The Potential of AI-enabled Quality Control Facing High Inspection Standard in Cross-Border Operations

Abstract

In practice, Technology Barriers to Trade (TBT) is commonly observed under which the import inspection standards are higher than the international ones. Under the TBT requirement, traditional manual inspection may lead to a significant level of supply quantity uncertainty due to the compliance issues when go through the customs, and result in customers’ quality concerns. However, with the development of artificial intelligence (AI), the AI-based quality control is considered to be an effective way to improve the yield in the face of high standards. To investigate whether a global manufacturer should adopt the AI-based quality control strategy, we consider a global manufacturer operating both an overseas manufacturing division and a local manufacturing division, where the two manufacturing divisions sell products through their exclusively retailers. We find that inspecting the product quality by AI to meet TBT requirements will be preferred by the global manufacturer when the custom disposal cost is moderate and the AI cost is either low or high. Interestingly, we find that using AI-based quality control may be better even when most overseas products have met the TBT requirements and customers’ quality concern is faint. We further investigate the impact of import tariff and find that the government should lower the import tariff rate because import tariff and TBT requirement have a substitutable relationship as the barrier to global trade.

Keywords: Responsible consumption and production, AI-based quality control, Global operations, Resilience improvement, Co-opetition