[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
Y2K, CUSTOMS FLOWS AND GLOBAL TRADE: ARE WE PREPARED TO MEET THE
CHALLENGES OF THE NEW MILLENNIUM?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTERNATIONAL ECONOMIC POLICY AND TRADE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 29, 1999
__________
Serial No. 106-198
__________
Printed for the use of the Committee on International Relations
Available via the World Wide Web: http://www.house.gov/
international--relations
______
U.S. GOVERNMENT PRINTING OFFICE
70-536 DTP WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa TOM LANTOS, California
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American
DAN BURTON, Indiana Samoa
ELTON GALLEGLY, California DONALD M. PAYNE, New Jersey
ILEANA ROS-LEHTINEN, Florida ROBERT MENENDEZ, New Jersey
CASS BALLENGER, North Carolina SHERROD BROWN, Ohio
DANA ROHRABACHER, California CYNTHIA A. McKINNEY, Georgia
DONALD A. MANZULLO, Illinois ALCEE L. HASTINGS, Florida
EDWARD R. ROYCE, California PAT DANNER, Missouri
PETER T. KING, New York EARL F. HILLIARD, Alabama
STEVEN J. CHABOT, Ohio BRAD SHERMAN, California
MARSHALL ``MARK'' SANFORD, South ROBERT WEXLER, Florida
Carolina STEVEN R. ROTHMAN, New Jersey
MATT SALMON, Arizona JIM DAVIS, Florida
AMO HOUGHTON, New York EARL POMEROY, North Dakota
TOM CAMPBELL, California WILLIAM D. DELAHUNT, Massachusetts
JOHN M. McHUGH, New York GREGORY W. MEEKS, New York
KEVIN BRADY, Texas BARBARA LEE, California
RICHARD BURR, North Carolina JOSEPH CROWLEY, New York
PAUL E. GILLMOR, Ohio JOSEPH M. HOEFFEL, Pennsylvania
GEORGE RADAVANOVICH, Califorina [VACANCY]
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
Richard J. Garon, Chief of Staff
Kathleen Bertelsen Moazed, Democratic Chief of Staff
John P. Mackey, Republican Investigative Counsel
------
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio PAT DANNER, Missouri
KEVIN BRADY, Texas EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California BRAD SHERMAN, California
JOHN COOKSEY, Louisiana STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California JOSEPH CROWLEY, New York
TOM CAMPBELL, California JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
Mauricio Tamargo, Subcommittee Staff Director
Jodi Christiansen, Democratic Professional Staff Member
Yleem Poblete, Professional Staff Member
Victor Maldonado, Staff Associate
C O N T E N T S
----------
WITNESSES
Page
John McPhee, Director, Office of Computers and Business Equipment
Trade Development, International Trade Administration,
Department of Commerce......................................... 4
The Honorable S.W. Hall, Jr., Assistant Commissioner and Chief
Information Officer, U.S. Customs Service...................... 5
Jack L. Brock, Director, Government-Wide and Defense Information
Systems, General Accounting Office............................. 13
Harold Bauner, President, Bauner International Corporation....... 14
Y2K, CUSTOMS FLOWS AND GLOBAL TRADE: ARE WE PREPARED TO MEET THE
CHALLENGES OF THE NEW MILLENNIUM?
----------
TUESDAY, JUNE 29, 1999
House of Representatives,
Committee on International Economic
Policy and Trade,
Washington, DC.
The Subcommittee met, pursuant to call, at 2 p.m. In Room
2200, Rayburn House Office Building, Hon. Ileana Ros-Lehtinen
[Chairwoman of the Subcommittee] presiding.
Ms. Ros-Lehtinen. The Subcommittee will come to order. It
has been said that as a rule software systems do not work well
until they have been used and failed repeatedly in real
applications. The media has been saturated with coverage about
the Y2K challenge and about the possible failures of those real
applications. Will operations come to a grinding halt on
January 1 of next year? In a country that has always been a
step ahead in the information age, the U.S. Is having to
reevaluate its answers to the millennium question.
The Y2K bug, as it has been referred to, has been more
difficult to exterminate than many had once thought. Today's
international business and trade transactions are increasingly
conducted via computerized and automated systems. That is
surely true for the operations of our U.S. Customs Service
which is the focus of our hearing today. Our U.S. Customs
Service, in fact, relies heavily upon the use of automated
systems to collect duties, taxes and fees on imports as well as
to assist in the enforcement of our trade laws. The importance
of information technology to this agency is evident in their
automated commercial system which is used to process all of the
commercial goods imported into the United States.
In fact, 97 percent of the data filed for imports are
processed through ACS. Customs automated export systems
collects export related information from exporters and is used
to identify violators of export laws. These two systems are
reflective of the increasing use of computer technology to
speed up commercial transactions and their importance in
facilitating global trade and enforcing the laws that govern
it.
So what does the possibility of technological problems in
Customs' automated system mean for the flow of trade? What
impact will it have on our U.S. Corporations? And how are our
foreign trading partners coping with this challenge? This last
question is one which has been looked at under strict scrutiny.
Japan and Mexico, which account for more than 20 percent of
overall U.S. Trade are among those which are not fully prepared
to deal with the Y2K issue according to a recently released
Senate report.
Venezuela, the United States' largest foreign oil provider,
is estimated to be 9 to 15 months behind the U.S. In
preparation of Y2K.
And Europe has been heavily criticized for focussing its
attention and resources on the introduction of the Euro rather
than on the implementation of the Y2K challenge.
Experts fear that even though the U.S. Customs Service may
be Y2K compliant, the lack of readiness on the part of our
foreign trade partners could have an adverse reaction on our
U.S. Businesses. A millennium meltdown in the rest of the world
could unsettle our financial markets and deprive the U.S. Of
badly needed supplies and export markets.
Delays in the transport or supply chain could cause an
entire industry to come to a halt. Are U.S. small- to mid-size
businesses especially vulnerable? What are we are doing and
what could be done to minimize the impact?
These are the issues that we hope to discuss today as we
look at how Customs is meeting the Y2K question. And I would
like to recognize our Ranking Member, Mr. Menendez, for his
remarks.
Mr. Menendez. Thank you, Madam Chairlady. There clearly
isn't a person in America today that hasn't heard, as you have
pointed out, about the Y2K phenomenon and who hasn't listened
to the stories on National Public Radio about people who are
stocking up on bottled water and canned goods. Yesterday NPR
even actually had a report that said there are an increase in
purchases of old windmills by people concerned about
electricity failures on December 31. Most of us won't go to
those lengths to prepare for Y2K, but some of us might withdraw
a little extra cash just before the big day just in case. The
problem however does have the potential to impact our lives in
more indirect ways and trade falls into this category. We all
know that we import goods from abroad and export American
goods, but we seldom think about the processes that are
required to make those transactions happen and the mechanisms
which ensure that the proper duties are paid on imports and
that exports have the requisite export licenses.
The international trading system is a web of suppliers,
distributors, and customers who depend on the timely flow of
goods and services. The failure of any one aspect of the
trading system--communication links, transportation services,
financial services, import and export tracking systems--has the
potential to slow or even halt trade. While the U.S. Government
doesn't control all of these services, the U.S. Customs Service
is charged with facilitating, managing, and tracking the flow
of imports and exports. A breakdown of the Customs Service
could temporarily paralyze trade into and out of the country.
Fortunately, the General Accounting Office recently issued a
report that concluded that, quote, Customs has established
effective year 2000 program management controls including
structures and processes for the year 2000 testing contingency
planning and the year 2000 status report.
I would be interested to hear from our Customs witness
about the status of their preparedness to respond to Y2K issues
should they arise. I would also be interested in hearing from
our witnesses overall as to the status of the preparedness of
our global trading partners and the impact that Y2K could have
in American businesses due to a failure in trading systems
overseas.
Lastly, this hearing is also intended to look at the
implementation of the Customs Modernization Act, particularly
Customs modernization of our import and export systems. As we
approach the next millennium, that seems fitting and
appropriate. However, I am concerned about the administration's
intent to pursue a user fee to pay for the implementation of
the automated commercial environment system for imports.
It is, in my mind, hardly fair to penalize custom brokers
and freight forwarders because of Customs budgetary restraints.
Having said that, I would also point out my disappointment in
the successive budget cuts made by the Congress in recent years
for the U.S. Customs Service. We should be supporting Customs'
efforts to facilitate and expedite trade flows. Not only does
it behoove us economically to facilitate trade, a well-
organized and a well-funded automated export system ensures our
ability to oversee exports of sensitive and dual use items.
We need to remember that the Customs Service ensures that
the export control laws which we pass in the Subcommittee are
enforced in our Nation's air and seaports.
My second concern is with the automated export service, or
AES. I support Customs' moves to fully implement the AES.
However, I am concerned about the large number of exporters who
are unaware of the transition from AERP to AES. I hope to hear
from our witnesses on how we are going to better educate
exporters about the end of the year deadline for that
transition.
I look forward to hearing from our witnesses, Madam
Chairlady, and I appreciate you holding this hearing.
Ms. Ros-Lehtinen. Thank you so much, Mr. Menendez. Mr.
Delahunt.
Mr. Delahunt. I have no opening statement. Thank you.
Ms. Ros-Lehtinen. Thank you. I would like to introduce the
two panelists now. Mr. John McPhee is the director of the
Office of Computers and Business Equipment in Trade Development
for the International Trade Administration of the U.S.
Department of Commerce.
In this capacity, John is responsible for analysis, trade
policy development, and export assistance affecting the
computer systems, software, and networking industries. Mr.
McPhee has led business development and issues throughout the
world, including Germany, Japan and Venezuela. In recognition
of his work, he was awarded the Department's silver medal in
recognition of his long term contributions to the analysis and
developments in these industries. We welcome Mr. McPhee.
Then we will hear from Mr. Woody Hall who serves as the
Assistant Commissioner for the Office of Information and
Technology and is the Chief Information Officer for the United
States Customs Service. He is responsible for ensuring the
effective acquisition and use of information and applied
technology to meet Customs' business needs as well as for the
development, implementation, and maintenance of sound and
integrated information technology architecture. Mr. Hall was
previously with the Department of Energy where he served as the
Deputy Assistant Secretary for Information Management and Chief
Information Officer as well as senior advisor to the Secretary.
We welcome both of you gentlemen to our Subcommittee, and
your statements will be in the record in full. If you could
summarize your statements. Mr. McPhee.
STATEMENT OF JOHN McPHEE, DIRECTOR, OFFICE OF COMPUTERS AND
BUSINESS EQUIPMENT TRADE DEVELOPMENT, INTERNATIONAL TRADE
ADMINISTRATION, DEPARTMENT OF COMMERCE
Mr. McPhee. Thank you, Madam Chair. Madam Chair,
Representative Menendez, and Representative Delahunt, thank you
for inviting me today to talk about what the Department of
Commerce is doing about international Y2K outreach activities
with our trading partners. We have been actively involved in a
number of activities which I will briefly discuss with you.
First, I would like to draw your attention to a report we
put out which helped us select the countries that we have been
holding conferences, Y2K conferences with. It is entitled,
``The Year 2000 Problem and the Global Trading System.'' we
have placed it on the International Trade Administration's Y2K
web site. It has received 13,000 hits, visits, since May
reflecting a very strong interest in the Y2K problem and its
effect on trade.
The report highlights the dependence of international trade
on well functioning infrastructure which is composed of such
critical elements as energy, communication, transportation, and
finance. It also focussed on the fact that at that time when it
came out--and still, unfortunately, the case--that small- and
medium-sized enterprises lag behind in addressing the Y2K
problem.
We decided on the basis of this information that we would
put together a very ambitious schedule of international
outreach conferences with our trading partners focussing on
small- and medium-size enterprises. Previous to this, the
National Institute of Standards and Technology and KPMG had
developed a CD-ROM self-help assessment tool and began to
distribute it throughout the United States through its
manufacturing extension partner centers, SBA, and the
Department of Agriculture cooperative extension offices.
This is our international version of this, so-called. This
incorporates the Y2K tool from NIST, and it adds to it a 10
minute video featuring Secretary Daley and other noted Y2K
experts discussing the issue of contingency planning. In
addition, we have added hot links via the Internet to important
Y2K information sites. We have translated the CD-ROM materials
into ten foreign languages, and we have begun to distribute
this throughout the world to the conferences, which I will
describe in a minute, and also to all of our posts overseas.
We, working with the Department of State, United States
Information Agency and other U.S. Government agencies such as
the Department of Transportation, plan and continue to conduct
the Y2K information sharing conferences with our trading
partners. Since March 31, when the first such event was held in
Shanghai, China, we have completed 28 of these events in 18
countries.
I have attached a list of these events to the back of my
testimony. For each event we have tried to work with the host
governments to identify the most appropriate focus on the Y2K
problem. For example, in Shanghai we provided Y2K experts on
problems of embedded systems, ports and shipping, and local
government. These experts joined their Chinese counterparts to
discuss best practices and successes in addressing the Y2K
problem.
We have demonstrated the CD-ROM at these conferences and
distributed to the attendees. We have today distributed roughly
80,000 copies worldwide. We hope to finish distributing the
first printing of this by the end of July. The target audience
is typically multiplier organizations such as government
agencies and trade associations that can distribute the CD-ROM
to small- and medium-sized enterprises. We have had great
demand for the CD-ROM; and, in some languages, we will be
through our first printing shortly. This is particularly true
of the Chinese and Portuguese versions.
We have learned several things as a result of our outreach
conferences. No matter where we have held them, local
governments and businesses have been grateful for the boost
that the events have given to raising local awareness of the
problem and the need for contingency planning. Often audiences
realize for the first time that it is not enough to address the
problem internally in an organization. All organizations have
external relationships with suppliers and clients and must also
address the problem successfully to avoid broader disruptions.
We also have pointed out and it struck people for the first
time that the Y2K problem is not only a technical issue but
most importantly, it is a management challenge. Management at
the highest levels, whether it is a company or a government, or
nation must lead the efforts and allocate the necessary
resources to address the problem. As we approach January 1,
2000, we will be continuing our efforts to reach out to small
and medium size enterprises in this country and overseas, and
we will be working with our trading partners as much as
possible to minimize the disruptions that Y2K may introduce
into international trade. Thank you.
Ms. Ros-Lehtinen. Thank you.
Mr. Hall?
STATEMENT OF S.W. HALL, JR., ASSISTANT COMMISSIONER AND CHIEF
INFORMATION OFFICER, U.S. CUSTOMS SERVICE
Mr. Hall. Madam Chair and Members of the committee, thank
you for the opportunity to appear before you today and report
on the status of both the year 2000 and the modernization
programs of the U.S. Customs Service.
I am pleased to report the Customs vital computer systems
are ready for the new millennium. Assuring that our systems are
year 200 compliant is a top priority for Customs and is
critical to the Nation's economy and safety. A major failure of
Customs computer systems would result in delays, loss of
revenue and would jeopardize the integrity of U.S. Borders by
severely crippling our ability to apprehend criminals and
interdict narcotics.
To reassure you that Customs is prepared for the year 2000,
I would like to briefly discuss the efforts that we have made
over the past few years to address the Y2K problem. All of the
computer systems that support our most critical functions, for
example, those affecting inbound and outbound trade and the
processing of international passengers, have been successfully
renovated, tested, validated and placed back into operation.
Customs computer systems are also vital to the operational
success of other Federal Government agencies with whom we share
electronic information such as the Census Bureau, Fish and
Wildlife Service, Food and Drug Administration, Department of
Justice, Department of Agriculture, and other bureaus within
the Department of Treasury. Customs has tested or is currently
testing the systems that provide information to each of these
groups.
On an international level, Customs has been in discussions
with our Canadian and Mexican counterparts on the year 2000
issues and is participating in the World Customs Organization's
year 2000 awareness campaign. We also continue to work with the
United Nations Conference on Trade and Development to address
year 2000 issues.
We have completed comprehensive continuity of operations
plans to ensure that procedures are in place to continue
Customs business in the event of a system failure. Although our
systems are year 2000 compliant, they do rely on public
utilities and communications infrastructure.
Major failure of these services could cause a disruption to
Customs' operations. We have established a Year 2000 Emergency
Response Center which will enable Customs to quickly respond to
any year 2000-induced information technology failure affecting
our private and public sector trading partners. The emergency
response center will be operational on August 1, this summer.
The success of the Customs' approach to year 2000 has been
recognized with the Government Executive Magazine's Federal
Technology Leadership Award, an award of excellence by
Government Computer News Magazine, and Vice President Gore's
Hammer Award. In addition, the General Accounting Office
conducted an audit of the structure and processes of the year
2000 program at Customs.
GAO found that the Customs has established effective year
2000 program controls and praised the management structure that
we put into place to assure the year 2000 program is
successful. It was critical to Customs and the organizations
that interface with our computer systems that the year 2000
programs receives the Bureau's number one priority.
However, work did proceed on elements of the Modernization
Act which helped expedite and streamline the processing of
cargo into the United States. The regulatory and operational
aspects of the Modernization Act that did not require
automation changes have been implemented. Customs has also
implemented modernization projects that could be done within
the limits of our current information infrastructure and the
current automated commercial system.
Recent modernization and accomplishments include the
development of software that permits an entry of merchandise to
be filed electronically with Customs from a location other than
at the port of arrival or the place of examination; the
development of software which permits the filing and processing
of protests against Customs' decisions regarding imported
merchandise; the development of software to allow our trading
partners to enter preliminary cargo entry data in stages.
These entries are later completed and then finalized by
Customs automated systems. The implementation of the national
Customs automation program prototype demonstrates a fully
electronic process for the release of cargo, collection of
import data and duties, and supports the critical elements of
the Modernization Act and business process redesign such as
account management and periodic filing.
Five importers at three Customs ports currently participate
in the pilot which provides electronic cargo release and
examination processing. After the first year of operation, more
than 25,000 trucks and 54,000 entries have been processed using
this highly automated system. While not required by the
Modernization Act, Customs has implemented other initiatives to
modernize and streamline cargo processing including
enhancements to the automated export system, information
gateway design to assure compliance with bugs relating to
exporting, improving trade statistics and improving customer
service.
The goal of the automated export system is paperless
reporting of export information by the year 2002. AES is a
joint venture between the Customs Service and the Foreign Trade
Division of the Bureau of Census at Commerce and the Bureau of
Export Administration at Commerce, the Office of Defense Trade
Controls at the Department of State and the export trade
community. It is the central point through which export
shipment data required by multiple agencies is filed
electronically with Customs using the efficiencies of
electronic data interchange.
AES facilitates quick and efficient exporting by
eliminating inaccurate information, filling out paper forms and
duplicating reporting. The efficiencies generated by this
consistent single source of uniform data translate into
billions of dollars saved for business and government
worldwide.
Implementation of the international trade prototype, a
joint development by the U.S. Customs Service and Her Majesty's
Customs and Excise of the United Kingdom will lead to a uniform
methodology for sharing import and export information across
international Customs organizations. We have developed a
strategic plan to replace the current automated system with a
redesigned trade compliance system that meets the requirements
of the Mod Act and leverages information technology
breakthroughs to meet increasing demands for international
trade related services and information.
The new system is known as the Automated Commercial
Environment, or ACE. ACE will allow Customs to fully implement
the Modernization Act and the benefits that will accrue from
electronic processing of trade data. ACE will provide brokers,
importers and carriers a streamlined cargo entry process and
just in time reporting capabilities. Support for international
account management and trend analysis will ensure that Customs
resources are targeted to the most substantial compliance
risks.
Finally, ACE implements a comprehensive flexible design
that can carry Customs and the trade community well into the
21st century. To date, the development of ACE has been severely
impacted by a lack of funding. The cost of moving to ACE is
estimated to be 1.4 to 1.8 billion dollars over a 4-year
development deployment cycle and 3 years of initial operation.
The lack of funding is impeding the transition from the aging
current system to the needed modernized capability.
In order to prepare for the development of ACE when funding
becomes available, we have developed the plan that ensures
successful phased implementation of ACE. This plan includes
partnering with MITRE Corporation to plan, review, and oversee
ACE development. MITRE brings expertise in system acquisition,
program management technical design and program evaluation. We
will rely on MITRE for technical advice and independent
evaluation of the ACE project as it progress.
MITRE is an internationally recognized leader in the
evaluation of large technologically complex projects. Customs
is also planning to competitively procure a prime contractor to
be responsible for the technical design, development and
deployment of the ACE system. The contractor will be selected
primarily on the basis of its proven world class systems
development capabilities.
This concludes my remarks before the committee. I would be
pleased to answer any questions that you may have.
Ms. Ros-Lehtinen. Thank you so much. I would like to ask
you two questions. The first one is a two-part question about
the compliance trials that ran for about 4 months starting in
February. If you could elaborate on that, how they were run,
what were the results, what problems were discovered and what
is being done to correct those, and related to that, the
testing for the passenger process and how you are--what
conclusions do you have even though they are preliminary and
what will be done to correct those?
Mr. Hall. The compliance tests basically were an effort to
deal with the question of end-to-end operational capability of
our systems that interface with other people's systems. This
was to ensure that our trade partners really had an opportunity
to make sure that once their systems were corrected they would
work with ours.
We have been in the process of doing that as, you
mentioned, since earlier this year. We have tested with any
members of the trade who have been ready to do so. Those tests
actually have gone very well. What we found is the folks that
came to us ready to test, other than the usually problems you
have in getting the systems repointed at each other, have been
very reliable. Our systems have worked well. Theirs have worked
well.
At this point, we have tested with representatives of
approximately 80 percent of the kinds of organizations that we
deal with. That is not 80 percent of the whole world, but 80
percent of the various kinds of brokers, freight forwarders,
carriers, and so forth that we deal with. There are still many
organizations within the private sector though who have--who
are not ready yet themselves. So what we have done to deal with
that is we have extended the opportunity to test with less
until they are ready.
We are about to conclude our formal window of testing in
the next few weeks. What we have published is our willingness
to test with anybody who is ready actually through early next
year. But frankly, this is basically a kind of system
maintenance kind of an issue. This is a matter of doing the
tedious work of looking at the software and finding the places
where there are dates and making sure that they work properly.
We haven't found any really unusual situations. It is just a
matter of making sure that these large programs work and they
will work together.
Ms. Ros-Lehtinen. And related to the problems of our
trading partners that aren't quite ready, we hear a lot of
reports about Latin America being one of the regions that is
not ready, neither the governments nor the corporations. Was
this a discussion in the Trade Negotiation Committee of the
free trade area of the Americas? What discussions have you had
at your levels with our trading partners?
Mr. Hall. Primarily from the Customs point of view, our
international affairs organization has been leading that effort
as I mentioned in my introductory remarks. We have been very
active with the United Nations efforts and the World Trade
Organization and other international Customs organizations to
share lessons learned, point out the things that we have
discovered as we have gotten ready to provide some
technological advice.
Fundamentally, though, the responsibility to get their
nation's systems and infrastructure ready falls on them. We
have put a lot of effort into our continuity of operations
plans to ensure that we have got ways to respond to problems at
our borders. So we have focussed over the last 4 or 5 months in
discussions with Canada and the Mexican Government to make sure
that we are clear on what our procedures are and how we could
support mutual operations if there were a problem on either
side of the border.
We also have made sure that we understand how we could
reconfigure our systems to support each other if that became
necessary at the borders. Primarily it has been a combination
of sharing lessons learned and awareness and making sure that
our systems will work has been our approach to dealing with the
problem.
Ms. Ros-Lehtinen. Thank you. Mr. Menendez.
Mr. Menendez. Thank you. Let me ask you in your statement
that I just want to make sure that I am not reading into that
more than what it is. In the second paragraph, ``I am pleased
to report that Customs vital computer systems are ready for the
new millennium.'' .
Does that mean selective parts of your computer system or
are you just referring to all of your computer systems?
Mr. Hall. No, sir. What I referred to there is the mission-
critical systems which are all of our mainframe systems and
have actually been back in operation since last October.
The only qualification there is actually this month we are
finishing the renovation of our desktop computers and some of
our voice telephone systems nationwide which will essentially
complete our efforts to upgrade all of our communication and
computing systems. But the basic mainframe oriented systems,
that major systems that support the trade and our other
government partners have been renovated and back in operation
since last fall.
Mr. Menendez. With reference to on page 2 of your
statement, you say we have completed comprehensive continuity
of operations plans in the eventuality of a system failure.
Can you give us a sense of those contingency plans; what
they are?
Mr. Hall. Sure. We actually have contingency plans for each
port which are hundreds of locations. We have administrative
contingency plans for our regional headquarters, if you want to
think of them in that way, of our Customs management centers.
And then, of course, we have contingency plans by functional
area within the headquarters. That deals with both operational
considerations and information technology considerations.
For example, I am responsible for a set of contingency of
operation plans for if we have an information system failure or
a problem at the National Data Center. Most of these
contingency plans have to do with how would you restore
operations at a local operating location if, for example, you
lost power or lost automation. In fact, we recently ran two
simulated tests in two ports to collect data and measure how we
would respond to such an outage. Basically, what we would have
to do is revert to manual operations which is very inefficient
and time consuming but that is what you would do if you had a
major catastrophe. We have invested considerable effort over
the last 9 months or so putting these detailed plans in place
and distributing them and making sure people understand what
their role would be.
Mr. Menendez. So at the Port of Elizabeth in Newark in my
district in New Jersey, you would have a set of circumstances
should it be necessary that that port in essence wouldn't close
down, it would continue to operate? Probably a lot slower but
it would continue to operate?
Mr. Hall. That is the plan.
Mr. Menendez. Has anybody done a dry run of that plan?
Mr. Hall. We just did that recently a couple of weeks ago.
Not at that port. We picked two ports in the southeast. While
we didn't bring the live systems down, we did a manual
simulation of how we would do business without automation, for
example. Resorted to manually doing the forms and going through
the inspections and so forth. And Customs is in the process of
evaluating that data now. Of course, as you might imagine, the
initial indication is that things really slow down, but that is
how we operate. We would go back to a manual operation.
Mr. Menendez. If I was bringing narcotics into this
country, that would be a good time of the year to give it a
shot?
Mr. Hall. Probably, that would be a better time, but we
would still be vigilant. We do rely heavily on our information
systems to collect intelligence and decide where the risks are
higher.
Mr. Menendez. Let me ask you one other different set of
questions. What is the--what can you tell us about the
administration's proposed user fee to be paid by importers for
the ACE computer system? How much is it expected to be? And my
understanding is importers already pay fees to Customs. What
are you looking at here?
Mr. Hall. Well, as I mentioned, our cost to develop the new
system over a 7-year-period--that is 4 years to develop and 3
years of initial operating cost--is in the range of 1.4 to $1.8
billion. To get started, we need $242 million in the first
year. I think the fee proposed was expected to collect about
150, $160 million, if my memory serves. The idea was to--once
you were well into development, we would collect about half of
the costs. The costs ramps up to about 300, $330 million a year
over the course of the development period. So the fee was
structured to collect about half of that.
Mr. Menendez. Now, that fee is focussed on importers?
Mr. Hall. Yes, brokers. Basically the fee was proposed to
charge an access fee to connect to our data systems.
Mr. Menendez. Have you looked at whether or not that has
any problems in terms of WTO challenges?
Mr. Hall. That has been considered, but I have no
information on the WTO's position on that.
Mr. Menendez. Could you submit to us through the committee
some information on where the Department and the administration
is on this whole issue?
Mr. Hall. Certainly.
Mr. Menendez. So that I could get a better sense of it. It
seems to me that I understand we are not giving you the money
and that is part of your problem. By the same token, I am not
sure that we are going to create a set of circumstances in
which we are going to even inhibit or put an onerous burden on
some of the trading entities that are important to us at a time
of greater trading opportunities; and secondly, whether or not
you are also going to face the WTO challenge in the process. We
saw that in another context of the Nation's ports with its
harbor user fee taxes. I would love to see some of the
information that you have on that.
Thank you, Madam Chairlady.
Ms. Ros-Lehtinen. Thank you. Mr. Delahunt.
Mr. Delahunt. The Chairwoman posed a question regarding our
Latin American trading partners and what is the status of their
preparation. I guess my question would be posed to Mr. McPhee.
Do you have concern about particular trading partners in
terms of their preparation for the end of the year? Some are
real, and I don't know whether you feel comfortable in
identifying them. I am not necessarily asking, but are some in
real--do we have a serious concern with some of them? What
would be the consequences to this country, to this nation?
Mr. McPhee. We haven't--I haven't been involved directly in
any effort in the government to really evaluate countries
lately. I have been focussing mostly on these conferences that
we have been holding. But the feeling that you get from the
attendees of these many conferences gives us some indication of
at least where part of a given country's efforts are.
We have held roughly seven or eight events in Latin
America. One of my staff members is leaving today to go to
Brasilia for the third event in Brazil. There is a great deal
of interest in the materials. There is a great deal of activity
on the part of organizations like the AMCHAMs in these
countries. They are one of our biggest supporters in terms of
getting the word out and getting to the small companies.
Mr. Delahunt. What is your judgment though in terms of
where they are at at this point in time? Have they started too
late?
Mr. McPhee. I think what you see as you look out lately is
that when we first started this back in January, March time
frame, there was still an issue of even being aware that there
was an issue in some of these countries. I think we are beyond
that now. I mean, from what we can tell from these conferences,
everybody is aware. Some of them know they are late to start,
but what they are doing now is they are remediating as much as
they can.
Mr. Delahunt. Are we working with them to remediate?
Mr. McPhee. Well, we are not exactly in there helping them
do it. We help them in the sense of illustrating contingency
planning. A lot of what the experts that we bring in these
conferences focus on that aspect. So while remediation
continues, at the same time we are suggesting very strongly
that they put contingency plans into place.
Mr. Delahunt. That they accelerate their efforts?
Mr. McPhee. I think efforts--my sense is that efforts are
accelerating whether it is in Japan or Brazil or whatever. I
think it is becoming abundantly clear at all levels that the
possible dimensions of the Y2K problem in terms of disruptions
to internal and external structures that they depend on. I
think a lot of people are moving much more quickly than they
used to.
Mr. Delahunt. What happens if they don't get there in time?
What are the consequences for the United States in terms of our
commercial relations, our trade relationships with them?
Mr. McPhee. I sort of use Commissioner Hall's examples of
what would happen if you had to go manual on some of these
ports. I think that you would probably see some slow downs. You
will see some backlogs, that kind of thing. People before that,
though, I think will see in the next 6 months a lot of people
working or trying to work around that in terms of additional
supplies or inventories. I think that you will also see
countries put into place some contingency plans that are
broadcast literally so everybody knows where they are at. I
think there is more of that happening.
Mr. Delahunt. So we could see a spike in our exports in the
last quarter is what you are suggesting.
Mr. McPhee. We could. I am not sure to what extent that
would happen, but that has been a suggestion from many quarters
that just in time, inventories be put aside for a while, and
maybe some extra inventories put in.
Mr. Menendez. If the gentleman would yield, is that a
market----
Mr. Delahunt. That is an insight. Just one final question.
Are there any opportunities with this problem for American high
tech firms? And are we taking advantage of them?
Mr. McPhee. American high tech firms are quite involved in
many of these countries. In fact, we work with them and the
AMCHAMs, as I said before, in many of these conferences. They
are certainly on the ground there, as well as host countries'
own high tech communities, depending on how large they are. The
Indians and the Chinese are very active in terms of doing
remediation of software programming around the world. So you
see that there is opportunity actually for a lot of this. As a
matter of fact, in some cases the Japanese are forecasting that
they will be short software engineers fairly dramatically
toward the end of this year as they try to speed up and
complete their remediation. So I think there is more than
enough business for everybody at this point.
Mr. Delahunt. You say the Chinese and the Indians and the
Americans are active in terms of providing these remediation
services globally?
Mr. McPhee. Yes. Those are examples of two countries that
are particularly active besides ourselves.
Mr. Delahunt. Thank you. I yield back.
Ms. Ros-Lehtinen. Thank you, gentlemen, and we would
appreciate it if you would get back to Mr. Menendez with those
numbers. Thank you so much for being with us.
I would like to introduce the two gentlemen in the second
panel. Mr. Jack Brock, Jr., is the director of Government-wide
Information Systems at the U.S. General Accounting Office where
he is responsible for information management evaluations at the
Department of Defense, State, Treasury, and Justice.
In addition, Mr. Brock is responsible for developing
guidance for improving the performance in such areas as
investment controls, computer security, and performance
management. He is currently involved in evaluating the
readiness of Federal agencies successfully addressing the
issues associated with the year 2000 and for reviewing the
readiness of the banking industry, telecommunications, retail
and manufacturing as well as international sectors. We welcome
Mr. Brock to our Subcommittee.
He will be followed by Mr. Harold Brauner, who is the
president of Brauner International Corporation, a family
business started by his father in 1931. The corporation is a
customs broker, ocean transport intermediary, and an air
freight forwarder. Mr. Brauner has also served as president of
the National Customs Brokers and Freight Forwarders
Association, then chairman of the board and currently serves as
senior counsellor to the new york freight forwarders and
brokers association. Mr. Brauner was one of the members of the
teams that helped design the ACE system for the Port Authority
of New York and New Jersey. We welcome him as well to our
Subcommittee.
Your statements will be entered in full in our record. If
you could summarize your statement. Mr. Brock.
STATEMENT OF JACK L. BROCK, DIRECTOR, GOVERNMENT-WIDE AND
DEFENSE INFORMATION SYSTEMS, GENERAL ACCOUNTING OFFICE
Mr. Brock. Thank you very much, Madam Chair and Members of
the Subcommittee. I think Mr. Hall and yourself largely
preempted much of my statement today.
We agree, Customs is doing a good job. Sometimes as an
auditor, it is painful to say that, we want to caveat, but
Customs to its credit established a very strong management
process which they followed. And we believe that the chances of
success in any sort of endeavor are greatly high. If you have a
strong process with controls over that process, it would allow
you some assurance that you have established goals, you have
established processes to reach those goals, and, in fact, you
are able to measure your progress.
Customs has done all of these things and done them very
well. They have either met or exceeded the OMB guidelines for
system remediation. They are well into the interim testing.
They have got a good start on their contingency plans. They
have a good start on testing their contingency plans. I think
that if Customs continues to follow its management process, it
is going to be in good shape. I am not worried about Customs
particularly.
However, you were talking about international trade and
Customs is only one aspect of that. If Customs works and others
fail, either suppliers or customers or distribution channels or
the custom authorities of other countries, then the risk of
failure to U.S. Trade is high and Customs can't do that much
about that.
I can tell you with some certainty about what Customs is
doing because I have some visibility there. I can go in, and I
can review their records. I can review their test plans, and I
can look at their schedules. I can look at all of the details
that they have. I cannot do that for the Latin American
countries. I cannot do that for customers. I cannot do that for
suppliers.
So largely what we are faced with is a set of anecdotal
data, much of which is not verifiable. And we lack the
certainty of the status of our trading partners, the same level
of certainty that we have over the Customs Department. I think
there are risks to the U.S. Trading community. I think those
risks largely aren't defined yet and that remains the largest
challenge for the rest of the year; how certain do we feel
about our trading partners.
Are the customers okay? Are the suppliers okay? Will the
distribution channels work? Will the countries' infrastructure
work? Will the telecommunications and power work? Will all of
these things work that will allow a certainty of goods being
transferred from one point to the other? That, Madam Chair, is
the largest challenge that we face. That concludes my summary.
Ms. Ros-Lehtinen. Excellent witness. We are going to have
you back.
Mr. Brauner.
STATEMENT OF HAROLD BRAUNER, PRESIDENT, BRAUNER INTERNATIONAL
CORPORATION
Mr. Brauner. Madam Chairperson, Mr. Menendez and Members of
the Subcommittee, I serve as a board member of the New York
Coalition for Customs Modernization. This organization was
created in July 1998 by New York and New Jersey industry
leaders to raise regional and national awareness of the
critical possibility of the U.S. Customs Service computer
breaking down and the need for immediate funding for a new
system to replace the current one.
I have been president and now am senior counselor for both
the New York and New Jersey Forwarders Association and the
National Custom Brokers and Forwarders Association of America.
You have asked me to testify concerning Y2K issues at the
Customs Service.
Preliminarily to that, I believe it is necessary to make
the Subcommittee aware of the pivotal role played by the Custom
Brokers and Freight Forwarders in assisting the U.S. Customs
Service to meet its statutory obligations. We act as the bridge
between Customs and the importing and exporting public on over
90 percent of their transactions. This interaction is most
often conducted without the use of a single piece of paper.
In fact, U.S. Customs is one of the most automated of
Federal agencies. It is self-evident then that of course Y2K
compliance is fundamental to U.S. Customs performing its
mission to meet the demands of world trade. A constrictive flow
of trade is the make or break element that separates failure
from success, disaster from commerce as usual.
Fortunately, U.S. Customs has been recognized and applauded
for its proactive attention to Y2K compliance. Central to its
success appears to be customs program management structures and
processes. The agency has organized itself to take care of this
problem of unprecedented enormity. In short, Customs has come a
long way in its preparation and, although work remains, we have
every reason to expect success.
Nonetheless, Customs alone cannot prevent Y2K disruptions.
As the GAO pointed out, there are serious risks outside of its
control. The GAO points out the Customs dependence on power,
water, transportation, and voice and data telecommunications as
examples where outside forces are at play.
Yet this only brushes the surface. International trade is
dependent on the entire chain of commerce conducive to the
ultimate consignee. It is a chain with many automated links,
many in foreign countries, each of which presents a clear
vulnerability. That is where we need to focus now. We are
concerned about reports that other nations have been slow in
moving forward with Y2K programs of their own. We need to be
concerned that international air and ocean carriers are Y2K
compliant.
For example, many ocean air carriers are domiciled in
countries less disciplined in Y2K solutions than we are. A
single vessel manifest, a critical Customs document, might
contain computer input from as many as five to ten different
foreign ports of call. Customs has established the Automated
Export System, AES, totally automating the collection of inport
statistics making them more accurate and more timely and
enhancing our ability to negotiate the international trade
agreements.
Now the freight forwarder must also meet his obligation to
Customs by becoming Y2K compliant. The National Customs Brokers
and Forwarders Association is taking aggressive steps to ensure
that all of its members have the planning resources and
technical tools to meet the challenge posed by Y2K conversion.
In my company, we are presently working with our own
computers. We have a letter from our programmers that they have
tested with U.S. Customs and that that test was successful. For
years, Customs has warned that its principal operating system,
the Automated Commercial System, was on the verge of overload.
Then in 1998, Customs experienced a series of outages and
brownouts that clearly warned the private sector, and now
Congress, that a replacement system was absolutely essential
immediately. Customs has, on last Wednesday, done a test in
Charleston and Savannah to see if Customs can function when its
automated systems are down and it is deluged with paper
transactions. Brokers I have contacted in these cities said
that the test was on the whole successful, especially as it
pointed out weaknesses on the part of Customs and the brokers.
As far as the impact of Y2K on the implementation of the
Customs Modernization Act, there is no doubt that Customs
devoted resources to Y2K which might have been devoted to other
programs, yet it must be said emphatically that what is really
holding up the full implementation of the Mod Act is Congress's
failure to fund the new customs computer system, ACE.
Such funding is most urgently needed. Yet despite these
downside scenarios, U.S. Customs is the most crucial element in
the flow of international trade and has done an outstanding job
in managing its way to and hopefully through the crisis. We
brokers and forwarders are far more concerned that Custom
modernization is vulnerable to an aging Customs computer than
it is to Y2K. However, we are able to acknowledge Customs fine
work and face the millennium optimistically.
Ms. Ros-Lehtinen. Thank you so much, Mr. Brauner.
Mr. Brock, GAO states that systems have been renovated and
tested may encounter unanticipated year 2000 problems. What
type of problems do you think they would be? What evidence is
apparent that a problem can or will occur even after a system
has been renovated and tested?
And if a system cannot be 100 percent failsafe, what type
of contingency plans can the Federal agencies implement to
prepare for such a situation?
Mr. Brock. In the case of Customs, where they have
renovated their systems and implemented them and they are
actually running, in this case the Y2K failure may come from
outside sources. For example, if their power supply goes down
or telecommunications links breaks or a building doesn't work
properly or some other extraneous factor comes to play, then
the system for all intents and purposes won't work regardless
of where the fault lies.
Customs needs to develop really a rich range of contingency
plans to account for a whole variety of activities, many of
which are beyond their control. Of course, that makes their
planning that much more difficult.
Ms. Ros-Lehtinen. Thank you. Mr. Menendez?
Mr. Menendez. Thank you, Madam Chairlady. In that context,
Mr. Brock, does part of your auditing look at what Customs'
interrelationships with others, which they don't control in
that respect, in terms of have they interfaced with those--the
power suppliers, telecommunications companies?
Mr. Brock. To some extent. We have the visibility problem
that we were talking about when we are dealing with the private
sector. The telecommunications industry, for example, is now
undergoing extensive testing and we have increased confidence
that the U.S., the domestic telecommunications industry will be
ready.
There is still an issue with customer premise equipment,
that is, the equipment you own. If that is not ready, then you
have a problem. So Customs is making that kind of interface.
But for many aspects in terms of suppliers, a lack of
consistent information from suppliers has been a problem on a
government-wide basis. But I believe, in reviewing some of the
Customs contingency plans, that they are taking that into
account.
Mr. Menendez. Thank you. Mr. Brauner, let me ask you a
couple of questions. I actually appreciate everything that you
had to say with reference to Customs and Y2K, but that is not
what I want to talk to you about.
I am concerned about the last statement that you made in
your presentation. ``we brokers and forwarders are far more
concerned that Customs modernization is vulnerable to an aging
computer systems than it is to Y2K.'' .
In that respect, I have been looking at some of these
reports that are coming out about this transition, about
potential problems at the U.S.-Mexico crossings, few prepared
for the shutdown of AERP are evident; looking at the whole
question that many members of associations similar to yours
have raised; the lack of, as I understand it, the preparation
by many to be ready to transition to the new system; and
lastly, the concern by some with reference to imposing upon
importers a fee for a computer system used by exporters.
Can you, from your industry perspective, address some of
those issues?
Mr. Brauner. Yes, I think so. As I understand it, the
funding system that Customs wanted to use would be on the basis
of the use of the computer. The number of bits or bytes that
you input and receive back from Customs would send a clock
going and you would pay according to that.
Which is probably the most unfair way of charging anybody
because you might have a small shipment worth $5,000 and have
as many bits and bytes in that as you would have a shipment
worth millions of dollars; an oil tanker, for instance,
entering the harbor. So that is not a fair way to assess the
charges for any kind of computer.
The real fair way to do it is for the general public to pay
for this new computer. And the importers have already, through
the merchandise processing fee, paid for this computer and
there shouldn't be any further new charges. As far as AES, I am
not sure if someone was--from Customs was here. I believe that
is on a separate funding system. That computer, while it is
still resident in the old Customs computer, is more up to date
than the present one and would not--would integrate into the
new computer fairly easily without a lot of extra expense.
Mr. Menendez. Do you feel many people in the industry are
ready to make this conversion by the end of the year?
Mr. Brauner. No, I believe not.
Mr. Menendez. That is going to be a problem, isn't it?
Mr. Brauner. It is a difficult program. It requires a lot
of input, and a lot of exporters are not really prepared. They
feel it is going to go away or something will happen. The
freight forwarders are trying very hard to get into that
system. But while the customs brokers were dragged kicking and
screaming into the computer age by U.S. Customs, the freight
forwarders have not. And they are more used today to the
Internet, hooking of cargo on the Internet and things like
that. There is no single system that unites the forwarders into
one group. For instance, the ABI, the Customs system, really
united the Custom brokers to one system. Everybody had to have
the same system and therefore it became less expensive. It is
fairly expensive if you have 15 different systems going around.
Mr. Menendez. In the absence of my last question of
congressional funding for the ACE system, do you foresee the
industry supporting a user fee at any level to pay for the
implementation of this?
Mr. Brauner. That is a hard question for me to answer
because you are asking me to speak for my customers. My
customers are the importers. They are the people that would be
paying for this if it were like a user fee. Ultimately they
would pay. I think they ultimately would have to bow to
something, but Congress should realize that it comes out of the
pockets of the American people in higher prices to their
imported goods. So why are we doing it that way?
Mr. Menendez. Thank you, Madam Chairlady.
Ms. Ros-Lehtinen. Thank you, Mr. Menendez. Mr. Delahunt.
Mr. Delahunt. I have no questions.
Ms. Ros-Lehtinen. I thank you gentlemen for being with us.
And I thank the Members, and the audience for their
participation as well. Thank you.
The Subcommittee is now adjourned.
[Whereupon, at 3:07 p.m., the Subcommittee was adjourned.]
-