Transforming Trade with Blockchain & Smart Contracts

1. Larry Shi, Ph.D.; University of Houston EleftheriosIakovou, Ph.D.; Texas A&M University Vincent Iacopella; 14th Advisory Committee on Commercial Operations of CBP Project: Transforming Trade and Ensuring Global Supply Chain Security with Blockchain and Smart Contracts

2. Agenda • Project Introduction • Problem Statement • Approach & Methodology • Key Accomplishments • Transition Pathway • Challenges regarding Project Execution • Deliverables • Wrap-Up

3. Project Introduction “Transforming Trade and Ensuring Global Supply Chain Security with Blockchain and Smart Contracts” Project PI and Key Personnel • Project Champion: Mr. Vincent Annunziato, Director, Office of Trade, U.S. Customs and Border Protection • Larry (Weidong) Shi, Ph.D. University of Houston • LefterisIakovou, Ph.D.; Lead for Texas A & M University subaward(Logistics and Supply Chain Management) • Mr. Vincent Iacopella, Licensed Customs Broker, Trade Co-Chair of the 14th COAC Committee Project Theme • Enhance the Ability to Secure and Facilitate Transnational Flows of Goods Project Start and End Date • Dec 1, 2018 – Nov 30, 2019

4. Problem Statement (1/2) • Explore innovative opportunities provided by blockchain and other relevant technologies for transforming entry data collection process in order to facilitate the timely analysis of supply chain risk and to ensure trade compliance • Conduct feasibility evaluations of simplifying entry data collection by integrating and leveraging commercial blockchain-based E2E) SC ecosystems • Identify values and use case scenarios for entry data collection • Provide recommendations and knowledge products to CBP components and HSE stakeholders

5. Problem Statement (2/2) • Provide a “30,000 ft. roadmap” to CBP so that the agency can leverage the power of blockchain and extend it to the use of blockchain-based applications • Support CBP Emerging as a Leader amongst Customs Agencies globally, in utilizing blockchain as a platform for the customs of the future • Employing an end-to-end supply chain view of adopting blockchain technology, with a focus on business and commercial process viability

6. Beneficiaries of the Project • Trade Facilitation • Trade Law • Protecting against illegal imports and collecting customs revenue (e.g., tariffs, fees, and taxes) • Import Security • Preventing entry of CBRN and related materials, illegal drugs, and other contraband Office of Trade

7. Beneficiary / End User Profile: Jobs Before goods leave the country of origin, CBP collects initial information from the carrier, importer, freight forwarder and customs broker.

8. Beneficiary / End User Profile: Desired Gains (1/2) • Faster processing • Fewer supply chain disruptions • Enhanced interagency management and data sharing • Reduced labor (e.g., staffing needs, manual or duplicated work) • Enhanced transparency and visibility for Global E2E Supply Chain and improved data reliability and quality • Added flexibility to the existing revenue collection process • Improved targeting capability to identify high risk shipments and importers

9. Beneficiary / End User Profile: Desired Gains (1/2) Facilitation • Faster processing • Fewer supply chain disruptions • Enhanced interagency management and data sharing • Reduced labor (e.g., staffing needs, manual or duplicated work) • Enhanced transparency and visibility for Global Supply Chain and improved data reliability and quality • Added flexibility to the existing revenue collection process • Improved targeting capability to identify high risk shipments and importers

10. Beneficiary / End User Profile: Desired Gains (1/2) • Faster processing • Fewer supply chain disruptions • Enhanced interagency management and data sharing • Reduced labor (e.g., staffing needs, manual or duplicated work) • Enhanced transparency and visibility for Global Supply Chain and improve data reliability and quality • Added flexibility to the existing revenue collection process • Improved targeting capability to identify high risk shipments and importers Security

11. Beneficiary / End User Profile: Desired Gains (2/2) • Border related trade barriers accounts for 44% of trade cost1 • 1 day less in delivery times => 0.5 % of landed cost of goods2 • Each additional day of delay prior to shipment, reduces trade by more than 1%3 • Average impact of Supply Chain disruptions4: • 107% decrease in Operating Income; • 114% decrease in Return on Sales; and • 92% decrease in Return on Assets • More than 10% reduction on Shareholder Value [1] James E. Anderson and Eric van Wincoop. "Trade Costs". Journal of Economic Literature, 2004. [2] Hummels, David. "Time as a Trade Barrier". 2001. [3] Simeon Djankov, Caroline Freund, and Cong S. Pham. "Trading on Time". The Review of Economics and Statistics, 2010. [4] Hendricks, K. B., Singhal, V., “Handbook of Integrated Risk Management in Global Supply Chains”, 2012.

12. Beneficiary / End User Profile: Pain Points • Inherent tension between facilitation and security1 • Lack of transparency and visibility in the global supply chain2. • Access to private databases (e.g., carriers, banks, importers, sellers) • Timeliness of data • Staffing challenges3 • Need for automation and reduction of manual processing of entry data • Cost for developing and maintaining IT systems4 Source : [1] CRS-Report-R43014; [2] GAO-17-650; [3] GAO-17-618; [4] GAO-18-271.

13. Product & Service/Nature of the Project • Artifacts including architecture, visual representation/infographics (business flow, architecture, etc.), and illustrations • Recommendations and opportunities for PoCs • Project report

14. Approach and Methodology: (1/2) Document As-Is Landscape Map As-Is Process Analyze As-Is Process Evaluate to be Process Collect Stakeholder Feedback Process Re-design Summary & Report Brainstorm Suggestions/ Ideas Stakeholder Meeting Technology Feasibility Pilots/PoCs WCO, 2FCC, BiTA, … Literature Review Related Literature Design Science Research (DSR) methodology

15. Approach and Methodology: (2/2) Document As-Is Landscape Map As-Is Process Analyze As-Is Process Evaluate to be Process Collect Stakeholder Feedback Process Re-design Summary & Report Brainstorm Suggestions/ Ideas Stakeholder Meeting Technology Feasibility Pilots/PoCs WCO, 2FCC, BiTA, … Understand the Problem Evaluation Re-design Report Suggestions and Ideas Related Literature

16. Current Process: (1/2) Trade and Commercial Transaction (offer, purchase order, invoice, etc.) Transportation and Logistics Providers (bills of lading, freight invoice, insurance policy, etc.) Trade Finance and Banks (letter of credit, bill of exchange, etc.) Customs, Brokers and Authorities (power of attorney, certificate of origin, import/export license, sanitary and phytosanitary certificate, etc.)

17. Current Process: (2/2) Carrier (air, ocean) ExportCustoms Exporter’s Bank/insure Import Port Forwarder Export Port Forwarder Importer’s Bank/insurer Import Customs Importer Exporter Manufacturer Customs Broker Typical Documentation Issued: Manufacturer • Sales contract • Commercial invoices • Term of sale • Packing list Forwarder • Road permit Export Port • Port declaration • Manifest • Shipment status Import Port • Port declaration • Manifest • Shipment status Importer’s Bank/Insurer • Letter of credit processing Export Customs • Certificate of origin • Customs value • Export licenses Customs Broker • Import manifest • Power of attorney • Bond • Entry summary Importer • Purchase order Import Customs • ISF • Manifests • Entry summary • Import licenses Exporter’s Bank/Insurer • Letter of credit • Insurance policy Forwarder • Bill of lading/airway bill • Delivery note • Shipment status • Loading certificate Carrier • Master bill of lading/airway bill • Shipment status

18. Sharing Supply Chain Data over Blockchain Buyer (Importer) & Seller Commercial invoice Purchase order Packing List Term of Sale Banks, Insurance Providers Letter of Credit Processing Insurance Certificate Letter of Credit 3PL, Carriers, Intermodal Operators Bill of Lading Dangerous Good Manifest Loading List Import Manifest Arrival Notice Entry Summary Reconciliation ISF (10+2) Authorities (Export Customs, Import Customs, PGAs) Document Request Advance Ruling Export License Certificate of Origin Documents Messages, Realtime data Public Bulletin, Announcements, Records of Actions (decisions, actions)

19. Ontology of Entry Data Elements Stakeholders Documents C: create R: read X: include Entry Data Elements List of Data Elements Required for Entries

20. Entry Process Re-Engineering: (1/2)

21. Entry Process Re-Engineering: (2/2)

22. Pains Alleviated

23. Gains Created * * * * * * * * * * *

24. Key Accomplishments: Current Status Document As-Is Landscape Map As-Is Process Analyze As-Is Process Evaluate to be Process Collect Stakeholder Feedback Process Re-design Summary & Report Brainstorm Suggestions/ Ideas Stakeholder Meeting Technology Feasibility Pilots/PoCs WCO, 2FCC, BiTA, … Steps completed Yet to be done Related Literature

25. Transition Pathway • DHS Components and Governmental Agencies: • CBP Office of Trade, CBP Office of Trade Relations, PGAs, BIEC (Border Interagency Executive Council) • 21CCF • HSE and Trade Community Stakeholders: • COAC • National Customs Brokers & Forwarders Association of America • Air Forwarders Association • Global Supply Chain Blockchain Consortia (e.g., BiTA) • Pacific Coast Council of Customs Brokers and Freight Forwarders • American Association of Exporters and Importers

26. Challenges • Communications with the Private Sector and the relevant Governmental Agencies • Temporal Constraints

27. Planned Items/Next Steps • Stakeholder survey on blockchain-based data sharing within trade and with customs covering: • Gains, concerns, barriers, adoption, etc. • Importers of various sizes and import activity • Cost structure analysis • Adoption costs in the near term and long term • Documentation (brainstorm, re-design, etc.) • Investigations (e.g., interoperation, adoption challenges, governance model) • Public dissemination (in consultation with BTI, Project Manager, and Project Champion)

28. Wrap-Up • An Overview of the Project • Team • Mission • Goals • Timeline • Next Steps • As per Project Champion, we are on the right track! • Exploring the potential of Blockchain to be the platform on which CBP can build upon to emerge as a Global Leader

29. Thank you for the support ! We look forward to completing the project successfully, while adding value to CBP!

30. Key References • Yotaro Okazaki. Unveiling the Potential of Blockchain for Customs. WCO Research Paper No. 45. June 2018. • Emmanuelle Ganne. Can Blockchain Revolutionize International Trade? 2018. • Boston Consulting Group. Digital Innovation in Trade Finance: Have We Reached a Tipping Point?, October 2017. • Deloitte's 2019 Global Blockchain Survey. BlockchainGets Down to Business. • Deidra Delisser. CBP 21st Century Customs Framework Public Meeting. March 1, 2019. • AnthiTsilimeni-Archangelidi. Blockchain Technology in Supply Chain. Conceptual Redesign of Crude Palm Oil’s Trading Business Process. 2018. • CBP. Business Rules and Process Document for Trade. • CBP. Valuation Encyclopedia(1980 – 2015). • GAO-18-271. • GAO-17-618. • GAO-17-650. • Independent Auditors' Report on U.S. Customs and Border Protection's FY 2014 Financial Statements. • Independent Auditors' Report on U.S. Customs and Border Protection's FY 2015 Financial Statements. • Hendricks, K. B., Singhal, V., 2012, “Handbook of Integrated Risk Management in Global Supply Chains”, First Edition, John Wiley & Sons, Inc., Chapter 3, pp. 51-78. • Hummels, David. "Time as a Trade Barrier". 2001.

31. Key References • James E. Anderson and Eric van Wincoop. "Trade Costs". Journal of Economic Literature, Vol. 42, No. 3. (Sep., 2004), pp. 691-751. • Simeon Djankov, Caroline Freund, and Cong S. Pham. "Trading on Time". The Review of Economics and Statistics, February 2010, 92(1): 166–173. • Sean Cao, Lin William Cong, and Baozhong Yang. Auditing and Blockchains: Pricing, Misstatements, and Regulation. Working Draft. 2018. • Accenture. How BlockchainCan Bring Greater Value to Procure-to-Pay Processes.