10 minute read 29 Jan 2021
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How a structured approach can help businesses control trade activities

By EY Global

Multidisciplinary professional services organization

10 minute read 29 Jan 2021

With trade risk on the rise, organizations are having to transform their trade function to deliver value across the broader business.

In brief
  • The COVID-19 pandemic has exacerbated the massive disruption to supply chains and governments around the world have introduced related stimulus packages, which have created more trade-related decisions to consider.
  • The trade function can no longer be seen as purely focused on operations and compliance—contributions to business planning and strategy are profound.
  • Leading businesses are taking steps to reorganize and refocus their global trade functions.

Getting things right in global trade has never been a sure thing. This is, after all, a world replete with local and regional geopolitical risks as well as natural disasters. But for a solid 20 years – the decades following the 1995 birth of the World Trade Organization (WTO) – global trade barriers, measured in tariffs, duties, trade restrictions, compliance and otherwise had been declining.1 But then things changed.

Today, global trade takes place in an atmosphere of instability, volatility, and protectionism. Whereas historically there was harmonization and an opening of world trade in the form of free trade agreements (FTAs), today there are events such as Brexit – which disrupt FTAs with Europe, the US and Asia. Added to this are changes to global tax regimes and the demand for greater transparency.

But that is just for starters. “Alongside this we see the US placing duties on steel and aluminum products – then the WTO allowing the EU to retaliate,” says EY Global Trade  Leader Jeroen Scholten. “Then there’s the ongoing hand-wringing over whether it’s Airbus or Boeing receiving the most in terms of allegedly unfair business subsidies. And not forgetting the expanding list of nations and industries getting caught up in US Section 301 investigations into trade abuses.”2

The COVID-19 pandemic has only exacerbated the situation. Not only have supply chains undergone massive disruption, but governments all over the world have introduced COVID-19 pandemic related stimulus packages, which have created more trade-related decisions to consider. “Overall the realization emerges that global trade risks and costs are greater than ever before – and they are likely to continue to rise,” says Scholten.

In this environment, it is easy for executives of global businesses to feel that they cannot control these powerful forces. But they can and they must. To achieve this, companies need to adopt a framework that allows them to control their trade environment.

The trade function evolves

Central to this transformation is the role played by trade professionals who can make a significant difference to the performance of the business. This includes reducing costs, streamlining processes, driving efficiencies, improving lead times, sharing intellectual property safely and keeping vital goods moving across borders. But there are often organizational challenges that can impede this.

“For decades, the global trade landscape provided foreseeability for companies,” says EY Japan Indirect Tax Leader Yoichi Ohira. “Since there were no major global disruptions such as the US-China trade tension, Brexit or COVID-19, global trade was often treated as a day-to-day operational matter, and not necessarily as a strategic matter that swayed major global supply chain decisions. As a result, global trade was a function that had limited resources and no home.”

But amid so much volatility, senior management began to notice the rise in risks as well as in planning opportunities. A particularly noteworthy moment of clarity for the C-suite occurred in January 2017, says EY Americas Global Trade Practice Leader Michael Heldebrand. “That’s when leaders in the US Congress were considering a border-adjustment tax with the idea that goods should be taxed where consumed, not where produced.” The goal was to encourage businesses to bring intellectual assets onshore.

Though never passed, the bill did in fact elevate trade discussions – and dramatically so, not only for US companies but for businesses around the world. As Heldebrand explains, “Suddenly, global C-suite executives were asking: do we know how much we export and import? Do we know the full ramifications of all of this? And from there they started calling into question where they were on tariffs, taxes and FTAs. But, for many, because their trade-related functions were so disparate and so operations-focused, none of the answers were immediately at hand or easy to obtain.”

Fast-forward to 2020 and the impact of COVID-19-driven lockdowns. Almost with no warning, entire nations or regions were shut down. “Workers were told to stay home and factories and offices temporarily closed,” says Heldebrand. “Everyone was given a crash course in the risks of global interdependency.”

On top of it all, add Brexit which came into effect on 31 December 2020, has introduced greater complexity into doing business with the EU and the UK. “It will take considerable work to re-evaluate and re-establish optimum trade flows even for companies operating outside Europe,” says Ohira. “For example, companies based in Japan can no longer rely just on a Japan/EU FTA, they now need to look at a Japan/EU FTA, a Japan/UK FTA, the upcoming UK-EU FTA and even CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) just to conduct trade with Europe. That is a lot of FTAs to manage out of Japan.

“So much disruption and change over so short a period has greatly elevated the value and visibility of a company’s capabilities in managing VAT and tariffs including FTAs. What’s more, the rise of volatility in trade regulations and rates is becoming critical, as indirect taxes such as customs duties, though difficult to see within cost of goods sold, can often exceed direct taxes.”

Against this backdrop, the trade function can no longer be seen as purely focused on operations and compliance. Today the contribution it can make to planning and strategy is profound – and so it makes sense for companies to take the needed steps to realize this value.

Today’s more strategic missions

Businesses today need to look to their trade functions for optimization across a range of challenges. Perhaps foremost of these is the need to look at the potential for origin shifting. For example, if goods are currently coming from mainland China, can they be sourced from the US or maybe Taiwan?

Another key consideration that can add real value is making sure certain goods receive their appropriate and optimal customs valuation. As Scholten explains, “When you are paying duties of 2%, it’s often much more of an operational issue – you want to be compliant. But when the duties are increasing – when it’s 25%, now there is great value in making certain you’re getting the correct valuation, so you pay the right customs amount that’s applicable to your product.”

Then there’s the shift from mere compliance to strategic business planning. “What happens when the role of the trade function becomes one of helping to strategize various approaches to the business? What if the company made a subtle change in sourcing or operations and could qualify for lower customs valuation? The point is that when costs become more material, valuation becomes a more value-added activity,” says Scholten.

This is a different mindset, and yet there are many ways things can go awry when the focus shifts from compliance and getting the goods cleared toward the more strategic mission of cost optimization.

A matter of resources

As the risks and costs of trade-related activities increase, so the perspective and priorities change. The question becomes, what is being done about organization, people, processes and technology, not to mention a mission statement for the corporate trade function?

Most crucial is the mission statement. Is this to be a compliance-focused function or a source of value-added activities? “If the latter, you need to look even more closely at the organization and its resources,” says Ohira. “You need to standardize and centralize what makes sense. And you need to make decisions as to how to more effectively manage your day-to-day activities so as to free up existing resources to focus more on value-added activities.”

A key method of optimizing resources is the adoption of leading-edge technologies as a means of reducing workloads. Much of what takes place in global trade operations is highly manual. But tools such as robotic process automation (RPA) and machine learning (ML) can be harnessed to achieve greater efficiency as well as confidence in associated processes.

A further method is to reduce the amount of effort required in maintaining an up-to-date knowledge of rules and restrictions in an environment of continuous, rapid and often significant change. This is difficult enough at the best of times, but in an era of rapid change, companies can fall far behind in a very short time.

For these reasons, there is a trend in global business toward freeing global trade resources by outsourcing the most hands-on, labor-intensive processes to a third-party provider. As Heldebrand explains, “The changes in global trade are moving so far and happening so fast that a large number of sophisticated companies are looking to third-party providers to take on a wide range of time-consuming, routine tasks.”

Third parties are well-positioned in terms of scale and scope to take advantage of not only leading-edge technologies but also to stay on top of changes to tariffs, VAT and FTAs. Some of the areas particularly well-suited for outsourcing include harmonized tariff classification; export control classification number (ECCN); FTA qualification; and restricted party screening.

By reducing the lower-value, repetitive workload, companies are freeing resources for far more strategic, value-add activities – they’re enabling executives to focus on fulfilling the strategic imperatives of the function,” says Heldebrand.

Going forward

The global trade environment is shifting from stable to volatile, from straightforward to complex, from low risk to high risk. Leading businesses are taking notice and taking steps to reorganize and refocus their global trade functions in order to more capably address these seismic shifts.

“A tariff or a clause in an FTA may just be viewed as a cost of doing business,” says Scholten. “But when you put one thing in motion like this, and you see how it can affect one thing and then another, there’s an opportunity to act and achieve a better outcome. That’s what we see in the evolution of the global trade function and what we are advocating for EY clients.” 

Questions for reflection

  • Are you overpaying VAT, duties, tariffs?
  • To what extent are you taking full advantage of FTAs or COVID-19 incentives?
  • How are you organized for global trade? Does your data – and your resources – reside in inaccessible silos?
  • Are you making fully informed supply chain decisions taking into account current conditions and likely expected changes in tariffs, VAT and FTAs?
  • Are you taking full advantage of the latest technologies such as machine learning and RPA?
  • Are mundane, repetitive tasks preventing your global trade team from performing against their most strategic and value-added missions?
  • Are you gaining the full measure of value that is available from a strategically focused global trade function? 

Summary

Trade tensions and global events have massively disrupted international supply chains, creating more trade-related decisions for businesses to consider than ever before. So much change has highlighted the value in managing import taxes and duties – especially as these “hidden taxes” may far outstrip a company’s direct tax bill. Trade professionals, supported by technology tools, can add substantial business value by reducing costs, streamlining processes and driving efficiencies. More than ever, it makes sense for companies to evaluate the strategic role of the trade function and take steps to realize its potential.

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By EY Global

Multidisciplinary professional services organization