Tracking Trade

The Logistics Manager at your company hands you a letter.  From the expression on the Manager’s face and the letterhead, you can tell that this is not going to be a short conversation.  The letter is from U. S. Customs and Border Protection (imports), or the Bureau of Industry and Security (exports).  In rather cryptic terms it states that your firm has been selected as a candidate for a possible compliance audit.

The Logistics Manager may have brushed this off saying the company has received the same letter in the past but nothing happen, no audit occurred.  In fact, this is the “X” year in a row that the company has received a letter.  Your predecessor may have rolled the dice and ignored the warning, but you want to make sure that if it happens on your watch, you are ready.  But where should you start?

Welcome to the world of Trade Compliance.  Since Congress passed the Modernization or MOD Act in 1994 the U.S. government has been converting a manual process of inspecting each container of merchandise to a computerized monitoring and auditing system.  The government now has the ability to audit every step in the shipment process to prove “admissibility”.

The possible end result of this audit might be fines, penalties, loss of trading privileges, and perhaps even jail time.  Here are two examples:

1. Your company exports (allows a foreign company to download your software, data, or technology from your website) without an export license.  The potential penalty starts at $250,000 per download!
2. Your company imports from an overseas manufacturer but without declaring all the foreign components that were purchased and incorporated into the finished product.  Customs will look back 5 years at all entries and demand back duties, interest on back duties, fines and penalties.  If they suspect fraud (intentionally reduced import value) jail time may also be included.  Remember that you are liable, not your broker or freight forwarder for everything (more…)

”Bill Would Create Port Fund from Harbor Tax”
May 25, 2009, Journal of Commerce

Harbor Maintenance Tax to create a fund for state highway, rail and port projects. The National Goods Movement Fund also would aim to mitigate environmental damage from freight transportation and improve cargo inspections and port security.

Sponsored by Rep. Laura Richardson, D- Calif., the” Making Opportunities Via Efficient and More Effective National Transportation Act of 2009 “the MOVEMENT Act” calls for an increase in the HMT, an ad valorem tax, from 0.125 percent to 0.4375 percent of the value of cargo arriving at a port. Goods originating in Mexico or Canada would not be taxed, although cargo moving through the country would be assessed at 0.315 percent of value. Richardson proposed a similar bill last year that would have funded infrastructure projects with a $50-per-container fee. Richardson estimated the bill would raise $2.7 billion a year, 90 percent of which would go to infrastructure. It also would remove bureaucratic barriers to accessing harbor maintenance fees, a problem that has \ long frustrated harbor authorities.

The current trade compliance “soup du jour” is Free Trade Agreements (FTA). The trade compliance world is a buzz with ways to save money by using FTAs. As this concept gets attention, companies will try to implement FTA procurement strategies around the globe. But is that a good use of corporate resources?

There is no question that importing from a country with lower duties can mean real savings. It is just a question of how much. Here are some points to consider before you start:

1. Is your current supplier a trusted partner? What will you lose if they are gone?
2. Is this trusted partner in C-TPAT and would changing add a new risk component?
3. Will the country of export or origin be difficult for your logisitics people to work with? And what is the added cost of this change?
4. Does the supplier have a proven track record of reliability?
5. Will there be quality issues?
6. Will there be country issues? And/or country of origin qualification issues?
7. What if material or component shortages arise for your new vendor?
8. Do you have to fund the new vendor’s pre-export production? Is a letter of credit (LC) required and what will it cost?
9. Can your company (not just the exporting vendor) afford these added financial costs?
10. What about “assists” that may be needed for your new vendor to meet FTA requirements?
11. How easy will country of origin certificates be to verify?
12. Will your current buying agent be able to help in the new FTA countries or do you lose your eyes and ears into the marketplace?
13. Will regional value content and tariff shifts add a new layer of complexity (and cost) to the products?

In addition to these questions, internal company politics can play a major role in working out an FTA procurement strategy. Most purchasing agents have a “stake” in the vendors that they use. This may be a decades long relationship that has proven value in good times and bad. It may also be based on shared technology or building to precise specifications. Asking a purchasing agent (or a purchasing department) to change its buying patterns could be a real challenge. Don’t forget that country shifts may also require learning a new language, geography and even finding a new buying agent.

Less than a year ago, finance would not have been a consideration when developing an FTA strategy. The economic meltdown in the financial sector has altered this situation. New suppliers in FTA countries may not have the financial wherewithal to produce product locally. Even some of the Asian Tigers have had to develop special government-to-government trade finance programs to deal with its financial crisis.

Buyers, sellers, and lenders are all struggling to find the financial resources they need. Securitization of trade receivables in the financial supply chain are vitually gone. Letters of credit, once expected to go extinct by the end of this decade, are on the rise. In addition, the cost of an LC is no longer a mere fraction of the overall cost of goods sold. Today the LC cost could easily dwarf the savings under an FTA.

Big corporations may have vendors from all over the world knocking on their door. For them, choosing an FTA vendor may be easy. However most companies have to be careful that this advantage does not turn into a disadvantage very quickly.

An FTA procurement strategy is worth exploring, but remember that it may not be as free as its name implies.