Point of View

On the future of the WCO Revised Kyoto Convention

By Dr. Hans-Michael Wolffgang, University of Münster and Dr. Achim Rogmann, LLM, Brunswick European Law School, Germany

Economic discussions at the international level are dominated by daily politics, such as global trade disputes on trade barriers, or the United Kingdom’s exit from the European Union (EU). Although these discussions impact on Customs administrations and global trade players, they should not overshadow other political, legal and technological developments that will shape the future of trade and which the WCO has been addressing for some years under the heading “The Future of Customs.” Also being addressed are disruptive technologies like the blockchain, the Internet of Things, artificial intelligence or 3D printing, all of which will change the way Customs works.

Trade challenges

The burgeoning corpus of bilateral and regional free trade agreements (FTAs) will assume greater importance for the future of Customs, especially enhanced efforts towards trade facilitation or the increasing importance of rules of origin. Negotiations on a “mega” trade deal between major economic regions of the world are currently underway, and, if successful, promise to have considerable economic effects. Only recently, the EU concluded new FTAs with Canada and Japan, and negotiations with other States and regions are in progress. Other countries, such as China and Russia, are pursuing the same aims.

Global value chains and their growing importance also present Customs with a challenge. “Global sourcing” and “global marketing” are now standard for many companies. Materials are sourced from all over the world, production sites are located in different countries, and markets are found on all continents. Multi-national companies expect national Customs administrations to come up with flexible and coordinated solutions and technical standards, allowing smooth Customs clearance to support seamless global supply chains.

Although cooperation between Customs administrations and companies has improved over the last 10 years, with global authorized economic operator (AEO) programmes and their mutual recognition representing a notable success, there are many different requirements relating to the integrated management of the supply chain that are demanding and still unfulfilled. Besides the exchange of data between industry and administrations and between administrations themselves, other issues include organizational, technical and legal framework conditions, such as those concerning data security and protection. There is also a need for interoperable information technology (IT) systems, whose use must continue to be actively promoted. The use of mobile devices in industry and Customs can accelerate electronic clearance processes, and contribute to procedural simplifications whilst making controls possible.

A number of other socio-economic developments are having effects on trade and Customs. They include increasing populations in Africa, Asia and Latin America, shifts in economic and political centres of power, the lack of sustainable economic development, the need to protect the environment, risks associated with international supply chains, nationalization tendencies, misgivings about globalization, and the emergence of regional or bilateral economic unions.

From the point of view of Customs, such developments demand much greater cooperation between players involved in international trade, be they governments, Customs administrations, companies or international organizations. For Customs, this would mean allowing for the cross-border sharing of relevant information on a best practice level. The WCO is already addressing this issue for its Members through the “Globally Networked Customs” concept that was launched in 2012, and which is currently being updated. At the time, negotiations on the WCO Revised Kyoto Convention (RKC) did not address this aspect as they had been conducted almost two decades ago.

The effects on Customs of electronic trade, or e-commerce as it has become more popularly known, are obvious. There has been an exponential increase in movements, mainly in relation to postal traffic, as more and more private individuals in particular, order goods via the Internet. Owing to the enormous quantities involved, there is currently little room for applying controls, whether they concern import duties, or prohibited and restricted goods. The risk that this entails for society must be taken into account: there must be more information on consignments collected and processed, but the practical implementation of this solution is still being worked on.

Sweeping technological developments are creating an additional need for action. In recent years, technologies have appeared on the market, which were dismissed as science fiction 20 or 30 years ago, but which are now determining the future:

  • The Internet has triggered an economic revolution, which is still underway.
  • The Internet of Things and 3D printing are changing trade flows.
  • Artificial intelligence is replacing human activities.

As far as Customs is concerned, it should observe the above-mentioned developments, respond as proactively as possible, take advantage of them, and issue regulations not only on how to cope with the changing character of trade, but also on how Customs should respond to technical developments. However, it must be recognized that States are usually driven by such developments and must confront situations, which they are not always able to plan or shape. Customs administrations must overcome their conservative way of thinking, which is embedded in outdated structures, and network globally, as discussed in the context of “The Future of Customs” in various WCO bodies, including through WCO News.

Revised Kyoto Convention takes centre stage

The discussion in the WCO is progressing and has now reached a point where the reform of existing instruments, such as conventions, frameworks or guidelines, or the creation of new instruments, is being considered. Right now, the attention is on the RKC, which has been in force since 2006. This instrument has laid down the global standard for all modern Customs legislation since 1999, covering, among many things, Customs obligations and controls, Customs declarations, and Customs procedures.

The RKC aims to simplify international trade, but another international instrument negotiated recently is pursuing the same objective: the Trade Facilitation Agreement (TFA) of the World Trade Organization (WTO), which entered into force in February 2017 and has since been ratified by 85% of the WTO’s membership. Customs administrations throughout the world now have to implement the provisions of the TFA, or at least commit to do so in a certain timeframe. Much of the contents of the TFA can already be found in the RKC, holding, therefore, few surprises for the WCO and its Member Customs administrations.

At the WCO, discussions on TFA implementation take place in the Trade Facilitation Agreement Working Group (TFAWG), and focus on assisting those WCO Members in need of support in implementing the provisions of the TFA, including trade facilitation measures in general, on the basis of international standards and best practices, especially those contained in core WCO instruments and tools such as the RKC. However, numerous countries (especially developing countries) still lack the necessary capacities, skills and legal foundations required by the intended trade simplifications. Furthermore, in June 2014, the WCO launched its Mercator Programme, which would act as a vehicle to assist governments worldwide in implementing trade facilitation measures, including the TFA provisions, expeditiously and in a harmonized manner by using core WCO instruments and tools such as the RKC, with tailor-made technical assistance at the heart of the Programme.

At WTO level, the TFA regulates many trade simplifications, which are already contained in the RKC. If the TFA is implemented worldwide, the WTO predicts an average additional annual economic growth of 0.9% for developing countries and 0.25% for industrial nations. Admittedly, there are no statistics for the RKC, but its comprehensive implementation could considerably exceed the promises of the WTO as the provisions of the TFA are rather vague, whereas those of the RKC are far more specific. This fact alone speaks in favour of developing further its provisions and of combining it with other instruments, such as the SAFE Framework of Standards to Secure and Facilitate Global Trade or other WCO standards, into a single code, one that is legally binding. As WCO standards are currently fragmented among its various instruments, a comprehensive instrument could prove very helpful for industry and Customs administrations alike.

Moreover, there is a need to review the RKC in light of the latest developments in trade-related services and IT, which leads us to the challenges of digitalization. A core one being how to “future-proof” the RKC, since amending a convention involves a laboured ratification process, which will make it even more difficult to ensure its provisions keep up with future technological progress. It might be possible to make it mandatory for WCO Members that sign up to a future RKC to reflect the state of technological and economic developments like the blockchain, “big data,” artificial intelligence and the Globally Networked Customs concept in their IT systems.

The RKC’s principles and standards themselves have been complemented over the years in other WCO instruments such as the SAFE Framework, which aims at securing the international trade supply chain. Instruments on trade facilitation and supply chain security developed outside the RKC should be integrated into the RKC, keeping in mind that any future instrument should serve as a model for legislation in individual States to a much greater extent than has been the case so far. To this end, the degree of regulation and its effect must be significantly increased towards a legally binding international agreement.

However, there must also be a rethink when it comes to the implementation of future Customs rules. It is possible to increase the effectiveness and efficiency of the limited resources available to Customs administrations by increasing partnerships between them and economic operators (i.e. more “trust” in trusted traders and less interference in the trade supply chain). The digitalization of the economy must be accompanied by the digitalization of Customs administrations, with a future RKC supporting such developments. The WCO’s “Digital Customs” initiative is already trying to address this issue, and the uptake by its Members has thus far been very encouraging,

Into the future with confidence

To date, the mission of Customs has focused on data related to international transactions and does not take enough account of the constantly growing international exchange of data, at least according to current standards, which have focused on isolated data exchange with companies, rather than covering the whole supply chain. However, digitalization will not only change consumer behaviour and trade, but also the exchange of data between economic operators and Customs administrations. Trade will, therefore, be viewed differently: instead of physical controls, the focus will increasingly shift to data analysis – another area of work that is being vigorously promoted by the WCO. In fact, a future RKC should contain some essential data analysis provisions to enable Customs to attain an enhanced level of inspecting and exploiting data.

The flow of goods and data will become increasingly linked, with the result that Customs administrations will not only be integrated into the trade supply chain, but also into the data exchange environment: regularly exchanging data with various economic operators (e.g., in relation to blockchain technology or the data pipeline). In this respect, it is important to view the digital future as an opportunity to develop, for example, a comprehensive Single Window solution, which would grant access to all data during the life cycle of a transaction. Furthermore, big data will give Customs the opportunity to regulate foreign trade on a holistic, rather than transactional basis.

The future role of a Customs administrations, however, will be increasingly shaped by global issues, which have to be mastered by Customs officials. These issues are the subject of the United Nations’ 17 Sustainable Development Goals (SDGs). The increasing liberalization of trade entails a constantly rising volume of goods, which recessions and protectionist acts are only able to stem temporarily. If the goal of sustainable balanced economic growth (SDG 8) is to be achieved whilst paying reasonable attention to global challenges like climate change and environmental pollution (SDG 13-15), then Customs clearance must, above all, be efficient. Consequently, the challenge for Customs lies in implementing the available legislative framework as effectively as possible, taking such considerations into account. Of course, the utilization of technological innovations forms an essential part of this.

Arguably, the most popular example given in this context is blockchain technology whose potential positive impact on the Customs clearance of goods for companies and authorities were recently demonstrated by Kerstens and Canham, Saadaoui and Santamaria in the previous edition of WCO News (87th edition 10/2018, pp. 52-62). Distributed ledger technology mainly promises to improve the security of data by speeding up tracing and access. The integration of the blockchain into a Customs-centric Single Window could considerably improve the already-proven trade facilitative effects. Since there has only been limited practical experience with such technology to date, it is important not to set expectations too high. At the same time, this should not be interpreted as an argument for delaying investment in the future.

In this connection, the goal of a global partnership for sustainable development (SDG 17) should be further realized in a trans-organizational context. Customs plays a crucial role in foreign trade since it traditionally has access to the goods at first hand, while often coordinating the work of other border agencies as the “owner” of the procedure. For this reason, the WCO should direct and further enhance Customs-related cooperation with all international organizations and its public and private sector stakeholders in the area of international trade, logistics, and safety and security, as already initiated in the WCO’s coordinated border management (CBM) concept (WCO Research Paper No 2, June 2009), which should also be reflected in any future RKC.

 

More information
wolffgang@uni-muenster.de
a.rogmann@ostfalia.de
www.wwu-customs.de