Sending and receiving goods across borders is becoming so complex—and the penalties for missteps so steep—that risk management in trade increasingly demands attention from the C-suite.
The time when large global companies could take an ad hoc approach to supervising the massive volumes of goods they ship and receive around the world is over. In the past few years, trade compliance has become enormously complex—and a significant source of corporate risk. In addition, CEOs need more expertise on how to navigate mounting geopolitical hazards and make their supply chains more resilient.
The role of risk management in trading, therefore, needs to change rapidly. And it should command greater attention from top management.
Many companies with large import and export footprints should consider having this function led by a senior executive—a “chief trade officer”—who reports directly to the C-suite. This executive should be involved in a wide range of strategic issues. He or she should be able to anticipate geopolitical shifts that could impact the business and help avert trade risks. The chief trade officer should also enable the organization to reduce costs and conduct scenario planning in order to seize any competitive opportunities created by changes in trade patterns and the global environment.
Creating such a senior trade compliance officer role would be a historical departure for most companies. Trade risk management typically has been a midlevel function tucked away somewhere in operations, sometimes only as an afterthought. The trade compliance organization often reports to a manager in sales, accounting, legal, procurement, or logistics who has little regulatory expertise. Coordination, training, budgets, and access to top decision makers have tended to be minimal.
That approach may have made sense when the world was moving toward a system of universally accepted trade rules primarily arbitrated by a single body, the World Trade Organization. But the golden era of globalization is no more.
The Rising Risks of Global Trade
Companies that trade goods must navigate an ever-expanding labyrinth of bilateral and regional trade arrangements, environmental regulations, sanctions, unilaterally imposed tariffs, and export controls on technology and products. Increasingly, companies are held accountable for the carbon footprints of their entire global supply chains and must certify to customs authorities that their products are free of forced labor and sensitive or “conflict” minerals.
For companies making thousands of cross-border shipment transactions daily, the challenge of complying with regulatory changes on so many dimensions is daunting and requires the processing of massive amounts of data. But those able to master the new rules of international trade and quickly adapt their trade compliance strategy can gain valuable strategic and competitive advantage.
With this growing complexity comes greater risk. In the absence of effective control mechanisms and expertise, liabilities can rapidly accrue and be challenging to quantify. Poorly functioning risk management in trading can drive up tariffs and administrative costs and cause goods to be stopped at the border. It can also result in lengthy and costly litigation, huge fines, and even prison terms for executives.
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