Bring America’s Supply Chains into the Digital Age

Stimson Spotlight

Bring America’s Supply Chains into the Digital Age

Editor’s note: This analysis is part of 2017 Presidential Inbox — an ongoing Stimson Center series examining the major global challenges and opportunities the Trump administration faces during its first 100 days in office. Click here to read the full series.

By Eric Miller

THE CHALLENGE: From sluggish economic growth to fast evolving security threats, President-elect Trump will face immense challenges. With constrained financial resources, his administration will have to work smarter and develop innovative solutions to these complex problems.

Achieving breakthroughs will necessitate new ways of working with key partners. One priority area of focus should be on partnering with the private sector to make trade both more secure and efficient.

THE CONTEXT: After 9/11, one of the key mantras of the Department of Homeland Security (DHS) was to “push the border out” in order to interdict threats before they arrived on U.S. shores. DHS also partnered with the private sector in a wholly different ways, including through the launch of the Custom-Trade Partnership Against Terrorism (C-TPAT).

President-elect Trump should commit to partnering with the private sector to push the border out still further to the next great frontier — data. It is time to bring America’s supply chains fully into the digital age. So what does this mean?

International trade today is increasingly conducted through production networks that often have many levels of intermediate inputs. Policymakers and companies have shown growing interest in tracing the history of traded products, whether to verify their origin or compliance with an array of policy measures, such as prohibitions on child labour or intellectual property rights.

Yet, the hard truth is that many legal importers of goods into the United States know little about the extended history of their products and, thus, the comprehensive nature of their compliance with laws and regulations.

Why?

Because importers are making statutory declarations based on information they neither created nor verified. Rather, they are using the information provided to them by their suppliers. These suppliers, in turn, have provided information based on what they received from their suppliers.

While most import declarations are undoubtedly accurate, in a world of disaggregated supplier networks, it is hard to know for sure.

President-elect Trump and the U.S. private sector should develop a supply chain transparency initiative that would incentivize firms to invest in tools and systems that would allow them to truly know their supply chains. Participating firms would “visualize” their production networks and seamlessly share this information with U.S. Customs (CBP) in exchange for enhanced trusted trader benefits.

Many of America’s largest firms are already investing in visualization systems. Progress has nonetheless been slow, largely due to the associated costs. The vision would be for importers of the goods to be able to digitally monitor the inputs and practices used throughout the production process and to track their physical location at any time.

Despite these preliminary investments, CBP receives little of the data generated. That which it does receive is not fully useful because it is not generated in a standard format.

PRAGMATIC STEPS: Starting with the highest level of trusted traders, the government would develop a pilot supply chain transparency program. The program would reward firms that invest in advanced predictive analytics and other technologies that provide a comprehensive view of their supply chains. Participating firms would share their data and analysis in a standard format provided by CBP on a real-time basis. This would allow the authorities to assess security and customs-compliance risks more accurately.

In exchange for these investments and enhanced transparency, companies would receive an exemption from import-related penalties and remission of duties payable, except in cases of fraud, malfeasance, or gross negligence.

While this would be a departure from the existing punitive penalties model of customs compliance, given the amount of information that CBP would receive about their global supply chains and the financial benefits that they would enjoy, the companies would have a great initiative to comply and become “super trusted traders.”

Under this model, the companies — not the government — will build out costs for supply chain visualization. Consequently, they would want to be sure that they are receiving a solid return on investment. Additional benefits also would likely include improved supplier price arrangements stemming from greater transparency about who is doing what throughout the production chain.

For its part, the government would be recognizing the partnership with participating companies, “paying” them for their data and giving the corporate leaders of these firms an investment case for making the up-front investments in supply chain visualization tools.

If this partnership model works, it can be scaled out to a broader community of trusted traders. Improved security. Accelerated trade flows. With the right partnerships and technology sometimes you really can have it all.

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Eric Miller is a Nonresident Fellow with the Trade21 initiative at the Stimson Center.