Keen change management needed for trade compliance

WHAT ARE the functions of trade compliance and how are they evolving in a fast-changing environment?

At its core, trade compliance represents conformity to trade laws, norms, and standards. Traditionally, it has been seen as an internal resource, crucial for managing international trade risks, especially those tied to imports, exports, and licensing. However, as the global economic order gets revisited and supply chains adjust to the dual pressures of intensifying competition and a rising tide of environmental and supply chain regulations, trade compliance teams are feeling the squeeze.

This evolving landscape of international trade demands that these teams not only exhibit agility and expertise but also excel in data identification and leveraging. It calls for widespread inter-departmental collaboration. With profound shifts in taxation laws, environmental regulations, and an unpredictable geopolitical scene, there's a mounting need to reconsider the entire risk framework. At times, the structures and centres handling these risks may require a thorough overhaul.

Such transitions are bound to affect daily operations, recalibrate risk assessments, and change the liability landscape. Consequently, businesses might have to re-examine the global structures and frameworks that have been the pillars of their supply chain strategies for years.

Which legislative changes are we referring to when discussing these significant shifts, and why are they critical?

The roster of pertinent legislation, statutory requirements, and soft law has expanded dramatically. Key among them are the UK Environment Act 2021 and the EU Deforestation-free Products Regulation. The latter, alongside other new deforestation and anti-slavery legislation, mandates logistics operators to have an in-depth understanding of the origins and flow of goods to ensure supply chain integrity. The EU's Corporate Sustainability Due Diligence Directive further accentuates the importance of corporate accountability in areas like human rights and the environment.

In addition to these, the EU carbon border adjustment mechanism requires detailed information on the carbon intensity of products. Similarly, the ICS2 EU safety and security regulation stipulates more rigorous data requirements for goods transiting across borders. Legislation honing in on producer responsibility necessitates granular insights on packaging and materials, emphasising the commitment to environmental sustainability.

Businesses need robust systems resilient enough to withstand not only supply chain disruptions but also environmental calamities. Achieving comprehensive narrative reporting on ESG metrics hinges on the availability of quality data from international logistics operations. Firms need to arm themselves with substantial evidence from their supply chains, both to validate their sustainability claims and to defend against any greenwashing allegations.

Lastly, the introduction of the OECD's Pillar One and Pillar Two initiatives, which are geared towards addressing the tax challenges of the digital economy and ensuring a global minimum tax respectively, will push businesses to more rigorously examine intra-company goods movements. This transition places an even greater emphasis on synergy between tax and compliance departments.

Taken together, this broad sweep of regulations and requirements offers a glimpse into the intricate landscape that trade compliance teams must navigate.

From a financial perspective, how feasible are these changes?

Adopting the mentioned systems undoubtedly entails a significant financial outlay. Yet, these investments, when viewed through a lens of long-term value and risk mitigation, can be judicious. They not only diminish the hazards of non-compliance, consequential fines, and potential damage to reputation but also position logistics companies more favourably in an intensely competitive market. The capability to furnish stakeholders with real-time, detailed insights on movements, underpinned by advanced technologies like blockchain and AI, offers a clear competitive edge. However, it's vital to underscore that the incorporation of these new technologies, especially AI, necessitates a comprehensive risk analysis to gauge their broader implications. Ignoring or discounting this aspect could lead to unforeseen challenges in the future. Thus, while the initial expenditure might seem daunting, the prospective returns in terms of risk reduction, enhanced operational efficiency, and market leadership can justify the investment.

What are the primary requirements for a successful trade compliance strategy?

At the core of an effective trade compliance strategy are two pivotal attributes: skill and agility.

It's essential to recognise that fully mitigating all trade-related risks is an elusive goal. A substantial portion of these risks, by their very nature, are unpredictable. This inherent uncertainty accentuates the importance of scenario analyses, although even these tools come with their set of limitations. To successfully manoeuvre through the intricate trade landscape, teams need not only a well-crafted strategy but also the agility and deep expertise.

Take carbon reporting as an example. While the Greenhouse Gas (GHG) Protocol offers a foundational framework for carbon accounting, interpretations and measurements are far from universally standardised, creating ambiguities. Various methodologies come with their own nuances, making it a daunting task for businesses to consistently and accurately report their carbon footprints. This lack of universal clarity underscores the imperative for agility in trade compliance.

Governments, too, find themselves in a tight spot. They're frequently navigating the fine line between political objectives and economic imperatives. As they grapple with the taxonomy of emerging regulations, many have not yet fully assessed the ramifications of policies or come to terms with the potential consequences of measures such as supply chain decoupling and de-risking. These evolving global dynamics further complicate matters, pushing businesses into a continuous loop of strategy recalibration. It is clear that as both governments and businesses work to solidify standards and practices, agility remains a cornerstone for navigating this intricate landscape successfully.

Diving into new markets unveils a host of challenges. From understanding unique talent landscapes and navigating complex bureaucratic systems to confronting potential corruption and adapting to fluid trade regulations, businesses are continually tested.

However, the frontrunners in this demanding environment are often companies that prioritise cross-functional collaboration. By breaking down internal silos and fostering an environment of integrated risk management, they ensure that a focus on Environmental, Social, and Governance (ESG) is embedded within their strategic blueprint.

Given the regulatory and economic pressures, how should companies proceed?

Agile methodologies, with their iterative nature, hold the key. Businesses, even large ones, should continuously monitor the external environment and ensure their systems align with it. Although adjustments will be necessary, the overarching direction remains clear. The widening economic gap between the global North and South, heightened geopolitical competition, and environmental degradation will only amplify business pressures. While there's a shift in globalisation towards a more regional and diversified model, the foundational systems remain unchanged. The agility requirements stem not only from legislative or governance changes but primarily from economic ones. Businesses need versatile systems that can adjust to fluctuating regulations. Those that adapt quickly and continue to offer top-tier services will be the first to reap the benefits of these global shifts.

Which areas should trade compliance teams prioritise?

Traditional areas such as export control, import controls, cross-border taxation, licensing, and product conformity continue to carry a high likelihood and severity of risk and should remain at the forefront of trade compliance priorities. Additionally, areas that might be seen as outside the immediate purview of trade compliance departments, including corporate taxation and inter-company pricing, require clear, coordinated efforts to ensure all risks are fully addressed.

As companies merge and acquire new entities, integrating differing compliance cultures poses a unique challenge. Yet, the role of the trade compliance team does not end here. While sustainability departments and CSR might typically lead the charge on ESG initiatives, trade compliance departments must not overlook the mounting importance of climate risk mitigation and adaptation. This includes risks related to commitments towards achieving net zero emissions, transitioning to a green economy, physical risks due to climate change impacts, and the looming risk of litigation linked to climate change and unsustainable practices. Compliance departments must be proactively involved in ESG-focused corporate governance initiatives, playing a crucial role in mitigating these legal and transitional threats.

What is the specific role of trade compliance teams and consultants amid these changes?

Trade compliance departments should not be relegated to the sidelines or viewed merely as a functional entity to facilitate operational tasks of cross-border trade. Such an approach risks not only limiting the strategic potential of these teams but can also expose companies to unforeseen regulatory pitfalls. Instead, these departments should assume a central strategic position, operating as a second line of defence alongside legal teams.

It's essential for operational staff, as risk owners, to be well-informed and receive the necessary training to adapt to the evolving environment. This demands collaboration across various departments, especially strategic change management, sustainability, CSR, and operations. While trade compliance plays a pivotal role in ensuring smooth cross-border operations, it should be integral to the company's broader risk management framework. Ensuring that these teams are central to strategic decision-making rather than just operational execution is key. When this holistic approach is adopted, companies are better positioned to excel in international trade.

Tevolution Ltd is well-placed to offer services from international trade consultants, trade compliance consultants, customs consultants and brokers, trade and environment consultants,  agile project managers and change managers. We're here to support and assist with the challenges you face as part of your trade compliance team.

For more information, visit https://tevolution.international