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Why a balance between e-commerce trade and mitigating risks is required
In this episode of the NextWave Global Trade podcast series, Brenda Brockman Smith and Dan Dreyfus share their insights on e-commerce and the impact of customs control on e-commerce firms.
E-commerce growth is accelerating and every year there is tremendous development in the sector. The United Nations Conference on Trade and Development (UNCTAD) reports that in 2018 business-to-consumer e-commerce was valued at more than US$4t, proving that the market is extremely large and growing rapidly. But are countries prepared to facilitate this growth?
E-commerce rules and the treatment of e-commerce vary from country to country. And in some cases, this difference is considerable and wide. Even with similarities on paper, or in law, countries handle packages and e-commerce very differently. It is easy to think about e-commerce as being a globally cohesive system or ecosystem where consumers everywhere can make purchases online and receive packages overnight. But in reality, it is far from it.
Key takeaways:
The growth in e-commerce presents several new opportunities for international business, but it also opens the doors to counterfeiters, criminals and other trade violators.
In many countries, modernized systems capable of processing the high volume of e-commerce trade with risk assessment don’t exist at the moment.
Customs administrations around the globe need to have much greater visibility into e-commerce supply chains.
For your convenience, full text transcript of this podcast is also available.
Justine Greene
Hello and welcome to the podcast series from EY Global Services. I’m Justine Greene, and with global trade experiencing such uncertain times, we’ll be looking at how organizations can respond to survive and grow. Each episode we’ll be joined by expert guests to share their opinion and insight on our theme. Our focus this time is e-commerce and its impact on customs control. Joining us again from Washington, DC, are Brenda Brockman Smith, former Executive Assistant Commissioner for the Office of Trade, US Customs and Border Protection. Hello, Brenda. Welcome back.
Brenda Brockman Smith
Hello, how are you?
Greene
Very well, thank you. So glad you can join us. And, also from the Washington area, Dan Dreyfus, Global Trade and Customs Leader at EY. Hello, and welcome again Dan.
Dan Dreyfus
Hello, Justine. Hello, Brenda. Great to be with you again. Brenda, thanks so much for spending time with us on this really important topic. Looking forward to the conversation.
Smith
As am I, Dan. Thanks very much.
Greene
Now Brenda, e-commerce growth is accelerating. Just give us a quick overview of the key factors behind this change in global trade.
Smith
Justine, that’s not an understatement at all. What we’re seeing every year is tremendous growth in e-commerce. Most of those packages are very low value. In fact, 93% of what we saw were valued at less than $200, and over half of those shipments are valued less than $10.
Greene
What are the most valuable e-commerce commodities at the moment?
Smith
I would say consumer electronics, especially during the pandemic as folks have looked to increase their technology and really relied on things like computer peripherals and phones. I would say that electronics probably are the most valuable.
Greene
And Dan, how widely do e-commerce customs formalities differ around the world? Presumably, some countries are more liberal than others.
Dreyfus
That’s a great question, Justine. I think it’s really easy for us to think about e-commerce being a globally cohesive system or ecosystem where consumers everywhere can make purchases online, receive it overnight or whenever it is that they’re looking to get it, or even expect same-day delivery we’re starting to see more, but it’s really far from it. And despite the focus on lower-value products, and as Brenda just said, such a preponderance of them and being a consumer-driven aspect of the global trade arena, business-to-consumer e-commerce represents, by some accounts, 12% or more of the global trade in physical goods. UNCTAD [United Nations Conference on Trade and Development], for example, is reporting that in 2018, business-to-consumer e-commerce was valued at more than US$4 trillion, so the market is extremely large and important and growing, and your question really starts to get at whether countries are prepared to facilitate that growth, whether there are impediments to that growth even. So, e-commerce rules and the treatment of e-commerce do differ, and in some case, really considerably and widely, even within with similarities on paper, or in law, countries handle packages and e-commerce very differently, and even inconsistently within the same country sometimes between ports, even shipment to shipment, they are very different .
Greene
Brenda, how urgent is a unification of customs procedures globally?
Smith
Justine, I think for two reasons, we’ve got to be focusing on this now. I think the first concern is that customs administrations around the globe need to have much greater visibility into e-commerce supply chains. There’s a lot of new players, new platforms, new logistics facilitators, but most particularly, new sellers who may have never engaged in trade processes before, and suddenly they’re sending goods all around the world. And right now, because of the low value of the shipments and the fact that those have tended to be a little bit off customs administrations’ radar screens because they’re not worth a great deal of money. We don’t have a lot of information about those shipments, and so being able to identify the risk level associated with the small packages is really important.
Greene
Well, let me ask you both, how would you like to see e-commerce be standardized around the world?
Smith
One of the things we have to be very careful of is to recognize that government’s interest in e-commerce is not just about the collection of duties, taxes and fees. It’s not just the revenue associated with those packages, but more importantly, the focus needs to be on safety and security. We have a lot of consumers that right now they don’t know where their goods are coming from, and it really is incumbent on the sellers and on the facilitators to ensure that goods are not counterfeit, that they meet consumer safety standards, and that consumers can rely on them, so I think that that’s a key factor to the global standards.
Greene
And Dan?
Dreyfus
Let’s start with the consumer expectations for next-day or same-day delivery continue to increase —we’ll call it expedited delivery for lack of a better way to put it right now. And in the global environment, that only happens with the things that we’re talking about — streamlining of procedures, harmonization. The WCO’s framework is going to be really important as it gets implemented; transparency around it has to be communicated obviously. And in many countries, modernized systems capable of processing the volume with risk assessment just don’t exist right now, and, of course, the important piece for the consumer is ultimately value. If all of that doesn’t provide something that is a value for them, they just won’t purchase it. So, there’s one more challenge looming as well, and it’s likely it’s going to be the lifting of the moratorium on digital taxation. We don’t exactly know where it’s going to go, but it looks like that’s what’s going to happen, and it’s going to have implications for e-commerce. It will add to the complexity to include the payment and collection of taxes and how each country applies those taxes or interprets them, and it’s going to impact the value. We just talked about not just the cost, so not sure that standardization alone is needed, but the clear communication of differences in requirements is going to be one of the keys to the growth of e-commerce, and it’s clearly here to stay. It’s not a fad, so it’s going to continue to evolve.
Greene
OK, well next, we’ll talk more about security and risks affecting e-commerce. So, Brenda, can you give us an idea of the type of illegal practices that e-commerce trade has been susceptible to recently?
Smith
Justine, the growth in e-commerce presents a number of new opportunities for international business, but it also opens the doors to counterfeiters, criminals and other trade violators who are looking to make a fast buck. In fiscal year 2020, CBP seized approximately 27,000 shipments that were counterfeit goods. We saw most of these seizures happen in the express and mail environments, and likely those counterfeit shipments were primarily small packages. We have seized over 177,000 test kits that the FDA prohibits because they don’t meet consumer safety standards. We’ve seized over 30 million counterfeit face masks. We’ve also put our hands on nearly 45,000 counterfeit or prohibited pharmaceuticals.
Greene
Well, let’s look at e-commerce organizations and their role in risk assessment. Dan, what’s been learned, and what needs to happen now?
Dreyfus
So, companies deal with risk in many, many different ways. There’s some very obviously basic commonalities, and I think in global trade, one of the things they always have to contend with are the things that Brenda just alluded to. So, there are people who are looking to subvert the brand or violating intellectual property rights or other illicit behavior. Risk assessment is going to need to account for the going concern of businesses’ financial risks, risk that they deal with on a regular basis as we’ve talked about. But while e-commerce offers other opportunities, they are going to have to create strategies for how to deal with that, not just rely on customs administrations to handle risk, obviously, but they bear a big responsibility for it. Consumer awareness plays a role in what corporate risk is ultimately, and surveillance, is going to be able to do. The activism around things like, for example, forced labor, which was the topic of our first discussion. It’s not that e-commerce is immune to those by any stretch. In fact, they still have to account for those types of things and be cognizant of those types of pieces and presence in their supply chain, so e-commerce platforms are going to need to find ways of handling gray areas, including things like package theft or pilferage and risk associated with returning of merchandise on a global scale, which is not something that every consumer in the world has been either privy to, and may not even be allowed by some laws, but how do we handle goods being returned across borders and what opportunities those offer for illicit behavior as well.
Greene
And Brenda, your thoughts, including how’s the pressure of fast order fulfillment impacting risk assessment?
Smith
From the government perspective, what I think is important to recognize is that the e-commerce entities need to have a seat at the table. They have the best information about the way that supply chains are evolving, as well as a good picture of what the art of the possible is. So, let’s talk a bit about what that means in terms of data. E-commerce entities are by and large very technology cutting edge, and the information that they have available to them and the way that they can share that information, I think, is something that they need to lead forward on because it is only through using that data, sharing it and providing the tools that can be used to assess the risk will we be able to work together really as an ecosystem to support safe and secure but prosperous e-commerce.
Greene
And when it comes to sustainable industry success, what should a healthy balance between legitimate e-commerce trade and mitigating the risks look like?
Smith
think transparency is key, and it goes to the responsibilities of US consumers to, as we often say, buyer beware. But to know who they’re purchasing from. I also think that sellers need to recognize their responsibility to that consumer, not only to provide a product that’s fast, but one that is safe and secure.
Greene
And Dan, your thoughts, what does a healthy balance look like?
Dreyfus
Ideally, I think, you know, obviously Brenda covered a lot of it, but I think ideally trade and customs policies, customs technological capabilities and procedures evolved to the point where from a trade perspective, it’s fairly immaterial whether a shipment is e-commerce or more traditional, and that may be overstating it a little bit. The balance is going to continue to evolve, and I think depending on one’s perspective, there’s never going to be this kind of fine tipping point. We’re never going to reach that optimal point, but it’s the nature of global trade and so many factors and variables to consider that there certainly can be greater transparency, and perhaps that’s a better way to frame it.
Greene
All right, well, to round off this episode, we’ll focus on technology’s role in e-commerce. Well, transforming technologies are not only changing consumer behavior, but also producing huge amounts of data. Brenda, what is the US Government doing to harness and best use all this information?
Smith
Justine, Customs and Border Protection has been long a proponent of, and a collector of, data really going back to the early 1960s. Last year, for example, we had hundreds of millions of import and export transactions about which we collected information relating to the shipper, the manufacturer, the US importer, and the port of entry it arrived at. But one of the things that we found over the last couple of years is that there is not a great deal of detailed knowledge about global supply chains. I would call them third or fourth tier suppliers in those supply chains. But yet, there’s an increase in the demand for a significant amount of transparency that’s really caused us to invest in two areas. The first area really is around the legal framework. And that is for us, centered on the development of the 21st century customs framework effort, which is really an overall review and modernization of the statutes, the regulations and the policies that govern international trade coming into and going out of the United States. I think the other effort that we have undertaken is really a review of the available technology. Tremendous strides in the development of things like distributed ledger technologies or advanced analytics, and at CBP, we’ve been working with both the private sector on the technology development side, as well as the technology application side. So, we’ve done a number of tests around using distributed ledger technologies like blockchain to address issues like food safety or petroleum tracking, which have been traditional operational challenges for us, but really where there’s a high value in coming up with solutions that ensure that there is transparency and that the rules are followed.
Greene
And Dan, when it comes to compliance and efficiency, can the sharing of data between government and e-commerce operators be more open?
Dreyfus
The short answer is, I think that yeah, there can be better data sharing to lead to greater efficiencies. As long as rules are transparent and understood, commerce can adapt to the differences that they do that, on a routine basis already. There are discrepancies or differences across different administrations today in all kinds of trade transactions. So, it’s not optimal, but it’s the way global trade works. I think we’ll start to see some elements that are going to drive the need for, if not better sharing of information, perhaps, greater standardization. And countries are always and should always default to their sovereign rights in terms of the ways they handle the trade, and in our case, and for this discussion e-commerce, obviously. So, governments may find ways to get to greater collaboration around e-commerce, and if being more open about sharing data doesn’t impinge on sovereign rights or the abilities of customs or other agencies to conduct their proper risk assessment and management, then the business imperative will drive to more openness.
Greene
Well finally, in an ideal world, how would you both like to see e-commerce trade be conducted globally by the end of this decade?
Smith
If we build in transparency, we will provide for that risk assessment and risk mitigation. I think that needs to happen on the part of the government as well as on the part of the private sector. I think we all need to keep in mind that trade flows need to be efficient, and as Dan noted, that we do not necessarily have straight lines. But I think keeping our eye on the goal of efficiency will ensure that trade delivers low-cost solutions that are available to citizens around the world. And I think the third thing that we are looking for is to continue to support flexible and agile supply chains. You never know where the disruption is coming from, the next disruption is going to come from, whether it’s a pandemic, whether it’s a natural disaster, such as a storm or a tsunami, but I think having the ability in building resilience into supply chains is really critical to ensure that trade delivers on its promise.
Greene
And Dan?
Dreyfus
I think we’ve got to think a little bit almost kind of, where we started this conversation, which is maybe think about e-commerce being more of a globally cohesive ecosystem and where consumers really can purchase online and receive overnight or perhaps even next day or same day, and that puts a lot of pressure on a lot of points and nodes throughout the ecosystem, so a lot of evolution that can take place, and there’s so much that goes into achieving all of that, and elements that transcend e-commerce as a subject or practice, but our keys to the expansion, so things like open skies agreements that don’t exist everywhere for allowing for the freer and more-efficient movement would be one element that could start to affect the type of change has some different potential impacts on customs procedures, etc., and clearly e-commerce can exist without open skies agreements everywhere. It just may not be able to reach all interested consumers, so again consumer interests, behaviors, demands, etc., may drive some changes that otherwise we haven’t been able to arrive at. And clearly, infrastructure can have an impact as well, so the build-out and access to consumers in remote areas is going to be a big thing. Technologies like drones, which may help to leapfrog the need for some of those transportation-related infrastructures, but clearly some advances that could see a very significant change in the next several years. But one thing is for certain, and that’s that if the current growth rates in e-commerce continue, we’re going to see yearly volumes roughly equal to 30 or 50 packages per person on earth per year by the end of the decade. And that’s a pretty significant number. That’s packages, and then somewhere between 300 billion to 500 billion. There are going to be advances in manufacturing distribution that are going to bring even more potential sellers online, driving price points of what may be previously were not de minimis or low-value shipments into more affordable ranges. So, we’ve got also, the potential for needing to account for how we do things that didn’t fall into those categories that might now be may be offered at price points that meet those. The reinvention of supply chains, and we’re going to see consumer behaviors and buying patterns of all of this as well, as people become more comfortable, more people come online, etc., and we’ll see changes, obviously in policies and agreements. All of this points to significant pressure to adopt new and better ways of processing e-commerce.
Greene
OK, well, it’s been a fascinating conversation. I do hope you’ve enjoyed it. Thanks to both our guests for sharing their thoughts and knowledge. Brenda, thank you.
Smith
It was a pleasure. Thanks so much, Justine.
Greene
And Dan thanks to you, too.
Dreyfus
Very much a pleasure. Thank you so much, Brenda. Thank you so much for your conversation.
Greene
Now, do join us again while we continue to discuss global trade with our expert guests. Also, you can subscribe to this series, so you won't miss an episode. From me, Justine Greene, Brenda and Dan, thanks for listening and goodbye.
