Securing the Containerized Supply Chain: An Economic Analysis of C-TPAT

We perform an economic analysis of the Customs-Trade Partnership Against Terrorism (C-TPAT), modeling the strategic interaction between the Bureau of Customs and Border Protection (CBP) and trading firms as a Stackelberg game. We characterize the unique equilibrium outcome and perform comparative statics. We provide insights relevant to policy planners and to private sector trading firms. We find that, for a given level of inspection capacity, implementation of C-TPAT results in a Pareto reduction in costs. The membership level increases as the environment becomes riskier but is unaffected by changes in inspection capacity. The latter result implies that the program structure should be stable, and it indicates that it may be possible to decouple inspection problems across ports. At the same time, because CBP cannot base C-TPAT agreements upon observed outcomes (terrorist incidents) the program’s equilibrium does not achieve an economic First Best.