Smart Borders 3.0: Border Management in a Globalized World

Global Trade 2.0 Series (article II)

To meet the challenges of a complex world of trade getting more complicated every day, we need to address the enigma of borders. In a modern integrated value chain, commodities cross borders multiple times already during production cycles. The cost of moving products to end consumers is higher than the production cost. We need to talk about what I use to call the ‘black box of the border’. How are Government agencies performing their prioritized border management assignments to serve and protect the people? How are Government agencies applying coordinated border management to maximize efficiency?

Many of our current borders are designed using models that were created in 1970s, long before we had access to global trade data and advanced border technology.? ?

When I coined the term Smart Borders 2.0 in 2017 as part of a report for the European Parliament on post-Brexit borders, no one could have imagined the speed at which the concepts and elements would be adopted. Smart Borders 2.0 has led to the faster and more predictable movement of goods across borders driven by increased use of AEO, deeper international cooperation, and the adoption of already available technologies.

The period since the launch of Smart Borders 2.0 has been marked by a series of challenges for international trade and for governments. The most obvious of these was the COVID-19 pandemic. One-off incidents such as the blockage of the Suez Canal in 2020, and longer term conflicts have all highlighted the importance of predictability and resilience in supply chains. The mainstreaming of e-commerce into supply chains and recent high inflation have also changed global trade. At the same time, more stringent trade compliance regimes have increased the requirements for accurate and timely data by governments and traders.

The next generation of Smart Borders – Smart Borders 3.0 – addresses these challenges and leverages the opportunities created by new technologies. Smart Borders 3.0 will pave the way for the creation of Digital Trade Corridors that can be connected to and form part of international trade superhighways.

Smart Borders 2.0 in action

I created the concept of Smart Borders 2.0 to address an obvious need: international trade was becoming more complex and digital while traditional border processes, which were still largely transactional and paper-based, were failing to keep pace. Brexit, and the complexities it created for trade between the UK and the EU as well as between Great Britain and Northern Ireland, was a catalyst for an entirely new way of thinking about creating safer, faster, and more predictable borders for both governments and businesses.

The revolutionary aspect of Smart Borders 2.0 was providing a framework that brought together different elements that had emerged in the public and private sectors but had never been viewed holistically. These included better utilization of Authorized Economic Operator (AEO)/Trusted Trader programs, mutual recognition of AEO/Trusted Traders, integrated border management, and utilizing the latest technologies.

Smart Borders 2.0 used AEO and Trusted Trader concepts that had emerged first in Sweden in the 1990s and then gained international momentum through the World Customs Organization’s SAFE Framework of Standards in the early 2000s. AEO/Trusted Trader schemes were a move away from traditional transaction based border processes towards more system and compliance based risk management. We developed these programmes to make international trade more efficient and secure, to apply seamless borders in a new and innovative way. The first ever AEO programme, The Stairway was designed 1997 to 1998, tested with ten pilot companies in 1999 and went operation in 2000. ??

Another element in the Smart Borders 2.0 concept was leveraging the growth of mutual recognition between governments of their AEO/Trusted Trader programs. Under Mutual Recognition Agreements, traders benefited from trade facilitation measures at each end of their supply chains while customs and other border agencies were able to use resources more effectively to target high risk and non-compliant goods.

Integrated Coordinated Border Management (CBM) was also an important aspect of Smart Borders 2.0. within a customs jurisdiction, closer coordination between different border agencies, whether for risk management, inspections or controls. Another important element was the sharing of information and data between different jurisdictions, and in a safe infrastructure flowing between agencies, allowing information on the goods to be shared, providing greater insight for border agencies, and making borders faster and more predictable for traders. This model became the first Single Trade Window in the world and is still today considered as one of the most advanced and successful applications in this respect.?

The technology that underpinned Smart Borders 2.0 was also critically important. The basis for Smart Borders 2.0 was making greater use of electronic documents and payments in border processes. In addition, using the technologies of the time such as smart phone apps, automatic number plate recognition, bar code scanning, and RFID could reduce the amount of time spent at the border.

Over the past seven years, we have seen Smart Borders 2.0 come to life. One example is the Eurotunnel Border Pass for goods passing between the UK and the EU using the channel tunnel. This is a fully electronic environment where drivers are not required to present paperwork and are able to pass through the borders using ANPR technology. Information on shipments, including SPS information, is shared between the EU and UK electronically, meaning that each jurisdiction has full visibility in advance of arriving goods and the controls required. This not only means improved targeting for customs and other border agencies but speeds up arrival procedures.

Another example of Smart Borders 2.0 in action are the arrangements for goods moving between Great Britain and Northern Ireland. While this is not an international border, the circumstances surrounding the movement of goods between the rest of the UK and Northern Ireland led to the creation of the UK Internal Market Scheme (UKIMS) following the ‘Windsor Agreement’ between the UK and the EU. The UKIMS is an enhanced Trusted Trader scheme that provides members a special ‘green lane’ for goods moving between Great Britain and Northern Ireland. This fully electronic scheme uses standard commercial information to facilitate the fast and duty free movement of most goods that will remain in Northern Ireland.

Smart Borders 3.0 – the next generation

The creation of the Smart Borders 2.0 concept had a major impact on how trade across borders is perceived. New challenges, whether regulatory changes, ‘black swan’ events, new sources of data, or the acceleration of technological developments, demand new approaches that make borders even safer, faster, and more predictable.

Smart Borders 3.0 has been created to manage with these new challenges and leverage the opportunities. Smart Borders 3.0 is based on trust and will be the driver for the creation of digital trade corridors and the trade superhighways of the future.

The foundation for building Smart Borders 3.0 is trust; trust between the international trading community and border agencies, trust between different customs jurisdictions, and trust between members of the trading community. The essence of the update is to connect Smart Borders with the entire supply chain, end-to-end. It is about creating a more secure and digitally supervised seamless border utilizing all data from the journey of goods. The border used to be a line on the ground, today the new border starts when we buy goods on-line or when we purchase a ticket to travel. ??

One of the key building blocks for trust is the upgrading and reengineering AEO/Trusted Trader programmes that is already underway by governments around the world. This involves the creation of whole-of-government programs as well as using the vast amounts of data generated by traders themselves to make the certification and monitoring of AEO/Trusted Traders more robust and thus facilitating a broader and more tangible suite of benefits.

These strengthened AEO/Trusted Trader programs also benefit from enhanced AEO/Trusted Trader Mutual Recognition Agreements between different governments and customs jurisdictions. The importance of greater levels of mutual recognition is evidenced by the fact that the number of MRAs grew by 40% between 2018 and 2022. In Smart Borders 3.0, not only will the number of MRAs increase, but will involve greater sharing of insights between jurisdictions based on use of the same data as well as having the same or mutually supporting trade facilitation benefits.

Trust will also be built through supply chain integration – the use by border agencies of existing trade data. One of the most significant recent changes in international trade has been the creation of enormous amounts of data on the movement of goods. From the transportation of raw materials to the delivery of finished goods, supply chain data is available on almost every movement, often in real time. There is, however, an asymmetrical distribution of this data. The data sits with businesses and traders who want to be compliant and is not easily available to customs and other border agencies who monitor compliance. Through supply chain integration, Smart Borders 3.0 helps build trust by ensuring that business and border agencies are working from the same verifiable data.

Today we catch data from source all through the supply chain, end-to-end, and we analyse, refine, compliment, use and re-use, trade data all the way of the value chains we serve. ?

Supply chain integration and Smart Borders 3.0 have been made possible by new developments in technology and the processing of data. Data can now be shared securely between the private sector and border agencies in real time using distributed ledger technologies such as blockchain. Data on everything from consignees, arrival times, SPS certifications, and even the condition of the goods can be safely shred. This has the benefit of simplifying processes for import and export, increasing transparency, and reducing the administrative burden for both businesses and border agencies. The data that can be made available can also significantly improve compliance management by border agencies, reducing time at the border for goods and improving the effectiveness and resource allocation of border agencies.

The recent TradeTrust proof of concept involving the governments of Australia and Singapore and the private sector used blockchain to demonstrate how already available supply chain data can be used for Certificates of Origin, removing the expensive and time consuming process of creating direct digital connectivity.

The emergence of a new Safe Zones and Prosperity Zones across the globe is a critical underpinning for Smart Borders 3.0. These Safe Zones are free trade zones that are digital, transparent and compliant with pre-compliance programmes, creating compliance records making AEO/Trusted Trader certification possible also of this key component of international trade.

Safe Zones and prosperity Zones are now emerging as trusted hubs and key linkages in international supply and value chains offering safe alternatives for authorised traders. The compliance-based model for Safe Zones means goods can transit or undergo processing and that they can form part of MRAs and free trade agreements to drive the movement of goods from Safe Zone to Safe Zone, from prosperity Zone to Prosperity Zone – as engines and nodes of a new Global Trade 2.0 environment.

Digital Trade Corridors and trade superhighways

These elements in Smart Borders 3.0 can first be brought together to create Digital Trade Corroidors. A Digital Trade Corridor (DTC) enables seamless trade between two defined points of a trade lane using digital tools. DTC uses the compliance and transaction based elements of Smart Borders 3.0 to maximize trust, speed, predictability, security, safety, compliance and supervision. DTCs provide full visibility to border agencies of goods moved by AEO/Trusted Traders through supply chain integration based on distributed ledger technology and the development of secure platforms accessible through a portal or application processing interface. Declarations, SPS requirements, and compliance management are simplified and transparent for all parties making trade faster and more secure.

We are already seeing the first iterations of DTCs being tested. Maersk was a leader of a recently concluded pilot that tested a Trusted Trader Lane and Digital Trade Corridor as part of a series of UK Government Ecosystem of Trust pilots. As part of the pilot, pre-arrival information was provided on more than 700,000 transactions using readily available trade data. This data was provided by sources including Smart Containers, like Maersk’s Remote Container Management system, Captain Peter, and the MyMaerskSupplychain platform as well as AEO and supply chain stakeholder data. Use was also made of new technologies to preserve the physical integrity of goods and for providing data to the UK government.

The Ecosystem of Trust and DTC pilots showed a potential reduction in business data collection costs by 40%, a 17% decrease in decision-making time by border agencies for goods entering the UK, and the elimination of up to 62% of the delays on imported goods that are subject to plant, animal, or health controls. There were also significant reductions in carbon emissions and food waste observed in the pilot.

Looking beyond point-to-point DTCs, global trade superhighways of the future will be enabled by the trust-based elements of Smart Borders 3.0. Using Safe Zones as natural hubs, trust based DTCs can be linked together, creating secure trade superhighways. AEO/Trusted Traders will increasingly choose to route along these superhighways because they feed into networks of trust and there is data driven evidence of their compliance and performance.

Trade superhighways will provide increased supply chain resilience and flexibility. Unexpected disruptions can be more easily managed with AEO/Trusted Traders being able to reroute goods along other DTCs that form part of the superhighway trust network. In this way businesses that trade across borders will be able to meet the expectations of their customers and continue to deliver the ‘just-in-time-always and ‘just-in-case’ supply chains of the future.

Trade superhighways will see a major shift in how trade operates globally. Competition will shift from a fight for capacity, access, and control to a competition of the most trusted and advanced service providers with the best governance and compliance structures. Just as in the IT sector, there is ever increasing competition between platforms rather than within technologies in the same platform. Trade superhighways will link major market groups of economies and offer regionalized or local production, warehousing, and new Safe Zone and Prosperity Zone capacity.

Border agencies benefit from these superhighway linkages through increased transparency and improved compliance management. This includes both those AEO/Trusted Traders that have continually demonstrated compliance, but just as importantly trade superhighways will allow border agency resources to be targeted at those business that fall outside of the trust framework by not having demonstrated an ability to be compliant. In this way border agencies are better able to fulfil their functions of protecting revenue and society while at the same time delivering tangible trade facilitation benefits to traders with a demonstrated track record of compliance.

International standards and harmonization of laws

Implementing Smart Borders 3.0 requires a commitment from both governments and the private sector. As a first stage there is a need for a base level of trust through the development of new international standards. The updating of the World Customs Organization SAFE Framework of Standard is a welcome start to ensuring that global standards are meeting the needs of compliance management of the future. The same efforts also need to be made in the area of digital standards to support Smart Borders 3.0 and the development of DTCs and trade superhighways.

There is also a need for the harmonization of laws and regulations based on international standards. This applies in particular to the sharing and use of data both between the private sector and governments as well as between governments. There is also an important need for greater alignment on compliance management and AEO/Trusted Trader certification frameworks. This can be achieved initially between countries already connected by strong trading relationships or free trade agreements.

New technologies is the game changer making it possible to manage data pipelines from international trade and this new paradigm will play a pivotal role in the following years, building the new Smart Borders to be connected by Digital Trade Corridors providing Trade superhighways.

We already now see AI and machine learning having entered day-to-day operations of both Government agencies and international trade, providing supply chain visibility, supervision, advanced planning and automated de-risking.

Conclusion

New challenges and opportunities in international trade demand new innovative approaches. Smart Borders 3.0 paves the way for the creation of flexible and resilient Digital Trade Corridors and trade superhighways that will dominate how trade is conducted in the future. The foundation for this future is trust which is built through improved compliance management and transparency. Being part of the future means being part of Smart Borders 3.0.

The future is not something we enter, it is something we create.

Lars Karlsson, Global Head of Trade and Customs Consulting Maersk

This text is also published as a chapter of the book ‘When Elephants Fly – Leadership and Management of Customs, Trade and Borders in a Globalized World’ by Lars Karlsson