Supply Chain
Trade Compliance

Trade Compliance - a Necessary Actor in a Resilient Global Supply Chain

During the past 70 years, the world experienced unparalleled growth due to globalization.

Ned Blinick

July 26, 2018

During the past 70 years, the world experienced unparalleled growth due to globalization.  World GDP increased from $2.25 trillion USD in 1967 to $80.68 trillion US in 2017.  This is roughly a compound annual real growth rate of 3.5% after taking into account inflation.  During that period almost every nation and hundreds of millions of individuals saw significant increases in their standards of living.Since the Second World War, the United States has been the main driver of globalization through highly accommodative trading practices and support for appropriate global political and economic institutions.  During that period, whenever there occurred a substantial global economic slowing, the United States almost single-handedly drove the world economy forward and shared its incredible wealth.  It opened its markets to the world, lowered trade barriers, and encouraged other nations to step forward.   The success of globalization was broad and deep being reflected in the dramatic rise of the global middle class and the parallel reduction in poverty; the fall in infant mortality; an incredible reduction in global starvation; and the meteoric rise of emerging economies - particularly, but not exclusively, China.Looking at the results of globalization, the adage "A rising tide lifts all boats" was clearly appropriate.

2018 - A Dramatic Challenge to Globalization and the World Economic Order

There is a hardening and reversal of trade policy from the current US administration resulting in punitive tariffs being levied against a broad range of products from a range of trading partners including - China, the EU, Canada, Mexico, Japan, Korea, etc.What the overall fallout will be is yet to be determined.  However, it is certain that customs and other government agencies are playing a constant and significant role in the implementation of trade policy.  Another certainty is that corporate trade compliance practices is becoming more important in guiding a company through these highly charged and tempestuous times, not less.

Trade Compliance - Constraint or Asset?

The approach a company takes to trade compliance has a major impact on its current and future success in navigating global trade.  The vast majority of companies that import or export have a limited understanding and very narrow perspective of trade compliance.  Most companies are agnostic to trade compliance.  They do not give it much thought.  These organizations go about importing or exporting as though it was a domestic transaction.  They are blissfully unaware of the rules and regulations that they operate under.Of those companies that do have a trade compliance department, most look on trade compliance as a necessary evil.  Trade Compliance is something that must be implemented to reduce the organization's exposure to regulatory risk.  It is a cost center and a constraint to the import/export operations.  Trade Compliance is the department that says "NO".  It is a constraint on the flow of inventory through the global supply chain.If this is still the view of an organization that sources or sells globally it is in for a very rude awakening.The trade landscape is shifting tectonically and it is creating massive disruption across broad swaths of industries: aluminum, steel, consumer goods, electronics, auto, aerospace, and so on.  As the global trade environment becomes less predictable a company must have the agility and flexibility to move rapidly and intelligently.  It needs to quickly interpret sourcing and transportation options and create actionable plans that optimize their unique supply chain. What compounds and aggravates the situation is that the company's competitors are in exactly the same position.  In this scenario, the company that understands the sourcing options from a total supply chain execution and landed cost perspective have a dramatic competitive advantage.Global trade is not going away.  The reason that global trade will continue to flourish is that, realistically, the United States does not have the trained and educated human resources available to insource all the low wage manufacturing jobs that are necessary to make the products consumers want a price they are willing to pay.  Products that are price sensitive and require human labor will continue to seek the lowest cost.  In fact, 80% of the manufacturing jobs lost in the United States and other industrial countries over the past 20 years have been to automation.  This means that global manufacturing will shift as trade barriers are erected against those countries that are operating unfairly in trade practices - like China.

Trade Compliance - a major supply chain asset in times of trade disruption

When a "tradequake"  measures 6-7 on the trade scale there is the likelihood of extreme damage.  The damage will be immediate, serious, and its effects will be broadly felt. The current trade disruption is that 6-7 reading "tradequake".  What we don't know is the severity of the aftershocks to the initial quake.A company affected by the "quake" will have to adjust its supply chains to minimize the commercial upheaval.  A company with the built-in capability to quickly evaluate its current exposure to the "quake" risk and initiate corrective action has an immeasurable advantage. In all likelihood, a company will require reconfiguring its supply chains based on supply availability, origin, and destination country.  This is a massive job but the benefits are meaningful and measurable.In this scenario, the Trade Compliance team plays a vital role in supporting the supply chain configuration by providing knowledgeable insight into the various tariff options that affect the regulatory impact and landed cost of the companies products.

Trade Compliance - a under-appreciated strategic trade asset

The trade environment that we are in today is extremely uncertain by recent historical standards.  We don't know whether this state is the new normal, but I strongly suspect that it is.  If it proves to be the case, supply chain flexibility and agility become critical strategic differentiators.Viewing Trade Compliance as a department to be tolerated only for risk management is under-appreciating its value.  Trade Compliance, when managed strategically, is an invaluable resource supporting engineering, sourcing, sales, and supply chain management.In times like these, when supply chain uncertainty is registering levels not seen in most or our life-times, having a solution that allows the supply chain to flex rapidly is not a is a necessity.  Trade Compliance plays an integral and vital role in supply chain agility.  It is a huge asset when deployed properly.