SOU TH A S IA P OLIC Y N OTE S A D VA N C IN G R E GION A L 2015  MAY RATI IN TEG|  ON 3 ISSUE 1 97140 The Security and Trade Facilitation Nexus: International Trends and Practices Clay Kerswell and Charles Kunaka The Emerging Paradigm of Based on several case studies, this note synthesizes some principles that can be adopted to govern the balance National Security between managing security risks and facilitating trade. Improving levels of trade facilitation is one of the remaining The post-9/11 world resulted in new and increasingly challenges to enhancing connectivity and trade growth in complex security challenges to be addressed in regulating South Asia, but border and internal security concerns are cross-border trade. However, the processes of globaliza- often perceived as a barrier to implementing key reforms. tion and economic integration continue to move forward, Security is a legitimate issue for South Asian nations. But delivering improvements for all South Asian economies. there needs to be a balance to achieve the optimum level Recently, the adoption of the World Trade Organization’s of security without restricting trade and damaging a nation’s “Trade Facilitation Agreement” (TFA) has resulted in a new ‘economic’ security.1 Even border management agencies range of enforceable trade facilitation measures regional employing a “100 percent” intervention policy do not have economies have to work towards implementing.3 The TFA the resources to examine every package. The challenge is was not developed in isolation from security concerns. Most to focus security resources to target transactions of highest of its articles are based on elements of existing interna- risk, using sophisticated analysis of transaction data and tional conventions and agreements, particularly the World maintaining visibility and integrity of supply chains. Customs Organization’s “Revised Kyoto Convention” (RKC) ‘National Security’ is now seen as a broader concept that and its Framework of Standards to Facilitate and Secure includes goals relating to national economic performance as Trade“ (SAFE Framework).4,5 It is imperative to address all well as physical security.2 Contemporary border management strategies acknowledge this and strive to achieve both improved security and trade facilitation outcomes through comprehensive, integrated risk-based regulatory control BOX 1: Cost of border security related measures strategies, appropriately supported by technology. While it may seem clear that some border management After the 9/11 attacks, several governments had to policies impose additional ‘frictional costs’, there are address the challenge of securing their national borders also a range of direct costs related to increased border and protecting their international supply chains against management (security) measures. The impact of the terrorist threats. There is concern that poor border security 9/11 attacks resulted in increases in insurance costs, risks the trafficking of weapons or drugs, entry of terrorists security surcharges and higher base shipping rates. Some have estimated these costs amount to 3 percent or their means of support, or other threats. Following the of the value of traded goods, others, such as the OECD attacks, many jurisdictions emphasized more intervention (2002) suggest it is significantly less. In 2003 the esti- and an increased regulatory burden on international trade. mated cost of counter-terrorism measures in maritime However, added emphasis on security need not become a transport alone exceeded $2 billion (OECD, 2003). barrier to international trade or render trade uncompetitive. www.worldbank.org/southasia THE SECURITY AND TRADE FACILITATION NEXUS- INTERNATIONAL TRENDS AND PRACTICES 5-19-15.indd 1 5/19/15 11:08 AM 2 S O UT H A SIA P OL IC Y N OT E S AD VA N C IN G R E GION A L IN TE GR ATION major impediments to flows of trade in order to maximize can be physically inspected without causing unaccept- the benefits of the TFA. able delays at the border. • Goods are increasingly manufactured and shipped The South Asian Context with shorter lead times, allowing less time for advance The paramount objectives of border management agencies notifications and inspections. Any delays in border vary from region to region, and from nation to nation. As clearance can have an immediate and costly impact on such there is no on size fits all solution that can be applied related value-chain processes. globally. Generally, maintaining security is regarded as a more important objective of South Asian border agencies The ideal scenario is one where security risks are than it is in many other regions where revenue collection is managed not just at point of entry into a customs territory paramount. This does not mean that achieving greater facil- (the common case), but rather along the length of the itation is not possible or desirable, but achieving balance supply chain. In fact, cargo is most vulnerable at packing or may require greater effort. transshipment points. Achieving Balance Approaches to Balancing Security and Striking an appropriate balance between ensuring security and facilitating trade is at times seen as a trade-off. In fact, Facilitation the two are complementary and could be realized through a After 9/11 there have been several international and national balanced approach (Figure 1). Implementing concepts like initiatives to enhance the management of supply chains to “risk management” does not meaning taking extra risks and detect and deter security threats. Many of these initiatives 100 percent inspection regimes do not actually result in 100 seek to strengthen security procedures while simplifying and percent inspection and in fact achieve poor outcomes for facilitating improvements to customs procedures. Most have security, facilitation and revenue.6 focused on the concept of “supply-chain security.” In many cases, regulatory controls, including those that At the international level, the World Customs Orga- are security-related, are exercised at the borders or ports nization (WCO) has been at the forefront, while revisions of trading partners.7 Yet, the evolution of international trade were also made to the Kyoto Convention to reflect secu- patterns, with increased globalization, means security risks rity-related issues in border management. Some of the are actually distributed, albeit unevenly, along a supply national initiatives are based on the private sector playing chain. For example: an important role to improve supply-chain security, and benefitting from reduced regulatory controls. In general, private-sector involvement and broad-based training and • The tendency towards dispersed production means implementation, in cooperation with government regulators, supply chains are getting longer and more complex, is key to facilitating and securing global trade. Examples of with increased reliance on goods from diverse environ- these initiatives are provided below. ments and economies. • Growing volumes of imports and exports make it impos- sible to inspect all goods without some form of selective Global Initiatives: World Customs inspection. In most instances only a fraction of goods Organization As part of its goal to simplify and standardize customs practices among its members, the WCO supports and promotes the balance between trade facilitation and FIGURE 1: Facilitation—Control Matrix compliance/security. The organization has encouraged High the standardization of procedures through the SAFE Red tape approach Balanced approach Framework, which includes the concept of the Authorized Economic Operators (AEO) as a fundamental principle of balancing security and facilitating the global supply Control Crisis management Laissez faire approach chain. The SAFE Framework focuses on the concept of end-to-end supply-chain security and was developed in response to the demands of the evolving border-security Low Facilitation High threat. It is a set of non-binding technical standards that most WCO members have committed to implement, and Source: Widdowson & Holloway 2011. aims to secure international trade without impeding it. It www.worldbank.org/southasia THE SECURITY AND TRADE FACILITATION NEXUS- INTERNATIONAL TRENDS AND PRACTICES 5-19-15.indd 2 5/19/15 11:08 AM SOU TH A S IA P OLIC Y N OTE S A D VA N C IN G R E GION A L IN TEG RATI O N 3 has two main pillars: Customs-to-customs networks and The initiatives are tied together under the “Secure customs-to-business partnerships. Freight” program that links many of the elements of freight/ To supplement this, in 2010 the WCO developed a set cargo security within a comprehensive system that includes of AEO guidelines, defining an AEO as: radiological and X-ray inspection. “…a party involved in the international move- ment of goods in whatever function that has been Sweden approved by or on behalf of a national Customs Swedish Customs has for several years used accreditation administration as complying with WCO or equiva- of economic operators as a strategy to promote compliance lent supply chain security standards.8 and facilitate international trade for compliant operators A key benefit of AEO-type programs is the concept of through application of sophisticated risk management. The mutual recognition, where countries accept each other’s focus has been on designing a global supply chain security accreditation of operators, extending supply-chain visibility system to be integrated with the existing customs system. and resulting in greater compliance. Examples of AEO Designated as The Stairway®, it is meant to be a customs programs and mutual-recognition agreements are also system for improved service, quality and efficiency based on published by the WCO.9 partnership between Customs and business.10 The RKC, which entered into force in 1974 and was The inclusion of supply chain security requirements into revised in 2006, is a non-binding set of technical standards a broader partnership arrangement is a logical move that that most WCO members have committed to apply in order overcomes the likely loss of private-sector benefits under a to simplify and harmonize customs procedures. security-specific regime. Such an approach will enable cus- The RKC seeks to provide international commerce with toms authorities to continue to provide compliant enterprises the efficiency that modern trade demands. It requires model with tangible methods of facilitation, while mitigating risks customs procedures and sets minimum standards for: associated with supply-chain security and other regulatory objectives.11 • Predictability (standard principles for processing of goods, conveyances and people moving across borders). Regional Initiatives: the European Union In 2008 the EU adopted Regulation 1875/2006 creating an • Transparency (providing all information relating to AEO regime and made mandatory the electronic submis- customs and opening customs procedures to scrutiny). sion of pre-arrival and pre-departure information. The AEO • Legal process (preventing arbitrary or unfair actions by concept was designed to ensure a more secure end-to-end Customs, establishing necessary appeals procedures supply chain. The intention was to secure the Community’s and regulating the handling of offenses). borders while facilitating the movement of goods by using • Use of information technology. electronic data exchange and customs simplification. Being • Modern techniques (risk management, pre-arrival recognized as an AEO demonstrates compliance with information, post-clearance audit). national customs procedures and the implementation of robust security criteria. Individual EU member states are National Initiatives: The USA responsible for implementing national AEO programs in Approaches to supply-chain security have been led by the conformance with EU regulation and guidelines. Regulation United States, which introduced a series of initiatives after 1875/2006 is in line with WCO recommendations and 9/11, including the following: requires an AEO to be: “recognised as an economic operator who has • Importer Security Filing and Additional Carrier Require- taken appropriate measures to secure his business ments, the so-called 10+2 rule that requires more and is thus a reliable actor in the international sup- thorough and timely trade data prior to containerized ply chain both from the perspective of the relevant cargo loading that is then subject to risk review and government authorities and from the perspective of analysis. his business partners.”12 • Container Security Initiative (CSI), which stations U.S. AEOs include manufacturers, importers, exporters, Customs and Border Protection (US CBP) inspectors at brokers, carriers, consolidators, intermediaries, ports, foreign seaports. airports, terminal operators, integrated operators, ware- • Customs Trade Partnership Against Terrorism houses, and distributors. Traders also need to be aware of (C-TPAT), which focuses on voluntary industry partici- the unique requirements imposed by national regimes within pation to better secure commercial supply chains. the broader AEO concepts established by the EU. www.worldbank.org/southasia THE SECURITY AND TRADE FACILITATION NEXUS- INTERNATIONAL TRENDS AND PRACTICES 5-19-15.indd 3 5/19/15 11:08 AM 4 S O UT H A SIA P OL IC Y N OT E S AD VA N C IN G R E GION A L IN TE GR ATION There are four blocks of conditions and criteria to be Acknowledgements met (as per WCO guidelines): The authors would like to thank, without implicating: Sanjay Kathuria, Sohaib Shahid, Manuel Henriques and Jose • Record of compliance with customs requirements. Eduardo Gutierrez Ossio. • Adequate commercial and transport records systems. • Financial viability. • Applying and adherence to security and safety Endnotes 1. Basu, G. (2014). “Combating illicit trade and transnational smug- standards. gling: key challenges for customs and border control agencies”. World Customs Journal, Vol.8 No.2, (Sept, 2014), 15–26. The EU program mandates trade compliance as a 2. Dent, C. (2007). “Economic Security”. In A. Collins (Ed.), Con- prerequisite for participation in trade security and facili- temporary Security Studies, 204–221. Oxford University Press. tation benefits. This stance underlines the importance of 3. WTO (World Trade Organization). (2013). “Agreement on Trade Facilitation”. Ministerial Decision of 7 December 2013. WTO. private-sector participation, and the creation of comprehen- 4. WCO (World Customs Organization). (1999). “International sive, affordable and scalable solutions. Convention on the Simplification and Harmonization of Customs Procedures (As Amended)”. WCO. Lessons for South Asia 5. WCO. (2007). “WCO SAFE Framework of Standards”. WCO. 6. Widdowson, D., & Holloway, S. (2011). “Core border manage- SARConnect Issue 4 will examine in more detail the ment disciplines: Risk Based Compliance Management”. In G. relevance and potential importance of some of these, and McLinden, E. Fanta, T. Doyle, & D. Widdowson (Eds.), Border other, strategies in the context of concerns expressed by Management Modernization 95–113. Washington, DC: World Bank. South Asian countries about the potential security fallout 7. See, for example: US Customs and Border Protection (US of improved trade facilitation. It will explore how some CBP). (2002). Container Security Initiative (CSI). elements of the recommendations and global approaches 8. WCO. (2010). “AEO Implementation Guidance” How to examined in this issue can be adopted to improve security Develop an AEO Program. WCO. and facilitation outcomes in the South Asian context. 9. WCO. (2010). “Compendium of Authorized Economic Operator Programme” Members’ AEO Programmes / Mutual Recognition Arrangements/Agreements. WCO. About the Authors 10. Swedish Customs. (2003). White Paper on accreditation of Clay Kerswell is Senior Customs and Border Manage- operators and the supply chain security (StairSec®), Swedish Customs, Stockholm. ment Specialist in the World Bank’s Trade and Competi- 11. Widdowson, D. (2006). “Border Protection and Trade Facilitation tiveness Global Practice, based in Washington, DC. – Are the Two Compatible?” presentation to the Korea Research Society for Customs Conference on Globalization of Customs Charles Kunaka is a Senior Trade Specialist in the Administration & Border Protection, Seoul, Korea, May 2006. World Bank’s Trade and Competitiveness Global Prac- 12. European Commission. (2014). “Authorised Economic Operator tice, based in Washington, DC. – Guidelines” (Rev.5). 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