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Will TPP set a new standard for the next generation of FTAs?

Will TPP set a new standard for the next generation of FTAs?




by Alex Capri, Visiting Senior Fellow, NUS Business School


Washington promises that the Trans-Pacific Partnership (TPP) will raise the bar on “good governance” throughout global supply chains by placing an unprecedented focus on labour standards, environmental protections and other socially responsible trade practices.

The full details of the TPP agreement have recently become public, and what is immediately evident is that this FTA is possibly the most complicated agreement in decades. At over 1000 pages long, there is a great deal on new standards for cross-border trade, but also a glaring lack of uniformity and clarity when it comes to how countries will enforce these rules.

The TPP is a watershed FTA, but not just because of its social values. Its sheer complexity will require a new approach to global trade management. If businesses do not adroitly leverage digital platforms, collaborative networks and big data, it is difficult to imagine high levels of compliance within the TPP framework. Governments will also need to significantly evolve trade facilitation capabilities.

Trade Compliance 4.0

Four powerful trends are impacting trade compliance, and will continue to do so in both the near and long-term:

(1) Social responsibility and good governance have become core elements of a company’s value chain and must be carefully measured and managed.

(2) Digital technologies and data management capabilities have converged to create an environment that enables businesses to gain end-to-end transparency in global supply chains, all the way down to the most granular level.

(3) To improve both trade facilitation and compliance, customs agencies will increasingly need to share data and collaborate with key stakeholders, including importers, exporters, manufacturers, NGOs and 3PLs.

(4) As the TPP and other FTAs continue to eliminate customs duties, the number of non-tariff measures (NTMs) will increase as customs regimes attempt to enforce new standards and controls.

A well-rounded trade compliance program, therefore, must take into account the above while continuing to manage the “traditional” customs compliance matters such as valuation, tariff classification, rules-of-origin, and export controls.

Leveraging Collaborative Networks

The Internet provides instant access to a wealth of trade compliance tools. In the wearing apparel industry, for example, companies share best-practices and gap-analysis templates, questionnaires, scorecards and key performance indicators (KPIs) for the vetting of suppliers and manufacturers—all with an emphasis on good governance.

NGOs also provide resources and data that enable the public to evaluate, screen and hold accountable suppliers, manufacturers, and others, including government officials. The Gap Inc. and Levi Strauss, both billion dollar clothing retailers, routinely post the results of manufacturer and vendor reviews on the Internet—which are then referenced by other apparel brands that share the same supplier base. The naming and shaming of “under-performers” serves as a strong deterrent to potential violators and drives a culture of compliance across the wearing apparel industry. A successful trade compliance programme, therefore, must be well-connected to virtual networks and relevant on-line communities.

Big Data and Trade Compliance

To achieve end-to-end transparency throughout a supply chain, trade compliance managers must have access to the entire motherlode of company data. This means bolting on Global Trade Management Systems (GTMS) to existing ERP programmes so that key data can be extracted from functions such as procurement, manufacturing, engineering and design, sales, logistics, and warehousing—even after sales services. Isolated data sets can then be screened for compliance risks or to spot trends or opportunities.

Jaguar, an automobile company, and L’Oréal, the world’s largest cosmetics company, currently analyse data-streams to track the CO2 and H2O footprints of individual products, from the initial input of raw materials, through the fabrication, transportation and distribution processes. This progression links thousands of data points between intelligent machines and people, all inter-connected through digital networks. Both companies are continually leveraging data to drive improvements in sustainability.

The good news for GTM is that the big data revolution that is driving environmental sustainability objectives has resulted in a positive spillover for customs compliance. It is now possible to glean previously “invisible” data from all phases of the supply chain and proactively vet that data for information that would allow proactive risk management of such thorny topics as dutiable assists, commissions, royalties, proceeds and FTA rules of origin—all areas that have been extremely difficult to manage in complex international value chains.

Trade Facilitation 4.0

If the TPP lives up to its promises of driving good governance standards, this will require the sharing and screening of unprecedented amounts of data between customs agencies and third parties.

Getting to Trade Facilitation 4.0 will not be a top-down government driven initiative. Instead, customs agencies must partner with key stakeholders in the trade community, including manufacturers, exporters and importers, logistics companies, trade associations and NGOs. Bringing Trade Facilitation 4.0 to fruition will require the involvement of data aggregators and facilitators that can capitalise, in a collaborative role, on building the right platforms, protocols and applications for a functional trade network.

Just as social media has rewritten the rules in the realm of e-commerce, effective trade facilitation must exploit low-cost, free flowing and transparent data that is shared between key stakeholders. Data regarding customs clearance timeframes for tariff classification headings, for example, should be made public, on a daily or weekly basis. Importers, exporters, and their agents must be able to report unreasonable cargo delays, non-tariff barriers, and post general comments about the quality of trade facilitation services– in real-time. Customs agencies should post updates on key rulings, procedural requirements and dispute resolution processes, and then be held accountable by the trade network.

Building on the AEO Programme

There is currently a framework in place that could serve as a building block for the Trade Facilitation 4.0 model. Administered by the World Customs Organization, the Authorized Economic Operator (AEO) established custom guidelines on integrated supply chain management. Its purpose is to ensure that the entire supply chains are secure, safe and fully monitored. Manufacturers, exporters, shippers, warehouse operators, intermediaries, consolidators, transportation companies (even port facilities) and importers are screened and vetted against an extensive list of requirements.

To pass the AEO qualification test, businesses must adopt best practices around supply chain security management, which includes adequate electronic data interface systems between external parties. This includes transmitting key data to customs long before cargo arrives in port, which allows customs agencies to “pre-clear” the cargo.

Pre-clearance allows customs organisations to intelligently focus on important issues, and not waste time on needless cargo exams. Additional time and resources can then be allocated towards effective enforcement of non-tariff measures (for example, identifying and stopping importations obtained through illegal logging or fishing practices), and working with stakeholders to eliminate non-tariff barriers.

Building upon the AEO model towards a Trade Facilitation 4.0 architecture would serve the TPP member states well. Trade compliance professionals would also be wise to leverage emerging IT trends and embed themselves in emerging collaborative networks.

Not only will this lead to effective trade compliance under the TPP, it will lay the foundation for a well-rounded and robust GTM programme in any company.