but it had to suspend plans for enforcement of the change after an outcry from carriers. That suspension appears indefinite. Nevertheless, CBP warns that information given in the shipper field on manifests that is not useful in assessing risk will increase the likelihood of inspections. Carriers continue to insist that they should not be providing CBP with information they don’t know or can’t verify, all under the threat of penalty for inaccuracies.

So if—as the shipper controversy illustrates in part—manifest data filed by carriers is insufficient for the most precise targeting of high-risk cargo on a complex journey, what additional data is needed, and from whom?

A typical trade may involve the interaction of 25 different entities, use two or three different transportation modes, be handled at as many as 12 to 15 locations, and generate 30 or more documents, including purchase orders, commercial invoices, shippers’ letters of instruction, and certificates of origin. (12)? A 2004 GAO report suggests that several such documents generated at stages throughout supply chains could be used in targeting. (13)? Before that report, in 2003, U.S. senators from both parties on the Governmental Affairs Committee called on CBP to expand the number of documents it receives, including data collected at the time of purchase. “Purchase order data is historically more accurate and more detailed [than manifest data],” wrote Committee Chairman Susan Collins, R-Maine, and Ranking Member Joe Lieberman, D-Conn. “Import specialists and auditors already collect purchase order data to perform entry audits. If the information is already available to CBP when necessary, why should that data not be included earlier in the process to ensure a more accurate profile by ATS?” (14)? The senators went on to suggest that additional documentation is necessary to target containers that have moved through multiple transshipment points prior to the port of lading, making it easier to catch terrorist attempts to hide a container’s true origin or alter its contents. They cited a European Commission pilot program called Contraffic that tracks all of the ports of call for both containers and ships. “CBP could similarly minimize the vulnerability by requiring data detailing all ports of call for both the ship and all containers on it,” they said. (15)

While it may be impractical, if not impossible, to require electronic filing of additional documents anytime soon, that day will come. Clearly, supply chain entities in addition to carriers will have to bear at least part of the reporting burden in the future. The Trade Act of 2002, in fact, states that, “In general, the requirement to provide particular information shall be imposed on the party most likely to have direct knowledge of that information.”(16)? To date, carriers have insisted that information about importers’ vendors, suppliers, and manufacturers is best obtained from the importers themselves. In fact, importers provide this information to CBP in the merchandise entry process, though the data, of course, is not filed before vessel lading in time to be useful to ATS. (17)? That may change. Shippers on foreign soil also may be responsible for filing information of which they possess the most direct knowledge. Such a requirement would require initial investment in infrastructure to convert and transmit documents in electronic form, plus maintenance expenses to keep track as ACE and other government software platforms evolve over time. But even before the implementation stage will come an industry-wide debate over confidentiality. “Do shippers want their supplier and vendor lists given to carriers, and filed in the public manifest system?” asks Christopher Koch of the World Shipping Council. (18)

In addition to documentation of a container’s contents and origin, the verification of secure practices in the stuffing, sealing, and land transportation of a container also should play a role in the targeting of suspicious cargo. While the issue of individual container security warrants a separate report of its own, it is worth noting here that the prospect of “smart” containers and the related responsibilities placed on shippers will soon cross paths with advance reporting and targeting processes. Electronic sensors that can broadcast a container’s location and security status via radio frequency or satellite are not a viable technology today, primarily due to the lack of accepted global standards and high start-up costs. Currently several CBP and industry programs (such as Operation Safe Commerce and Smart and Secure Tradelanes), as well as private manufacturers, are investigating solutions for smart container sealing and right-time tracking. Within individual supply chains, smart containers would undoubtedly enhance asset visibility and decrease cargo theft and pilferage. Once such containers become part of a worldwide infrastructure, however, CBP will want to monitor the data for its own reasons of security. Until that time, businesses should continue to follow and participate in smart container research programs to keep security-driven goals from outpacing practicality. Supply chain managers also should look ahead to the potential costs and implications of electronic seals, maintaining a network of seal readers, and ensuring the timely delivery of container data to CBP or other government agencies.

Footnotes:

1. Testimony of Robert Bonner, Senate Committee on Commerce, Science, and Transportation, Oversight of Transportation Security, 108th Congress, September 9, 2003, p. 3.
2. Testimony of Edward Henderson (director of strategic planning and development, Philadelphia Regional Port Authority), House Subcommittee, Port Security, p. 2.
3. Paul Scott Abbott, “Kerry urges more inspections, increased offshore deterrence,” American Journal of Transportation, www.ajot.com, June 5, 2004.
4. U.S. Customs and Border Protection, Frequently Asked Questions: 24-Hour Advance Vessel Manifest Rule, www.customs.gov, pp. 8-9.
5. U.S. Customs and Border Protection, Container Security Initiative (CSI) Fact Sheet, www.cbp.gov.
6. International Maritime Organization, “Security compliance shows continued improvement,” www.imo.org, August 6, 2004, p. 1.
7. U.S. Coast Guard, “Port Security Advisory,” September 9, 2004. The 17 nations identified in the advisory were Albania, Benin, Dem. Rep. of Congo, Equatorial Guinea, Guinea, Guinea-Bissau, Kiribati, Lebanon, Liberia, Madagascar, Mozambique, Nauru, Nigeria, Serbia and Montenegro, Sierra Leone, Solomon Islands, and Suriname.
8. Flynn, p. 7.
9. Lukas expands on the uncertainty idea first suggested by Chip White of the Georgia Institute of Technology. See Lukas, p. 12.
10. Lukas, p. 13.
11. U.S. Customs and Border Protection, Frequently Asked Questions: 24-Hour Advance Vessel Manifest Rule, www.customs.gov, p. 25.
12. Crist, p. 24.
13. GAO-04-557T, p. 22.
14. Sen. Susan Collins and Sen. Joseph Lieberman to Asa Hutchinson, under secretary for Border and Transportation Security, Department of Homeland Security, October 28, 2003, p. 3. Available at http://govt-aff.senate.gov.
15. Collins and Lieberman, p. 3.
16. U.S. Statues 116 (2002): p. 982.
17. Koch, p. 3.
18. Koch, p. 3.

Production Sharing and Sourcing: FAQ and Talking Points

Published on Saturday, January 01, 2005

FAQ: Do U.S. production sharing operations abroad destroy U.S. jobs?

Talking Points:

Several anti-globalist groups feel U.S. production sharing (the allocation of different stages of the manufacturing process to different countries) is totally unnecessary and should be eliminated. What they don’t understand is that production sharing actually saves more jobs here at home than would be lost due to protectionist efforts to place a straight jacket on business.

Read more