Let us not replace red tape with green tape - There is another way

We need smarter solutions to save the world – and trade is a critical part of the answer

Global Trade 2.0 series. Chapter V.

The world stands before a number of critical challenges, all of which threaten our futures in some way. One of the most critical is the climate crisis. At the same time, our prosperity and the challenge of lifting millions of people out of poverty remains. History has shown us that only by government and business working together to find practical and workable solutions can we really hope to meet and overcome these challenges, which means that customs and borders is part of these solutions as well.

The Challenge Ahead of Us: We are Getting Ready are You?

Within the frameworks of international treaties such as the Paris Agreement and the Trade Facilitation Agreement, business has been a driver of change. My own company, Maersk, as an example, has been working to find new and innovative ways to reduce emissions from shipping. Our Maersk ECO delivery solution is replacing fossil fuels with green fuels and Maersk has the target of having net zero greenhouse gas emissions by 2040. Trade and transport need to be an essential part of the solutions to tackle these global challenges.

Trade is a major driver of poverty alleviation and growth for developing countries and business has also been a major driver of taking advantage of opportunities created by the Trade Facilitation Agreement. The TFA was a major boost in cutting red tape for businesses around the world, allowing goods to move faster across borders. As just one example of the benefits of trade facilitation and customs simplifications, the World Trade Organization estimates that businesses in developing countries have been able to increase their agricultural exports by 17% between 2017 and 2019. This has aided farmers, traders, transport companies and many other businesses that are involved in the supply chain in developing countries.

The Paris Agreement to tackle the climate crisis showed both the potential and well as the difficulties of finding common ground between countries and international solutions. The fact that the TFA took over a decade to negotiate also highlights the problems of coming to an agreement on solving global problems. This has often led to individual governments and customs unions trying to find their own ways to tackle the climate crisis and solve economic problems.

Over the last decade, at the same time as businesses in developing countries are trying the make the most of the potential of the TFA, more than 7,000 new trade barriers have been put in place mostly in the world’s leading economies that are critical markets for developing countries. These barriers have created new levels of complexity for businesses wanting to trade globally. IMF estimates that more than 3000 new trade restrictions was implemented in 2022.

And while free trade agreements have been an attempt to try and address this growing burden of red tape, the lack of awareness of the existence of these agreements and their complexity means they are only utilized 60-70% of the time by businesses.

We are now seeing the same developments in the area of addressing climate change and achieving the UN’s Sustainability Development Goals more generally. Either to ensure the implementation of the SDGs or the Paris Agreement or to get ahead in tackling the climate crisis, governments and customs unions such as the EU are introducing new regulations.

These have the potential not only to achieve critical social, environmental, and economic goals, but also to have flow on benefits to international trade. One of the effects of these new regulations will be to increase supply chain visibility and the vetting of stakeholders of the supply chain. This will provide a regulatory framework for efforts already being taken by businesses to increase supply chain resilience and the ability to act when there are disturbances in the supply chain.

The Risks of Bad Applications of Needed New Regulations

While we need new solutions for the challenges outlined above, these new Environment, Social Protection and Governance (ESG) regulations aimed at achieving sustainability goals also come with risks, in particular where they are designed without the insights and expertise from businesses that operate in and drive global supply chains. These regulations can lead to the creation of a new type of ‘green tape’ that replaces the red tape that previous efforts in trade facilitation have cut through.

At the moment, there are at least ten major pieces of new regulation that have the potential to create green tape if not implemented properly and with the cooperation of business. Perhaps one of the highest profile is the EU’s Carbon Border Adjustment Mechanism. This mechanism, also known as CBAM, will require importers to report on and pay for emissions involved in the production of their imports through the purchase of CBAM certificates. The first reporting period for importers of cement, iron and steel, aluminum, fertilizers, electricity and hydrogen products came into force on January 31 2024. New commodities will be added in the coming years.

CBAM will require importers to have a very high level of visibility over their supply chains, including the energy and transportation methods used throughout production, as well as whether a form of carbon price has already been paid on the goods. Meeting reporting requirements of customers in Europe will be easy for large companies in more developed countries. It risks, however, creating green tape for small and medium sized enterprises in developing economies, the effect of which may be to lock them out of the European market.

In addition to CBAM, there are a number of other sustainability regulations that have been implemented or in the pipeline. Updates to the US Customs Act in 2016 covering forced labor require companies to increase their understanding and oversight of production. The German Supply Chain Dur Diligence Act passed in 2021 places requirements for businesses in the world’s third largest trading economy to document and report of violations labor and other social and environmental measures and maintain a risk management system for compliance. A new EU deforestation regulation is well on the way in European Union. Other jurisdictions and geographies will follow shortly.

There is Hope and New Lights in the Tunnel

All these changes will have a positive effect on our world and help business both contribute to achieving the UN SDGs as well as improving oversight of their supply chains for their own benefit. The continued implementation needs to be done in close conjunction with business. This has the potential to enhance the operation of these new initiatives through the digital tools that have been developed by the private sector already, particularly by those companies involved in trade and supply chains.

And because trade is a driver for growth, particularly in the developing world, they need to be developed in a way that doesn’t create a barrier to entry into the world’s biggest economies.

How Trade Digitalization can Provide Smarter Solutions

The answer to this paradox is named trade digitalization. We are the first generation can transform problems to opportunities through information technology.

There are ways to learn from previous mistakes and to avoid problems where trade policy and regulations become hinder for trade. Today trade is on the way to become digital. It means that we have access to trade and supply chain data in ways like never before and trade digitalization is accelerating creating the new Global Trade 2.0 environment.

The UK Electronic Trade Documents Act is operational and paved the way for similar framework regulations in other regions. The eBL is starting to take off. There are numerous sandbox pilot projects on the way to build trusted trade lanes supervised by digital trade corridors. We in Maersk and all other movers of goods use Smart Containers and similar IOT solutions to supervise cargo and goods movements IRL 24/7. Integrators of Trade, like Maersk, provides end-to-end supply chain visibility solutions and AI powered supply chain de-risking models that over the next years will become the standard way for global trade.

It can be acahieved by collecting source data, refining and manage the data end-to-end - while the data elements are used for multiple purposes, to analyse data and various risk patterns for de-risking and using AI to provide supply chain visibility and border transparency.

By complementing obligatory reporting with voluntary submission already existing commercial data values we can create models that work for reporting of various new trade compliance demands, like ESG regulations, in exchange for improved security, safety, trade facilitation, predictability and resilience of supply chains. A win-win for all.

An emerging new Global Trade 2.0 environment and these mentioned supply chain solutions creates opportunities that should be used also for the ESG area. In fact, with smarter application the intention of these new ESG regulations have a higher likelihood to give the expected results – what we all want, a better and more sustainable world.

Let’s not make the mistake of replacing red tape with green tape. This time we will be smarter than in the past. Instead, let’s develop smart end-to-end solutions to the challenges of the climate crisis, forced labor, and meeting the UN SDGs. This is the way forward to making the world a better place.

Let's have real consultation and a new paradigm partnership between the regulator and private sector to make this change efficient and pragmatic, using industry standards, digitalization, new solutions and elements already on the way to make this work. This topic and quest is too important for us to fail. We are ready to do this now. Let's Go.

By Lars Karlsson, Global Head of Trade and Customs Consulting, A.P Møller-Maersk, Former Director World Customs Organization and act Director General Swedish Customs. Karlsson is Doctor of Education (HC) and holds a Master in International Customs Law.