Trade compliance is a critical component in risk management strategy. Compliance experts proactively assess and mitigate risks to prevent operational, financial, and reputational impacts. They work closely with stakeholders across multiple functions to reduce all kinds of trade-related risks, notably impacting customs compliance and supply chain efficiencies. They actively assess the risks to cross-border trade from geopolitical tensions, environment and climate considerations, labor and human rights expectations, cyber-attacks, and supply chain volatility, such as described in more detail below.
Geopolitical Tensions: More so in recent years, geopolitics has become a key consideration for businesses evaluating investment risks and supply chain variables. While friction between key trading partners and even armed conflicts are not new, we have seen a marked increase in global tensions and the resulting use of financial mechanisms and trade constraints as tools to pressure opponents. Russia’s recent invasion of Ukraine demonstrated the ripple effects that a regional conflict can have on global trade. Impacts include increases in the prices of grain and other commodities, banking and currency exchange restrictions, and export bans of certain products to Russia.1,2,3 As recently as 21 March, Vladimir Putin and Xi Jinping met and issued a joint statement reaffirming their partnership and China’s support for Russia’s invasion of Ukraine. China and Russia’s alignment further exacerbates tensions with the United States as well as other countries that have denounced the invasion of Ukraine.4 These tensions may manifest in additional sanctions, continued export bans, and other trade-impacting developments. Environmental & Climate Considerations: Governments are also using trade policy to advance sustainability goals. For example, the European Union is implementing a carbon border adjustment mechanism (CBAM) with the aim to incentivize the production and import of goods made with sustainable practices. Under the current CBAM proposal, EU member states will implement a cap on imports of goods in carbon intensive industries. In early phases of implementation, importers will be able to buy or trade allowances for import of carbon intensive products. However, this provision will eventually be phased out to create stricter barriers to entry to ensure the reduction of carbon emissions. The legislation, if implemented in its current form, will create a barrier to entry for many industrial goods, such as steel and concrete.5,6 Tracking the implementation of CBAM regulations will be important to exporters that rely on the European Union as a destination market. Implementation of CBAM may mean finding more sustainable production practices or a shift to new export destinations to make up lost market share in the European Union. Labor & Human Rights Expectations: Investigations into human rights and labor issues in China, particularly in the Xinjiang region, have caused companies to reconsider importing goods that could possibly have been produced, or that contain inputs produced, using child or forced labor. Several countries, including the United States, United Kingdom, and Canada, are expanding existing measures to avoid complicity on the use of abhorrent labor practices. The United States has been strengthening measures to combat forced labor through an increase in U.S. Customs and Border Protection’s withhold release orders and passing new legislation such as the 2021 Uyghur Forced Labor Prevention Act. Customs authorities now expect greater visibility into supply chains, including where and how products are harvested and produced, and evidence that importers are doing their due diligence throughout their entire supply chain, beyond tier 1 suppliers. Trade compliance managers have an important role to play in helping business units find new suppliers or move their supply chain elsewhere. Technological Threats: Greater digitalization and reliance on technology has led to a greater risk of IP theft and cyber attacks on governments and companies alike. In 2017, AP Moller-Maersk, a Danish shipping company, experienced a cyber-attack that temporarily halted the company’s operations ended up costing it around $200-$300 million.7 In January 2023, a cyber-attack on Royal Mail, a British parcel and mail carrier, prevented exports by many small retailers to customers outside of the United Kingdom, resulting in lost revenue as companies refunded customers for shipments that could not arrive on time.8 Awareness that these threats exist and require effective countermeasures is important to protect against cyber threats and, if necessary, continue operations in the midst of a cyber attack. Supply Chain Volatility: Volatility has become the new normal in the global supply chain. Shutdowns at ports and manufacturing facilities due to the COVID-19 pandemic, resulting price volatility in costs of shipping due to increased demand during the pandemic, inflationary pressures on inputs used in manufacturing, and an increase in weather-related events, such as the shipping backup caused by the 2022 Mississippi River drought, have created numerous challenges for companies to monitor and act on.9,10 Many companies have begun to diversify their supply chain away from countries that pose geopolitical, labor or other risks, such as China, in favor of other markets with less associated risks.11 A dedicated team to review your company’s international operations and flag potential vulnerabilities in the supply chain is key to undertaking a comprehensive strategy to mitigate risk and ensure the smooth transit of goods across the globe. With more headwinds and complexity on the horizon, join us on 26 April to learn more from CTP’s webinar, “Identifying & Managing Cross-Border Risks: Risk Management at the Intersection of Trade Operations and Trade Policy.” Topics will include identifying cross-border trade risks beyond customs risks, assessing risks and cross-border impacts, and leveraging your role & expertise to help your company proactively identify and mitigate cross-border risks. Register for the webinar here. 1 “Saving Ukraine’s economy: the grain giant fighting for survival.” Financial Times, 22 March 2023. 2 “Russia’s December wheat exports close to record, experts say.” Reuters, 7 December 2022. 3 “Implementation of Additional Sanctions Against Russia and Belarus Under the Export Administration Regulations (EAR) and Refinements to Existing Controls.” U.S. Federal Register, 27 February 2023. 4 “Xi Jinping backs Vladimir Putin on Ukraine but holds out on Russian gas pipeline.” Financial Times, 21 March 2023. 5 “EU Reaches Intel Agreement on Expanded CBAM.” InsideTrade, 13 December 2022. 6 “Brussels agrees details of world-first carbon border tax.” Financial Times, 18 December 2022. 7 Moller-Maersk puts cost of cyber-attack at up to $300m.” Financial Times, 16 August 2017. 8 “Small businesses count cost of Royal Mail’s cyber-attack.” Financial Times, 25 January 2023. 9 “The tricky restructuring of global supply chains.” The Economist, 16 June 2022. 10 “A Shrinking Mississippi River Could Lead to a $20 Billion Economic Hit.” Bloomberg, 10 November 2022. 11 “Companies race to work around choke points in world trade.” Financial Times, 16 January 2023. 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