On September 11, 2001, terrorists destroyed the World Trade Center towers, stole the lives of thousands of innocent people, and tainted forever America’s sense of security. As a result of these horrific acts, the United States has implemented and continues to implement new security measures that will permanently alter trading practices and pricing strategies of companies involved in global commerce.

Looking at where things stand more than a year later, it appears that companies have made some changes. But what still remains unanswered is whether this new phase will have a significant negative influence on exporters, importers and world trade.

Questions and Concerns

Thus far, heightened security measures have, to some degree, decelerated the pace of international business. And long lines at airports, for example, have caused some travelers to stay home or not travel by air. Will this continue to be the norm?

Similarly, corporate supply chains that span the globe have been affected. Will the proposed and perhaps very necessary searching of the millions of containers that arrive at U.S. ports annually delay imports considerably? What impact will this have on prices? And what affect will this have on U.S. manufacturers who depend on supplies arriving “just-in-time” from their overseas suppliers?

Terrorism Tax

To cover the delays of importing and exporting goods, in addition to the new costs associated with stricter security measures, a “terrorism tax” has been created. While more time is needed to assess its full extent, it is already certain that companies large and small will have to develop new security measures that will, in turn, alter their logistics and pricing structures.

A Move from Air to Sea

The use of new security technologies involved in shipping goods across oceans has resulted in increased inventory, insurance and administrative expenses. Overall, airfreight costs have risen an estimated 10 percent since September 11, 2001, according to the Organization for Economic Co-operation and Development (OECD). However, the costs of shipping by sea have risen only slightly. Consequently, more importers and exporters are switching from air to sea transport.

Yet, if port authorities and ship owners are required to examine cargo more extensively, this will undoubtedly boost shipping costs, as well as delay delivery. Plus, these groups can expect another cost — more ports will require tugs to accompany ships as they enter the harbor, an action designed to prevent ships from being intentionally crashed into bridge foundations by terrorists.

Greater Truck and Rail Safety

Measured by value, nearly two-thirds of the goods transported between the United States, Canada and Mexico are hauled by trucks. Calculated by weight, trucks and ships each transport about one third of the total, according to the U.S. Department of Transportation.

To protect their shipments, trucking firms have begun to build fences around freight yards, conduct background checks on drivers, monitor truck travel with satellite-tracking systems, and install electronic devices to detect when a container is opened illegally. Train operators have begun more frequent inspections of tracks, switches, bridges, and tunnels, and have strengthened communications facilities.

An Opportunity and a Challenge

U.S. firms that view the new logistic systems as both an opportunity and a challenge will fare well. Firms that quickly learn how to use the systems to their advantage will gain a competitive edge. Of course, larger firms with tremendous shipping volumes and clout, vast capital and innovative personnel will have a head start on smaller firms, who will need to be creative and act quickly to compete.

Taking the Customs “Fast Lane”

A head start over competitors can be gained by companies that obtain the Customs-Trade Partnership Against Terrorism (C-TPAT) certification. This voluntary program, created by the U.S. Customs department, requires U.S. importers to assess the ability of their supply chains to meet security procedures and to make any necessary changes to boost security.

Companies with the C-TPAT certification can use the “fast lane” to cross U.S. borders in less time and with fewer inspections. This is a definite plus for keeping supply lines intact and running smoothly.

Scrutinizing Owners of Goods

Another change is the U.S. Customs Service request that details of container contents be provided 24 hours before cargo is loaded onto ships at foreign ports. Companies that don’t comply with this request can be subject to fines or delays in the unloading of their cargo in the U.S.

Companies of all sizes will no doubt have to adopt procedures that improve their databases so that accurate information about products, shipments and final customers can be easily retrieved and evaluated. Otherwise, further delays will be encountered at borders, creating disruptions in the supply line, and adding to the product’s final cost.

Delay Costs Could Be in the Billions

Prior to last fall, the cost of delays in getting goods into the United States represented 5 to 13 percent of the final value of the goods traded, according to J. A. Leonard’s article in Manufacturers Alliance e-Alerts. If additional security measures add 1 to 3 percentage points to this, a figure projected by the OECD, Leonard estimates this could increase the cost of goods traded in the U.S. by $5.6 billion to $16.8 billion.

Although these estimates were made soon after the attacks, the new security requirements will undoubtedly affect product pricing. And companies likely will have to stockpile more spare parts — a move that will hike inventory costs.

Insurance Premiums Increase

Due to the September 11, 2001 attacks, insurance companies suffered their biggest loss ever, estimated as high as $50 billion. As a result, some insurers revoked policies covering airline’s liabilities, which in turn, forced many governments to step in with coverage. Additionally, ship owners sailing into countries considered high-risk either had their premium raised considerably, or their war risk coverage cancelled.

Commercial insurance premiums were on the rise even before September 11, 2001; the reduction of insurance capacity brought about by the billions in losses, accelerated these rate increases. However, insurance premiums still only represent a small portion of total shipping costs. As of 2000, the share of transport and insurance costs was 3.39 percent of the customs value of imported commodities, according to the OECD. While this figure may slightly increase this year, overall, it will not be a strong factor on the final pricing of goods.

But the considerable rise in workers’ compensation rates over 2001’s could influence the price of goods and services considerably. Insurers and reinsurers are now aware and concerned that a high concentration of employees in one building, especially a high rise, could produce losses similar to those they suffered from the collapse of the World Trade Center. As a result of this and other fee increases, companies need to reassess how they do business and accommodate the changes ahead.

This article appeared in Impact Analysis, November 2002.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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