Episode Transcript
[00:00:03] Speaker A: Stephen, where does trade fragmentation create the most practical difficulty for European importers and exporters? And what should freight buyers change about how they do business or their strategy?
[00:00:15] Speaker B: Okay, Mike, the difficulty is not at the border. It's in decisions that are taken months before the goods arrive.
Tariff changes, we know they move your landed costs and they impact your cash flow.
However, sourcing origin raises new origin questions.
U.S. imports from China fell 29% last year, but that trade did not vanish, it moved. And every move now needs new origin. Evidence has to be sourced, but very importantly has to be verified within that environment.
My advice to freight buyers is price the whole route. World bank research estimated that an extra day of delivery before a shipment reduces trade by 1% on average. And that's like moving your partner 70 kilometers away.
So it is a concern in relation to moving, verifying when you actually change your data to actually verify that the or change your source supply, verify the origin of and do that properly because it does have a significant impact. Landing cost we know about, but actually having the full impact with documentation, charges and everything that goes that needs to be done. So sometimes the fastest freight route is not the most economic freight route for those involved in the industry.
[00:01:43] Speaker A: I just want to zoom in on one particular reform we've seen in Europe.
Echo is what we saw last year in the US, the end of de minimis exemptions on 1 July this year, the EU brought in a flat €3 customs duty on parcels under €150 value. We saw a load of front loading air cargo volumes and rates spiked and then slumped. What is that? This is a temporary charge, right? It's a three euro temporary charge.
But how should businesses plan? Well, how did business plan for this and how do they plan beyond this? Interim arrangement.
[00:02:16] Speaker B: Yeah, interim arrangements. As we know, within the tax situation, if we go way back, value added tax was a experimental charge way back. So it's very hard
[00:02:26] Speaker A: to stick
[00:02:27] Speaker B: to be moved away in that regard. But the three euro in my view is not a price, it is a classification test. The duty applies per tariff category within a consignment of €150 or less. So a phone case and a charger and one box that can lead to two charges and not one. So that test now runs about, you know, based on last year's evidence, 16 million times a day because that's how many low value parcels Europe imports with an average declared value of under €9. A €3 duty on a €9 item is not a rounding error. And a second category in the box would also double that. So the unglamorous work is suddenly commercial. Accurate descriptions, correct classifications, a landed cost the customer can trust at checkout and get unexpected charges post facto. I think that's important. Air freight volumes and rates. Roel may have a better view. But on planning, I wouldn't plan just around the interim. As you mentioned, three euro. It's around the direction the interim mechanism gives way to the normal tariff and duty on low value. E Commerce is now the policy and closer oversight comes with that.
[00:03:51] Speaker A: Just a two pronged question, Stephen. Does anything around the implementation of this policy accelerate the shift towards, let's call it like a genuinely data led model for European customs, something we've talked about before and more generally. Where is EU customs reform actually up to, including the Customs Data hub?
[00:04:11] Speaker B: If I could answer, and it's a two pronged question. There are two clocks. If I could use that analogy. There are two clocks running and business need to watch both of them. The near one says November. The product identifiers become mandatory on the relevant import declarations and a separate €2 union handling fee is currently scheduled for the 1st of November. That is practical work on product records and who charges to what to whom. And it's only three weeks away.
The FAR clock says 2034.
The reform completed its approvals in September and today an importer trading across Europe deals with 27 administrations and the commissions count. There's 111 separate IT systems. The Customs Data Hub replaces that with one interface where you supply information once and reuse it.
By the Commission's own estimate, there were savings of up to 2 billion a year for member states and 2.7 billion euro a year for business.
E Commerce will use the hub from July 2028 and we speak at this moment in time, every trader until March 2034. So in between, traders have to live in both worlds. And the homework for both clocks is the same. Know your product, know your supplier, have one person who can stand over that data. And we'll come back to that later in our discussions. And that improved clearance today and exactly what the hub will ask for later.
[00:05:49] Speaker A: Where can AI make any of this? Or where can AI make customs work better with all of this going on? And where do you think that decisions still need that human or expert judgment?
[00:06:03] Speaker B: The useful applications for AI are not overtly glamorous, if I can say, but they increase in the truth and the verification that is required. And I can be concrete, they're alive in our platform. Today we have various AI features running in the platform, turning A commercial invoice PDF into a structured data that the declaration can use and the operator can check it side by side with the source. That's really important.
Walking a broker through a classification, asking the questions a senior broker would ask and then presenting a code with the justification and the alternatives. Researching a commodity line, the goods, the parties, the control lists and returning risk rating with a reasoning written down so you have a full audit trail matching supplier's invoice to the job. So finance only touches by exception and manages by exception.
So this is the frame we operate in. So the European Commission are estimating 65% of low value parcels are undervalued if most of what reaches the border is wrong in relation to its data compliance. The first job for AI is not necessarily speed, it's truth and it's actually verification of that. A fluent wrong answer is the most expensive thing in cost jobs. So AI reads researches, writes down and a person makes a call and we call it Assistive and we have to be very careful with that, that it is assistive technology in relation to what it can do. And we judge any deployment on less rework and fewer avoidable errors managed by exception is really important.
[00:07:51] Speaker A: I just want to get into Stephen, a little bit about your strategy here.
Wisetech bought FRDM AI in July and I believe the idea is you roll this in to Verify w your compliance and risk product.
What are you building with Verify Wise and where does FRDM help businesses understand risks beyond their immediate suppliers? It's really what we were talking about earlier with Cindy.
[00:08:15] Speaker B: Sure most businesses know their supplier, but far few know their supplier's supplier. McKinsey's latest risk survey puts it precisely 95% of companies can see their Tier 1 supply chain risk, but only Tier 42% can see Tier 2 or beyond. The gap is where the risk lives and increasingly where the law is starting to look. And that's really important. The published direction for Verify Wise is to bring supplier risk intelligence together with our trade compliance capability.
So decisions about who you trade with and the decision about how you clear the goods come from the same picture and the same single source of truth, which is very important.
FRDM brings the ability to map relationships beyond direct supplier and surface risk further up in the chain.
So if we picture a buyer who's sourcing from a supplier they have used for years, a Signal 2 tier should trigger a question and a request for evidence before the order goes in and not after the shipment has been detained. So it's a bit advanced checking and advanced cargo screening. In relation to what we're doing to ensure that the goods move correctly through the supply chain. So the value, it tells you where to look. It supports the business judgment. It doesn't guarantee compliance. That responsibility still vests and stays with the business.
