The Hindu Business Line : Balancing trade security and facilitation

A correct balance between prudent trade security measures and international trade flows is not only feasible, but expedient. A very close link there is between trade security and trade facilitation, mutually reinforcing, as better trade facilitation can actually enhance trade security and vice versa. Vessel turnaround times can be shortened, Customs clearing accelerated, costs associated with redundant data entry eliminated, and cargo handling costs slashed. Automation not only leads to gains in efficiency and reduced transaction costs, but also to fewer opportunities for illegal transactions.

History is replete with examples of important trading routes being plagued by banditry and piracy. The best known threat to trade - piracy at sea - has posed a problem for more than a millennium. In the First Century B.C., Phoenician and Greek grain convoys suffered such high piracy losses that Rome almost starved. Lucrative trade routes engendered piracy. This trend continued until the development of national navies in early 19th century. Piracy continues to be a significant problem in South-east Asia, especially along the Straits of Malacca, between Indonesia and Malaysia, and Singapore Straits, which serve as the jugular of maritime trade in the sub-region, one of world's busiest and strategically most important shipping lanes, the narrow waterway accounting for about 40 per cent of the world's trade and 80 per cent of Japan's crude oil. The Malaccan Straits and its littoral countries account for about a third of all pirate attacks in the world.

The importance of trade security and the threats to trade grows with the globalisation process, as economies become increasingly trade-dependent. Trade dependence almost doubled among Asia and the Pacific countries, from 25 per cent of GDP in 1990 to 48 per cent in 2004. Trade flows depend on trust to flourish. But trust steadily diminishes in a world where death can arrive hidden in a metal box.

Implementing security is a management as well as a technical problem. Technology is necessary, but not sufficient. Before the 9/11 attack, trade security was mainly viewed as economic and financial security including the fight against fraud and counterfeiting.

Shortly after 9/11, there was a focus on minimising security risks associated with the international flow of goods and services. Among the security measures undertaken were the installation of grenade-proof barriers in front of plane cockpit doors. The US Customs mandated that information about every air cargo shipment had to be supplied to it 12 hours before take-off for regular cargo and eight hours for express.

Extending security

The US Aviation Security Act made it mandatory for all-cargo airlines to enforce a system that screened and inspected goods on an aircraft. It focuses on extending secure areas at airports, requires extensive background check of workers and heightens scrutiny of "known shipper lists". The rule calls for consolidation of approximately 4,000 known shipper lists into one central database managed by TSA (Transportation Security Agency). An additional 50,000 airline employees undergo full criminal history background checks.

The Government of India too has put into force some regulations, meant only for `Regulated Agents' or those who have been in existence for five years and have at least three years of experience in the air cargo business. The regulated agent is expected to follow security procedures laid down by the Commissioner of Security, Civil Aviation.

Proper Balance

It is well-recognised that the need to ensure security of the global supply chain need not be at the expense of trade facilitation and trade efficiency. In fact, trade security and trade facilitation can complement each another. Achieving the proper balance is a dynamic process. One major security challenge is ensuring the security of payment arrangements. The bulk of cross-border trade transactions now involves the electronic exchange of information at some stage of the transaction, if only at the payment stage. The need for rapid availability of information in advance of shipping, combined with the increasing application of risk management techniques by customs agencies have greatly increased the use of modern information and communication technology (ICT).

Standards Framework

In June 2004, the WCO (World Customs Organisation) Council entrusted a high level group of the representative Directors-General of Customs, who drew together a framework of standards to secure and facilitate global trade, developed with four principles: Customs services would undertake to harmonise advance electronic information; use a consistent risk management approach; use non-intrusive detection equipment; and lead to the accrual of benefits to customs, business and ultimately nations. The Framework of Standards, unanimously adopted by 166 Customs Administrations in June 2005, gives equal importance to revenue collection, trade facilitation and security. It also incorporates the modern customs principles proposed by the Revised Kyoto Convention (which came into force in February 2006) and the Recommendations and Guidelines produced by the Joint Customs/Industry Task Force on security and facilitation. This, inter alia, pertains to risk management based on advance electronic information, use of modern technology, and a partnership with trade. By June 2006, 135 WCO members had expressed their intention to implement the Framework.

The key elements of the WCO standards will in due course become part of the international law for maritime cargo transport such as the 1965 Convention on Facilitation of International Maritime Traffic, as amended, and the 1974 Safety of Life at Sea Convention (SOLAS), as amended.

There have been other similar initiatives: The International Maritime Organisation (IMO) amended the SOLAS Convention and introduced the International Ship and Port Facility Security (ISPS) Code, effective from July 1, 2004. The ISPS Code is a framework that facilitates risk evaluation, in order to prevent maritime transport and port infrastructure (ships, facilities, cargo and passengers) from being used to commit terrorist attacks. The ISPS Code had been put into practice by 145 countries in 2005, representing some 9,600 port facilities (97 per cent of the total) and 95 per cent of the world shipping fleet.

At the national level, the US now has an omnibus 180,000 strong Department of Homeland Security that includes the Coast Guard and the Transportation Security Agency (TSA), for implementing a series of voluntary programmes aimed at improving ship and port security such as the container security initiative (CSI), the Customs-Trade Partnership Against Terrorism (C-TPAT), and the 24-hour advance cargo manifest rule. Many ports the world over have become CSI-compliant and many more are in the process.

There is the X-ray screening of all containerised goods going out of the country to American destinations. These include 24-hour surveillance at warehouses, higher walls and sniffer dogs to detect explosives. In India, in the past two years, the system has helped to confiscate a large haul of illicit goods - from drugs to ammunition.

Nations at Risk

There is a real risk that some landlocked developing countries, or Pacific island-nations with economies in transition could be marginalised on account of their inability to comply with new security measures.

On the one hand is the cost of implementing the measures; on the other is the cost of being left out of the global supply chain because of lack of compliance with emerging multilateral security frameworks.

Such countries may find foreign direct investment (FDI) and trade diverted to third countries due to, inter alia, higher insurance premia, or the goods originating from countries with lax security measures being subject to closer scrutiny and customs delays.

In the longer term, this will undermine their export competitiveness and attractiveness as a destination for new FDI, besides loss of international credibility. Uncoordinated, inconsistent security measures raise the level of public anxiety. Effective security also costs money. Funding needs will have to be identified for new technologies, implementing new standards, and increased scrutiny of the industry.

To recover implementation costs of new security measures, a number of ports are levying surcharges that ideally will be spread along the whole export chain, from the point of origin to the final user. "Aid-for-Trade" initiative, adopted at the Sixth WTO Ministerial Conference in Hong Kong, in December 2005, is one potential source for these funds.

The "Aid for Trade" initiative is meant to develop countries' supply side capacities. Long-term savings far exceed the set-up and operating costs for all trade facilitation measures. Security-related trade facilitation measures, such as risk management, pre-arrival clearance and electronic single window (automation) are indeed important and useful.

(The author is a former Managing Director of Concor.)