[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.]

                                   -