Lessons learnt from COVID-19: the cross-border part of supply chains is overlooked, vulnerable and complex. What can be done about it?

April 2020

One of the main recurring themes of the COVID-19 response has been border, border and border. It is discussed on the global level by the World Customs Organisation (e.g. collective effort to harmonise trade policy responses) as well as on the national level (e.g. export bans, acceptance of copies of preferential rules of origin certificates). Businesses lucky enough to have goods to trade during the pandemic are having to respond rapidly to previously overlooked weakness in their supply chain, exposed and exacerbated by COVID-19. But for all businesses trading internationally, now is the time to do something about it.

Overlooked

In ordinary times, businesses tend not to pay much attention to the cross-border aspect of their supply chains. Vast attention is given to the procurement and management of the third party actors with key roles to play, namely suppliers of goods as well as service providers for transportation and customs brokerage. However, the number of businesses with a specialised team handling activities happening at the cross-border points of the supply chain is outnumbered by the ones without. This observation is based on experience advising countless businesses over the last few years, and it stands true regardless of the size of the business and industry in which it operates (bar a few highly regulated ones such as aviation and pharmaceutical).

There are many reasons for why the cross-border part of supply chains is so overlooked in comparison. Perhaps it is a result of long-term over-reliance on third-party actors to carry out the necessary activities with limited instructions from the business itself. This has resulted in a lack of insights/knowledge of what is happening at the border. Take a look at your own business, do you know the exact volume of goods that are crossing a border at any given time? Do you know how much customs duty is paid annually?

Knowledge about what is happening at the border to how many of your shipments is key to combating a global supply chain disruption, such as the one happening now. How are businesses supposed to respond when they do not know what the problems are, or where they are?

COVID-19 has exposed this weakness. Policies at the borders are changing fast. In the UK, HMRC already published several updates on easements at the border to keep goods moving. Similarly, on the EU level, new rules and guidance are introduced to help control/facilitate the flow of goods in and out. Businesses without in-house customs/trade teams or detailed insights on the cross-border part of the supply chains are reactive rather than proactive. This is not a surprise: how would businesses know which guidance applies to them if they don’t know what is happening at the border?

Vulnerable

The cross-border part of the supply chain is also the most vulnerable part. The place where one jurisdiction stops and another begins is a melting-pot of trade policy, tax and compliance. The territories on each side of the border set their own rules, with their respective customs officials collecting taxes and carrying out checks in accordance with these rules.

For businesses, this is the most unpredictable part, with many things being out of their control. Trade policies are domestic matters (with some exception, e.g. the EU) and are subject to change, especially during unconventional times, such as a pandemic. Businesses best prepared to deal with this are ones with agile customs functions to help goods move through this part of the supply chain. For example, shipments could be selected for documentary or physical checks based on risk profiling. Depending on the type of checks, there could be a delay in getting the goods customs cleared, which may, in turn, result in late delivery of the goods to a customer. While it is not possible to know exactly what risk factors would trigger such inspections, it is possible to anticipate and prepare for them. The ability of a business to do this depends on its customs function capability.

Paying the right amount of taxes (e.g. import VAT and customs duties) on time should not be the only concern of businesses. It is important for businesses to see this as a strategic part of the supply chain and not just an administrative burden.

Complex

The complexity of cross-border movements should not be underestimated. Mistakes made at the border as a result of customs clearing the goods as quickly and hassle-free as possible can come back and haunt a business for years to come. In the UK, customs officials can select shipments from three years ago for customs compliance audits. These audits can rob a business of already strained customs resource (if any) by dragging on for weeks. Addressing these complexities early will not only mitigate the risks of audits, but it would also help goods flow through borders smoothly and in a compliant manner.

During a pandemic, it may be tempting to prioritise rapid clearance over accuracy and compliance. After all, the aim of the supply chain is to get goods from A to B within the agreed timeframe. Nevertheless, mistakes made in the process can be costly later on. For example, an incorrect commodity code or customs procedure code used on the import declaration may get shipments straight through customs, but once the dust has settled, compliance audits will come back and when these errors are identified, any customs duty underpaid will have to be estimated and paid. Penalties may follow too, potentially damaging a business’ compliance profile. This is a risk that should not be disregarded.

The level of complexity differs by industry. However, based on experience, businesses with long lists of SKUs from a range of suppliers in different countries (e.g. consumer goods or food and drinks importers) are the most likely target for a customs audit. Nevertheless, in the UK, HMRC will usually carry out at least one compliance audit every three years for each importer. Therefore, it is important for all importers to identify the relevant complexities in the supply chain at the border as soon as possible, and build a robust customs function to tackle them.

What can be done about it?

COVID-19 has been a wakeup call for businesses to rethink the resources needed to manage the cross-border part of their supply chains.

Preparation is key. As soon as you know the upcoming shipment schedule, the goods can then be classified (i.e. allocation of commodity code). Instructions to customs brokers for the customs clearance of these shipments can also be written, ready to be shared when the time comes. For exporters, find out whether your customer is the importer or if you are the importer in the destination country. If you are responsible for the import clearance, make sure that you stay up-to-date with the local customs developments. If your customer is the importer, you can help them prepare the data required to import, for example, by giving them information to help them determine the correct commodity code for the products.

Businesses are advised to examine the resources available to do these activities, identify who in the business is ultimately responsible. Then the business would be able to decide whether what it has is it sufficient, and consider what is needed to make the processes and controls better.

With all this global disruption to supply chains, businesses are making adjustments. It is important to note that when changes are made to the supply chain, a customs specialist should be consulted early on to avoid nasty surprises when it is too late. For example, if it has been decided that a different legal entity within a group should act as the importer, consider whether it has the right customs registrations or authorisations. If not, consider how long it would take to put them in place to make the new supply chain work operationally.

While mistakes are near impossible to eradicate, businesses can mitigate the potential consequences (e.g. penalties) by continuously monitoring the relevant cross-border activities. Voluntary disclosures of mistakes identified made to Customs can help build a compliant image of the business as well as reduce the likelihood of a penalty. In light of Brexit, many businesses have already chosen to make improvements through the process of applying for the Authorised Economic Operator (AEO) status in the UK. Here, the means to an end can be more valuable than the end itself. AEO is a mindset rather than a simple certification. It helps the business as a whole, from procurement to transport teams, to treat the cross-border aspect of their supply chain with the appropriate care.

Building international supply chain resilience starts at the border.