Trade-Related Aspects of Cross-Border Postal Ecommerce - Tim Walsh 15th September 2018 Congress of the Federation of European Envelope ...

Trade-Related Aspects of Cross-Border
Postal Ecommerce

Tim Walsh

15th September 2018
Congress of the Federation of European Envelope
Manufacturers
Tallinn
Final

Industry Partnering For Growth and Innovation

                                25 Years
                               Postal and              DMAB
                                 Parcel
                               Experience
                               Across 60+
                                Countries

                          Shaping Postal, Parcel and
                            Ecommerce Policy and
                                  Standards

Agenda: Cross-Border Ecommerce Change Drivers
Supply-Chain and Delivery Dynamics

      Shipper Needs          Cross-Border Trade Policy Environment                Buyer Needs
      Low complexity as                             Illicit
       per domestic            Terminal             Trade,            Product        Cost certainty
       shipping                  Dues             Counterfeit          Safety        Low shipping
      Assurance on                               Goods/IPR                           fees
       compliance issues                                            Prohibition      Low cost
                               Aviation           Tax, Duty
      Data and visibility                        DeMinimis
                                                                       and            tracking
                               Security                             Restriction
       around the order        eg Hazmat           & Excise                          Reliable and
                                                                     eg CITES
      Supply-chain                                                                   fast shipping
       integration to          Customs                                                times
       delivery partners                           Returns            External       Parcel visibility
                              Processes,
       for efficiency and                          and VAT
                              IT & Other                               Costs          and notification
                                                   Recovery
       quality                 Agencies                                              Simple return
      Timely inventory                                                               processes
       re-integration on         Border Control                   Trade
       returns                (Fiscal and Non-Fiscal)           Facilitation

        What constitutes a desirable trade-related policy framework for the future of cross-
         border ecommerce where regulatory requirements balance trade facilitation with the
           need to promote safe, efficient, fiscally-secure and “trade creating” cross-border
                                               ecommerce?
         Striking this balance is critical especially in context of massive volume growth in
             time-sensitive, small packets – outbound, inbound return/refund processes;

A Brief History of Cross-Border Trade
    The geography of trade originally supported by the flow of letters which projected
     merchants’ authority over goods/ money that travelled independently across geographies;

    While letter networks determined the boundaries of trade its effectiveness was only as
     vibrant as the distribution networks on which it operated: mule, camel, caravan, ship;

    Medieval merchants protected the security of commerce by:
       packaging and labelling (“bales and bundles”);
       contract enforcement via reputation management; and
       the management of customs and the “bureaucracy of trade” as a “key differentiator;*

    Ultimately Genoese-centred commerce triumphed over Islamic trade because Italy
     protected commercial transportation as a state obligation;

    The scale/shape of international trade was ultimately limited by wind patterns until the
     invention of steamships (1850-1900) which reduced costs, improved quality and re-
     created trade routes globally (“1st-wave globalisation”);

    “2nd-wave globalisation” (based on Jet engine and post-war trade liberalisation and rules-
     based institutions) has given way to “3rd-wave globalisation” or the potential for the
     individualisation of trade, based on the internet;
                   Trade Fundamentals Remain: network efficiency and integrity;
                 customs management; security; data associated with flow of goods;
                             labelling; global rules and agreements
*Goldberg, J.L. (2012:12). Trade and Institutions in the Medieval Mediterranean, CUP.

Cross-Border Ecommerce and Trade: Three Economic Insights

                                                                         Exports
  1. Ecommerce overturns economists’ “proximity model”
  showing a strong, negative effect of distance on trade:              Prices/ Choice
  each 1% increase in distance between 2 countries is
  associated with a fall of 0.7-1% in trade*                           Employment

2. Cross-border ecommerce = $500bn (IPC, 2018): the fastest growing segment of
world trade (= $17tr) but still only 3% of total global trade. Online ecommerce’s ability
to build “scale without mass” raise fundamental tax issues: where is the value
created?; where is the “place of establishment?”;

 3.           Trade Creation              Versus               Trade Diversion
      Trade between two countries,                         Exchange on the basis of
          based on comparative                            distortions such that trade
        advantage, determined by                          from least cost production
           factor endowments,                              countries is displaced by
         technology and/or other                         trade from otherwise higher
        genuine cost advantages                                 cost countries
   Cross-border ecommerce which is                    Non-economic derived advantages
   efficient, sustainable and likely to                 in ecommerce are likely to be
       engage political and other                       contested, unsustainable and
         stakeholders, long-term                             ultimately inefficient
*Krugman and Obstfeld, 2006

Cross-Border Postal Ecommerce Small Packet Market
 4 platforms (Amazon, ebay, Alibaba, Wish) account for two-thirds of cross-
  border ecommerce items: growing around 30% p.a.;

 Posts have 70% share supported by pricing (TDs), light-touch postal customs
  clearance and operational fit:
     84% of cross-border ecommerce items

The Changing Global Architecture of Ecommerce:
Customs, De Minimis, EAD and Tax Issues

         Americas                                                                  Asia
•   US Law requiring e-                                               •   China Ecommerce
    data in place                                                         Law, effective 1/1/19
•   STOP Bill requires                                                •   China e-data law in
    USPS to transmit EAD                                                  place. Likely to follow
    95% of cross-border                                                   EU timeframe
    packets by end 2022;                      Global                  •   De Minimis Removal +
•   S. Dakota v. Wayfair     •   OECD-supported registration-             Tax on inbound:
    Supreme Court                based consumption taxes on B2C           Australia, 10%
    decision: tax where          ecommerce sales                          (1/7/18); NZ, 15%
    users are located;       •   2016 revised CN22/23 forms with          (2019)
•   US de minimis ($800)         additional data fields (HS code,     •   Australia’s Home
    under discussion             CoO, tel number of sender and            Affairs Dept
    within NAFTA                 recipient                                considering a $5-7 tax
•   US Customs and           •   UPU EAD 2021 roadmap to                  on all inbound low-
    Border Force                 improve security screening, fiscal       value parcels to cover
    Ecommerce strategy           management and Leg 2 reliability;        the (external/social)
•   Brazil new law for       •   WCO Framework on 15 Standards            costs of bio-security
    electronic pre-advice        for risk management and customs          screening;
    to reduce delays             clearance, June 2018                 •   APEC Cross-border
    being developed          •   WCO Ecommerce strategy                   ecommerce facilitation
•   Brazilian tax ID (CPF)   •   WCO SAFE 2015 Framework                  framework, 2017
    for every packet;            enhancing airline security
                             •   WCO-UPU customs and EAD
                                 guide;
                             •   ICAO-WCO aviation guidelines

The Changing Architecture of EU Cross-Border Ecommerce

        Legislative Drivers                    Risks for Ecommerce Trade:
 Union Customs Code: overhauls             Efficiency and Delivery Risks
  customs, declarations and tech;               Clearance not aligned with
    EAD mandatory for EMS,                       logistics processes;
      parcels and small packets;                Impacts on the Physical
 EU Ecommerce Package, Dec                       Supply-Chain: (i) inbound
  2017:                                           routing of product into EU; and
                                                  (ii) location/ structure of
    VAT collection on items < €22                fulfilment network;
      (de minimis removal); between         Operational: de minimis removal
      €22-€150; duties >€150; +              and customs tech readiness;
      excise – requires substantial IT      Complexity: Inconsistent member
      development;                           state IT spec/ implementation;
    VAT one-stop-shop and                  Data: “mostly” understood as CN
      marketplace liability to account       22/23 + transport manifest data;
      for VAT;                               data quality; readiness of 3rd-
 Proposed 3% Revenue Tax                    countries;
  Where Value Created                       Returns: VAT recovery process
                                             that has been paid in advance
 CEN TC331: data exchange                   when goods are returned;
  standards & labels                        Channel Distortion: revenue tax;

Counterfeit Goods: “Free-riding” on the IPR of Others
Counterfeits Seem To Be Increasing In International Trade*:
 From 1.9% of world imports (2009) to 2.5% of world trade (2013) - 5% of EU imports;
 Virtually all product categories are pirated;
 China No.1 point of origin and account for 80% of all counterfeits seized (fewer than ten
  countries account for virtually all of the problem – Free trade zone a particular problem);

Evidence That Ecommerce Expands Trade in Counterfeit Goods:
 Demand-Side: Choice and low shipping fees drive greater consumer complicity; 7% have
   bought counterfeit goods in the last 12 months; 15% among 15-24 year olds,**
 Supply-Side: Greater scope for anonymity; flexibility to avoid detection; 24/7 global
   reach; increasing share of small shipments, postal/ express with significantly higher
   enforcement costs (detection to destruction); use of criminal marketplaces modelled on
   legitimate platforms***;
But
 Most counterfeits are in bulk imports – only 2% in postal/express;
 Main cause of counterfeit is corruption, and failure to enforce, in provenance
   countries**** – limited enforcement yet new legislative measures which threaten to
   disrupt legitimate cross-border flows;

EC’s Product Safety and IPR Regulation on Compliance & Enforcement:
 Concern that EU product safety standards and IPR rules are being compromised by the
     ecommerce channel. Aims to: (i) protect EU consumers; (ii) ensure EU traders do not
     face unfair competition; (iii) improve the effectiveness of surveillance authorities;
     … *OECD, 2016; Chaudry and Zimmerman, 2009; ** EUIPO, 2013. EC, 2017 report on functioning of the MoU. ***Europol,
Sources:
SCOTA, 2017; ****EUIPO/ OECD: Why Do Countries Export Fakes 2018

EC’s Product Safety and IPR Regulation on Compliance & Enforcement
Proposes: a person responsible for compliance information be established within the EU
“as a necessary condition” for trading by importers:
 Person’s contact details be shown “on the product, its packaging, the parcel or an
   accompanying document” (Art 4 point 5);
 It is not clear how this could be operationalised, still less how under-resourced surveillance
   authorities would act on such information;
 Being able to serve a global market without being established in every country is the very
   core of SME ecommerce – tilts ecommerce playing-field in favour of marketplaces;
 Neither risked-based (only a small handful of countries are responsible), practicable nor
   enforceable;

Proportionate Approaches:
 Industry-Wide MoU* **,
     Provide a single contact point and co-operate with Member State authorities;
     Consult RAPEX and take down dangerous goods within 2 days;
     Effective in removing counterfeit products and fostering trust between parties;
 Inter-agency co-operation in destination countries
     Joined-up, inter-agency co-operation and detection at destination (penalties, seizures:;
 Ability to track/trace (IT/data) consignments critical in limiting counterfeits:
     Share of counterfeits in total exports is on average 7.5%, compared with only 0.5% for
       economies that can track shipments;
 Ecommerce Trustmarks…

* Memo of Understanding, June 21 2016 23 signatories of rights owners, platforms and associations, **Product Safety
Pledge signed by eBay, Amazon, Alibaba and Rakuten France, June 2018:
https://ec.europa.eu/info/sites/info/files/voluntary_commitment_document_4signatures3-web.pdf

Stronger Role For Ecommerce Trustmarks
                                and Industry Action?
 European Trustmark do not include specific requirements concerning counterfeit goods,
  rather:
     EMOTA: “Transparent information about the trader” or “Clear, complete and
       accurate product description” or “appropriate protection of minors”*;
     Ecommerce Europe: product characteristics “adequately described”, delivered
       based on the description,” and a reminder about “the existence of a legal guarantee
       of conformity for goods.”**
 The Merchant Charter is stronger: “As an online shopper with an EMOTA‐accredited
  merchant, you have the right to… Convenient, reliable, safe and legally compliant
  service”;***.

 National Trustmarks can also be explicit**** e.g. German Trustmark, (EHI), “webshop
  operators are obliged not to sell any goods that do not comply with the legal
  requirements”*****;

         Can Ecommerce Trustmarks be strengthened to address the counterfeit
        and product safety issue, thus protecting “trade creating” ecommerce and
          avoiding the risk of excessive legislative intervention which adds cost/
                          delays to the flow of cross-border items;
*https://europeantrustmark.eu/en/emota/participation-criteria/ **https://www.ecommercetrustmark.eu/the-code-of-conduct/)
***(https://europeantrustmark.eu/en/for-merchants/merchants-charter/ **** shops need to be certified by a national
Trustmark that is a member or the European Trustmark to be allowed to display the European Trustmark on their website
***** https://ehi-siegel.de/fileadmin/redaktion/gos_contracts/gos-Kriterien_140624_01.pdf).
With thanks to Alien Mulyk, EMOTA, for input on European Trustmarks

Electronic Advance Data (EAD)                                     Origin            Airline
                                                                  Post
  End-to-end electronic data, prior to loading, using
   standardized messages/ interfaces, critical in             Destination        Destination
   balancing control of illicit trade with facilitation         Post              Customs

      Customs and Border Authorities                               Posts
  Risk-Based, On-Route Decisions:               Carrier Compliance: data collected at
   Visibility about origin country; item          source; preparation of items for border
   description and value; possible automated      authorities (fiscal and non-fiscal);
   decision-making on low risk items/flows;
                                                 Reduced handling costs: in context of
  Improved Data Quality, detections and          high volume growth;
   Duty/Tax Revenue Collection
                                                 Process Innovation To Meet New
  Higher Throughput at Less Cost                 Legislation: automated item tax/ duty
                                                  calculation and tax invoice generation in
  Security Alerts: Supply-chain & aviation       context of LVCR removal;
   security identifying high-risk and advice
   on consignments (pre-loading; pre-arrival;    Value-Added Service Opportunity:
                                                  provides platform for VAS for benefit of
  Risk Assessed Database Supports                shippers and recipients (DDP; tracking);
   Analytics: seizure from provenance             and returns VAT recovery;
   countries; protects against “trade
   diversion”; interface with “control”          Improved QofS: delivery reliability via
   agencies                                       visibility in Leg 2; and customer service

External/Social Costs: The Environment
 Environmental and consumer concerns about sustainability shapes the trade landscape:
    Social costs associated with cross-border flows are generally not reflected in prices;
    Sustainability of the “Zalando Party” phenomenon?;

 Primary Packaging: a major ecommerce waste stream:
     Contain and protect the product, communicate the brand and integral to overall
       customer experience;
     Optimised for efficiency/ effectiveness across supply-chain: storage, transport,
       sorting and delivery (to the door; collection points…):
           Secure: limits damage and theft-proof, yet easy to open (“wrap rage”);
           Attractive: SKU-specific formats and materials: consumers’ low perceived of
             product in polybags?;
           Efficient: designed for dimensional pricing and lowest total cost (“no air”); Box-
             on-Demand opportunities: package bespoke for each order; easy returns;
           Revenue Stream: Amazon planning to sell zipcode relevant ads on packets;
           Sustainable: Reuse, inks, recycling, ease of disposal and curb-side recovery;
 Significant risk of “single use package tax” – UK likely to proposed packaging levy in 2018

                                 Testing re-useable compressible bag requiring less space
                                 than standard cycle packaging – can be reused 1,000 times

    Industry-approach needed - carriers, retailers, marketplaces, envelope and
packaging industry – to capture functionality and emotion of sustainable ecommerce
          packaging, at a cost-effective price – limit risk of “package tax”;

Terminal Dues: Distort Cross-Border Fulfilment and Delivery
 Terminal Dues are the inter-postal payment charge for
  delivery on ecommerce items weight less that

Terminal Dues Reform and Trade: 2022 and Beyond

  Failure to address distortions on

Nordic Case-Study: The Volume Risk on Cross-Border Packets

 PostNord Sweden required to collect VAT (25%) and duties on all
  inbound packets from 1st March 2018;

 To defray collection costs, Sweden Post levies a fee of between 75-125 SEK (≈
  €7.5 - €12.5), depending on merchandise value;

Since 1st March:
 Inbound Chinese volumes down 90% - from 150k to 15k per day;
 Much of this decline will be the low-value “trade diverted” volumes – but tax
   and collection fee hits all inbound volumes (down c. 60%);
 Wish.com Swedish-bound volumes returning but as Delivery Duty Paid;
 Other volume transiting into Sweden (via NL) until de minimis removed across
   EU in 2021 (eg Fyndiq Swedish bargain marketplace);
 Norway considering the same the same approach;

 Similar cross-border volume hit might be anticipated in Australia (1/7/18), NZ
  (2019), and EU (2021) e.g:
     Amazon.com no longer available to Australian shoppers - only Amazon.au
      – fulfilment moved to Australia arguable at a cost to efficiency;
            Excessive transaction costs will constrain “trade creating”
                ecommerce and not only “trade diverting” flows;

Conclusion I
 “Individualization of trade” via ecommerce:
    Transforming the way firms operate: sourcing, supply-chain, inventory and
      distribution.
    Promises significant economic benefits, if “trade creating”;
    Heightens challenge to balance control (fiscal and non-fiscal border risks)
      to tackle diversion, with facilitation;

 Legitimate cross-border ecommerce requires fast, simple and predictable
  custom formalities but such an environment also favourable to counterfeits and
  other “trade diverted” flows;

 Essential to balance border control with trade facilitation, where policy-makers
  focus on proportionate, provenance-oriented, risk-based and collaborative
  approaches based on data and analytics;

 The ecommerce industry and policy-makers have joint interests to create a
  cross-border regulatory eco-system which promotes the predictability,
  transparency, security and fair competition of “trade creating” ecommerce;
     Though ecommerce is the fastest growing segment in total trade, further
      growth (beyond 3% of total world trade) requires modernisation of the
       trade-related rules for the efficient and effective management of the
                    tsunami light-weight cross-border packets;

Conclusion II
Supply-Chain and Delivery Dynamics

      Shipper Needs          Cross-Border Trade Policy Environment                  Buyer Needs
      Low complexity as                             Illicit
       per domestic            Terminal             Trade,              Product          Cost certainty
       shipping                  Dues             Counterfeit            Safety          Low shipping
      Assurance on                               Goods/IPR                               fees
       compliance issues                                              Prohibition        Low cost
                               Aviation           Tax, Duty
      Data and visibility                        DeMinimis
                                                                         and              tracking
                               Security                               Restriction
       around the order        eg Hazmat           & Excise                              Reliable and
                                                                       eg CITES
      Supply-chain                                                                       fast shipping
       integration to          Customs                                                    times
       delivery partners                           Returns              External         Parcel visibility
                              Processes,
       for efficiency and                          and VAT
                              IT & Other                                 Costs            and notification
                                                   Recovery
       quality                 Agencies                                                  Simple return
      Timely inventory                                                                   processes
       re-integration on         Border Control                     Trade
       returns                (Fiscal and Non-Fiscal)             Facilitation

                                           Electronic Advance Data
       Strengthened                                                                       Proportionate
       Industry-wide             Company                        Postal Policy and        Legislation and
        Trustmarks             Processes and                        Agency              Trade Facilitation
                                  Actions                        Collaboration

Annexes

Ecommerce Business Model Drives Fulfilment and Delivery Integration
                                                              Returns experience,
                                  Doorstep/ pick-up           and immediate refund,
 Retailer brand
                                  experience shapes           supports recipient
 and marketing
                                  overall satisfaction and    stickiness to retailers
 programmes
                                  loyalty

   Traffic x conversion x basket value + Re-visit - Shipping - Inventory Return Costs

     Delivery choices/              Carrier selection based     Returns minimise
     prices critical for            on SKUs, value-add,         retailers’ inventory costs
     successful checkout            QofS and cost;              and avoids mark-downs

 Four Critical Capabilities:
 1. Get the Basics Right: merchandise, site navigation, copy, pricing, payments;
 2. Drive Traffic and GMV: marketing, promotions and communications;
 3. Innovation: Customer experience; choice, convenience and impact on repeat
    business (AI; Augmented reality; algorithms…);
 4. Supply-Chain Visibility and Integrated Delivery and Returns:
      Optimise order management and fulfilment (what is stocked, where and
        when) with delivery, based on SKUs and recipient needs;
      Timely management and re-integration of processed returns to inventory
        (returns are often carriers’ largest single stream);

Fulfilment, Delivery and The Wider Supply-Chain
  Fulfilment centre location/ numbers minimise inventory (better margin), optimise in-stock
    (improved customer experience) and reduce costs:
    For every 100 mile reduction in the distance of shipping goods Amazon reduces total
       shipping costs by 50% and increases profit margin by 5-14%;

 Delivery is a sub-set of a wider systems question:
   Order Management: Dynamic and seamless order management from DC, store,
      suppliers based on enterprise view of inventory;
   Fulfilment: from batch processes (episodic picking, sorting and packing) to continuous
      and predictable fulfilment processes;
   Delivery: procure delivery services optimised for the needs of the SKU category, and
      the proximity of the merchandise to the recipient;
   Returns: Timely and visible in-transit returns, across channels;

 But decisions around customer order assignment are myopic:
   Individual order merchandise combinations are unique and cannot (wholly) account for
      subsequent downstream events: other orders, inventory replenishment, delivery delays;

 Hence real-time analytics/ algorithms to drive order assignment, minimise total number
  shipments and optimise routing/delivery based on both the goods & recipient location;

 Commercial objective is to reduce per unit costs (sourcing, fulfilment and delivery)
  without violating the due shipment date;
       Delivery re-imagined as an extension of the supply chain for the efficient flow
          of inventory – delivery and upstream integration supports the customer
        experience, innovation and cost control, which in turn boosts retail growth;
Houde, J-F., Newberry, P. and Seim, K. (2017) Economies of Density in E-Commerce: A Study of Amazon's Fulfillment Center Network NBER Working Paper No.
23361, April

Thank you

Tim.walsh@pb.com
00 44 7743 840 396