"Can e-commerce help customs agencies fix old problems?"

" \r\n Can e-commerce help customs agencies fix old problems? \r\n \r\n \r\n \r\n\r\n While the rollback \u00a0of COVID-19 pandemic restrictions in some parts of the world may result in more shoppers returning to brick-and-mortar stores, the surge in online sales over the past two years marked a sea change in consumer habits, including growing demand for cross-border business-to-consumer (B2C) e-commerce. 1 \r\n\r\nCross-border B2C e-commerce could open new markets for businesses and help lower costs, especially for small and medium-size businesses. Consumers may also benefit from having more options to choose from and the ability to get bargains beyond their borders where tariffs don\u2019t apply. But what is potentially promising for businesses and shoppers is presenting yet another challenge to customs agencies across the globe. And the deluge of online shopping may only intensify. 2 \u00a0Conservative estimates project that the market for cross-border e-commerce will grow from $300 billion in 2020 to $1 trillion by 2030. In a bolder scenario, the overall market could total $2\u00a0trillion by the end of this decade (Exhibit 1). 3 \r\n \r\n \r\n \r\n \r\n \r\nMany customs agencies may struggle to take full advantage of the e-commerce opportunity for their economies. At the same time, they are wrestling with ongoing problems such as lost revenues from tariffs and taxes due to the misclassification and undervaluation of goods, as well as increased flows of contraband.\r\n\r\n \r\n \r\n\r\nHistorically, these issues have largely stemmed from the same problem\u2014an inability to sufficiently control and check growing volumes of post and parcels. And while countries around the world are piloting targeted solutions, as things stand, there isn\u2019t one that\u2019s designed to comprehensively resolve the three main issues we\u2019ve identified that impact multiple dimensions of customs activity:\r\n \r\n \t low-quality declaration information \r\n \t limited data sharing with logistics service providers \r\n \t overstretched customs inspection capacities \r\n \r\nWith a holistic approach in mind, we have analyzed three potential steps customs agencies could consider implementing over the next few years that are likely to help boost their capacity to facilitate smoother cross-border e-commerce flows, tackle long-standing problems, and anticipate future ones.\r\n The challenge for customs agencies \r\nCross-border e-commerce can involve far-flung participants, making search and coordination between countries more efficient and lowering costs for buyers and sellers alike. 4 \u00a0But these business opportunities can also present a challenge to customs agencies. There were an estimated 9.3\u00a0billion cross-border e-commerce orders in 2020, 5 \u00a0compared with approximately 3.2 billion in 2015, according to McKinsey analysis. Based on these findings, it\u2019s also estimated that parcel shipments, including consignments delivered as packages through express courier and freight services, represented roughly 40\u00a0percent of the 2020 total, while postal e-commerce orders shipped as lightweight mail of 2\u00a0kilograms or less accounted for the rest.\r\n\r\nBeyond growing volumes of post and parcels, customs agencies are also operating at the crossroads of shifting consumer purchasing habits and delivery preferences. Nearly eight in ten consumers globally shopped online at least once a month in 2021, according to the International Post Corporation. 6 \u00a0And the proportion of consumers shopping online at least once a week increased from 17 percent in 2019 to 22 percent in 2020\u2014gains that were maintained in 2021. 7 \u00a0While convenience factors such as delivery time windows offered to buyers remain a top priority, consumers also want to receive their orders quickly. In the United States, over half of consumers are interested in same-day delivery, with 20 percent of them willing to pay more for faster shipping. 8 \r\n\r\nBut as things stand, more than half of cross-border B2C shipments take eight days or more to arrive at their destinations (Exhibit 2). A key contributor to that lengthy delivery window is the time needed to clear customs inspections.\r\n\r\n \r\n\r\n \r\n \r\n\r\nThere are three main factors that can impact the clearance process:\r\n \r\n \t Low-quality customs declarations limit the scope for agencies to conduct risk assessments related to safety or fiscal compliance. \u00a0Compared with traditional customs declarations\u2014which typically include a variety of data points, such as the type of goods, value, and name and location of recipients\u2014e-commerce declarations are of lower quality. This is due to smaller buyers and sellers having limited knowledge of customs processes and minimal penalties associated with inaccurate declarations (providing incorrect values for B2C shipments, for example). Moreover, the relatively low-value, high-volume nature of individual B2C consignments makes it challenging for customs agencies to follow up with prosecuting specific cases. Low-quality declaration information\u2014when coupled with the huge volumes of e-commerce trade\u2014can make risk assessments difficult to implement. Ultimately, this means that government agencies at the border are often unable to enforce fair taxes and tariffs, and illicit goods are more likely to enter the country. \r\n \t Limited data sharing with logistics companies. \u00a0Poor integration between logistics service providers and customs agencies often leads to key data across the value chain not being shared, making risk assessments more difficult. At the border, government agents often make rapid risk assessments based on a limited set of declaration data that is frequently of low quality. Yet, logistics service providers such as fast parcel operators and carriers often possess more detailed information and tracking details about specific transactions. \r\n \t The COVID-19 pandemic and trade disruptions are further stretching already overburdened customs inspection capacities. \u00a0Customs agent absences due to the pandemic and supply chain disruptions are further straining customs inspections capacity, contributing to delays at ports and border crossings. In addition, some customs units at postal services don\u2019t have the necessary infrastructure to conduct full risk assessments of rapidly growing volumes of parcels, such as nonintrusive inspection devices and analytics-based risk engines. \r\n \r\nThese factors are not simply inhibiting the growth of cross-border e-commerce. Governments may be losing out on billions of dollars a year in taxes and duties from the misclassification and undervaluation of goods. The European Commission estimated annual value-added tax (VAT) losses in cross-border e-commerce of \u20ac7 billion due to noncompliance and other factors. 9 \u00a0Another study found that postal imports in the European Union had a VAT noncompliance rate of 65 percent. 10 \u00a0Small parcels sent by post or express courier are also a growing conduit for illicit goods. In a random sample test of third-party sellers, the US Government Accountability Office found that almost 43 percent of the items purchased online in the United States in 2018 were counterfeit. 11 \u00a0And the Association of Southeast Asian Nations e-commerce market experienced $260 million in retailer losses due to online fraud in 2017. 12 \r\n\r\nThese issues are expected to intensify in countries where a larger share of shipments may fall below the de minimis value threshold (the minimum value below which imported goods can enter a country without incurring customs duties and taxes). In 2016, the United States increased its de minimis threshold to $800, from $200. The move was designed to facilitate trade by ensuring low-value shipments are not delayed by formal entry or payment requirements, but it also led some sellers to split consignments into many smaller parcels to avoid paying taxes and duties. It also fed a surge in the volume of declarations, with the number of parcels processed in the United States growing from approximately 225 million in 2016 to 771.5 million in 2021. 13 \u00a0From 2018 to 2021, the number of total trade seizures, including intellectual-property rights, import safety, and other trade violations, grew by almost 64 percent. 14 \r\n Emerging efforts to tackle growing challenges \r\nAs customs agencies respond to the mounting challenges posed by e-commerce, various solutions have emerged. Countries are piloting new technologies, such as blockchain, Internet of Things (IoT), and AI, at different stages of customs clearance to improve monitoring compliance, transparency, efficiency, data sharing, and analytics.\r\n\r\nIn 2019, Dubai Customs launched a blockchain-based platform for e-commerce clearance to help facilitate cross-border trade. The platform is open to a variety of businesses, including couriers, e-commerce companies, and logistics firms. It enables the various entities involved in a transaction\u2014the shipper, the transporter, and government authorities\u2014to provide and access data related to an e-commerce transaction, enabling all of them to trace movements. 15 \u00a0Japan is working on an AI solution to automatically select e-commerce cargo for physical inspection collected from X-ray inspection equipment and then process it using machine learning. 16 \u00a0South Korea is testing how to mine data to identify which traders are splitting imports into multiple smaller parcels valued at below the de minimis threshold to avoid paying taxes and duties. 17 \r\n\r\nOther countries are partnering directly with logistics service providers. For instance, US Customs and Border Protection selected nine fast-parcel organizations and e-commerce companies to participate in a pilot in which they share cargo origin, content, tracking, recipient, and other information for all e-commerce, including shipments that fall below the de minimis threshold. 18 \r\n\r\nOther partnerships with the private sector are spurring new potential solutions and helping to support the effective implementation of existing procedures. In the Netherlands, Customs4trade (C4T), a customs-focused consulting company, is working with Dutch Customs to ensure its centralized software solution is fully automated and aligns with the new Dutch filing system, known as DECO, that automates declarations for e-commerce imports. 19 \u00a0Similarly, an increasing number of start-ups are developing solutions to ease the management of customs procedures. Estonia-based Eurora Solutions recently raised $40 million by creating a service that claims to allow e-commerce sellers to automatically apply correct VAT and duty rates for the goods they sell online. 20 \r\n\r\nWhile these approaches aim to either fix one or more issues, they are nevertheless piecemeal. Customs agencies seeking to take advantage of growing cross-border e-commerce opportunities, close the VAT gap, and help stem the flow of illicit goods may benefit from considering the following steps, regardless of how technologically advanced the agency is.\r\n\r\n Step 1: Conduct a diagnostic to assess the strengths and opportunities for improvement specific to the agency\u2019s needs. \u00a0An assessment can be done across six key dimensions of customs activity: trade promotion and facilitation, trade risk management, revenue risk management, data and IT infrastructure, operational excellence, and organization and change management. Ultimately, this diagnostic can help to build a fact base for the country to develop a strategic plan (Exhibit 3).\r\n\r\n \r\n\r\n \r\n\r\n Step 2: Develop a transformation plan over time to tackle key challenges. \u00a0This could be a multiyear, end-to-end transformation strategy or a targeted transformation on a specific dimension, with phased pilots aimed at the most feasible opportunities for maximizing compliance and improving operational efficiency. Thinking through interactions and system linkages with other government agencies, as well as private-sector players such as shipping and logistics companies, are likely to be critical to the plan\u2019s success.\r\n\r\n Step 3: Launch transformation initiatives tailored to specific needs across the core dimensions of customs activity. \u00a0This could include, for example, the following:\r\n \r\n \t Introduce reduced data sets for low-value consignments to make it easier for importers to submit required data for e-commerce transactions\u2014and by extension improve the quality of information received. This could be inspired by existing efforts such as the European Union\u2019s H7 import declaration data set. \r\n \t Enhance data sharing with logistics service providers such as fast-parcel operators and express carriers to ensure that teams are focusing their energies on the highest-risk consignments. By linking existing customs risk engines with IT systems run by logistics service providers, customs agencies could access more real-time data from across the supply chain. This would enable them to focus on the consignments that are most likely to be a risk, while facilitating trade for lower-risk declarations. \r\n \t Pilot new technologies using advanced analytics, machine learning, blockchain, and IoT to improve the overall risk-assessment process (see sidebar, \u201cThe Netherlands and European Commission: Using AI and data analytics to support customs declarations\u201d). Agencies could also focus on reducing basic noncompliance errors from the beginning of the e-commerce shipping process by introducing automated declaration management checks before submission. \r\n \t Expand Authorized Economic Operators or trusted trader programs to a wider array of traders to better inform risk assessments while facilitating trade. A tiered trusted trader program could include small and medium-size companies that can provide customs agencies with data for traders beyond the largest corporates that are typically part of such programs. This tiered approach could enable resource allocation toward B2C e-commerce consignments. \r\n \t Automate workforce planning to increase the productivity of personnel as they tackle exponential declaration growth. To drive a culture of success, agencies could combine qualitative criteria with effectiveness-based KPIs, such as measuring the success rate of physical interventions. This could be supported by a \u201ccontrol tower\u201d\u2014a central team in charge of progress review and delivery\u2014to provide real-time situational awareness for on-the-ground staff. \r\n \r\nThe cross-border e-commerce market is continuing to grow and evolve, impacting customs agencies and challenging operations with significant implications for businesses, consumers, government revenue collection, and risk management.\r\n\r\nWhile customs authorities are already working to address these issues, a more holistic approach could help them to strike the right balance of efficiency and security when managing cross-border flows. Putting innovation at the center and working closely with other public- and private-sector stakeholders will likely be critical for helping customs agencies manage the growth of e-commerce shipments."

"Can e-commerce help customs agencies fix old problems?"

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