International trade is complicated. Thousands of products sourced from dozens of countries involving multiple trading companies can lead to uncertainty about compliance with import regulations. Inspecting shipping containers is critical to ensure a safe trading environment and proper tariff enforcement, but it is difficult for inspecting agencies and inspectors to balance these benefits against the strain that frequent inspections impose on international trade.
Russell Hillberry is an agricultural economics professor at Purdue University and a faculty affiliate in the Krannert School of Management’s Purdue University Research Center in Economics (PURCE). He and his fellow researchers explain how implementing IT systems would allow inspecting agencies to dramatically decrease inspections while ensuring shipments comply with import regulations. In their working paper, “Risk Management in Border Inspection,” Hillberry and his coauthors analyze how implementing risk management strategies can streamline the import inspection process.
Effective risk management requires sophisticated IT systems to adequately store and analyze the data used to forecast risk. While most high-income countries already have these systems in place, less industrialized nations must decide if the cost of risk management implementation and training is worth the benefit.
Using comprehensive data from the Serbian customs agency for years 2006-2016, Hillberry and his coauthors found that import shipments that arrived less frequently in the past were more likely to be inspected. Since most shipments that go through Serbian ports are infrequently observed, the border management agency was conducting more inspections than necessary to maintain compliance.
The researchers argue that a possible reason for over-inspecting is the inspecting agency’s uncertainty about the risk that an unfamiliar shipment satisfies import regulations. When inspecting agencies see a rarely observed shipment, they are not sure what the likelihood of compliance is for that container.
The model developed by Hillberry and his coauthors shows that reducing this uncertainty by 66.7% can reduce search intensity by 70.2% without sacrificing compliance. By providing a better forecast of the probability of compliance than a human inspector, IT systems can more effectively sort shipments into high- and low-risk categories. Then, overall inspections can be reduced by decreasing the inspections of low-risk shipments.
Especially in developing countries, inefficiencies in the inspection process can halt the trading of time sensitive items like fresh fruits and vegetables, since traders know the items will spoil if there is a delay.
“If the borders operate better, developing countries will have more access to better, higher quality goods,” Hillberry says.
The consequences of non-compliance can undermine efforts to ensure food and animal safety as well as the mitigation of environmental risks. Import regulations are also in place to ensure that importers pay the proper tariffs, which can help developing countries form better functioning governments.
Luckily, as Hillberry and his coauthors have demonstrated, risk management can act as a solution to reach the right level of inspection to maintain compliance without over-burdening the trade process. Border inspection agencies that invest in the required IT systems can reap the benefits that risk management has to offer.