Wednesday, April 27, 2005

Something Sinister on Birdwell Island

Occasionally my circumstances in life compel me to watch Clifford the Big Red Dog and its companion series Clifford's Puppy Days. Am I the only one who has pieced together the terrible tale of Clifford and his flight from the authorities?

Clifford's Puppy's Days focuses on the early life of Clifford. During this time, Clifford was a small red dog sharing an apartment in the city with Emily Elizabeth, Mr. and Mrs. Howard, and several other pets. The animals include two cats and Daffodil the rabbit. Very cozy.

According to the opening credits of Clifford the Big Red Dog, the Howards had to pack up the family and leave the city. The move seems to have been abrupt. At this point, Clifford is, as his name implies, enormous. He is the size of a house. They move to idyllic Birdwell Island. But something is missing.

Where is Daffodil? Where are the cats?

And, why is Clifford so big?

The show wants us to believe that Clifford grew so big because of the love of Emily Elizabeth. Maybe there is a secret reason that makes more sense.

I demand that the authorities on Birdwell Island ask Mr. and Mrs. Howard to account for their other pets. An inquiry needs to be undertaken to determine whether there is any connection between the disappearance of these animals and the size of Clifford "the Big Red Dog." Did the Howards pack up the family and leave the city to escape prosecution? Are they harboring a fugitive dog?

Cleo, T-Bone, and Mack, please be careful.

Sunday, April 24, 2005

Compliance 101

Customs says there are five common errors that vex importers. In reality, it is Customs that is vexed, but that is a technicality.

These errors are:

  • Classification
  • Valuation
  • Quantity
  • Rate of duty
  • Payment of fees

Over the coming months, when the mood strikes me, I’ll occasionally visit each of these issues and give you my take on them. In between, I’ll blather on about whatever I want.

Today, we start with classification.

Tariff classification is fundamental to everything Customs does. It controls the most-favored-nation rate of duty for imports and also the availability of duty reduction programs such as the Generalized System of Preferences, African Growth and Opportunities Act, NAFTA qualification, etc. Classification is also involved in how Customs targets imports for intensive examinations, antidumping compliance, and compliance with other agency requirements. In other words, if you get the classification wrong, you are likely applying the wrong rules on a bunch of other fronts. So getting it right is critical.

One approach many importers take is to hire a licensed customs broker to handle the classification. That is a decent start but can provide a false sense of security. Under the 1994 Customs Modernization Act, consulting with a broker is evidence that the importer has exercised reasonable care in entering merchandise. It is, however, not a magic bullet.

First, the importer always (say that again, always) has the ultimate responsibility for the accuracy of the entry. When Customs comes knocking with a penalty notice, you won’t get too far pointing at the broker and saying, “He did it.” This also applies to those importers who require their foreign suppliers to give them the classification.

Second, one common complaint brokers have is that the importer does not provide enough information for a correct classification. It is not enough to say that what is being imported is a “motor.” The classifier has to look at the tariff schedule and ascertain that she needs to know whether the motor is AC or DC, single or multi-phase, brush or brushless, and the power output in watts. An invoice description that says “vacuum cleaner motors,” simply won’t do. So, the brokers are sometimes left to guess. Whether that is an appropriate strategy is a whole different issue.

So what is the right way to do it?

First, get yourself a current copy of the Harmonized Tariff Schedule of the United States. You can download it for free or order it from the Government Printing Office. Personally, I like to have it on paper so I can flip back and forth.

Next, read the General Rules of Interpretation at the beginning and then read them again. Repeat as necessary until you fully absorb those rules. The GRI are the rules of the classification game. To a customs lawyer, they are the constitution of what we do.

The next step is to know as much as possible about the product you are classifying. If you don’t know the specs, you are going to have to talk to someone who does. That might mean the seller, the buyer, an engineer, or anybody who really knows the product.

Now, open the Tariff Schedule and find as many possible classifications as possible based on name and description. So, for example, that vacuum cleaner motor might be described as a motor or a vacuum cleaner part. Don’t worry about getting too many possibilities. The more you have, the safer you are. If you want to toss in articles of iron and steel or other machines not described elsewhere, that is fine.

Now, you go back to the GRI to sort out the single right answer from all the wrong possibilities. Apply the GRI in order. That means you first have to look at the language of the headings in the tariff schedule and the relevant section and chapter notes. Don’t over look this. The section and chapter notes will often specifically list things that are not included in that part of the HTS. That will generally reduce your list of possibilities.

Work your way through the other GRI in order until you get to the solution. Think of it as a puzzle, because in a lot of ways, it is.

Often, the next relevant question is whether one or the other possibility more specifically describes the product. The one that covers fewer articles will almost always be the more specific. For example, “parts of vacuum cleaners” covers a range of parts from wheels to electrical cord. “Motors,” on the other hand, covers motors and nothing else. Thus, “motors” is more specific. There are exceptions, so you need to be careful. For example, a provision based on the use of the product is considered to be more specific than one giving its specific name. Go figure.

The GRI will also tell you what to do when you have mixtures of materials or components, unassembled goods, incomplete goods, and two classifications that appear to be equally specific. You need to understand and apply the rules.

Of course, sometimes things are not clear even when you apply the rules. And sometimes, you just don’t like the result. When that happens (or just to verify your work), there are places to turn. First, there are the very helpful Explanatory Notes to the Harmonized System. This is basically a commentary on the HTS from the World Customs Organization. It provides examples and some additional analysis. In addition, CBP has a searchable database of its advice to importers. This will often tell you how Customs classifies the merchandise.

Of course, there are plenty of competent lawyers with experience in these matters available to help as well. In many cases, there are relevant decisions of the U.S. Court of International Trade or the U.S. Court of Appeals for the Federal Circuit. These decisions are generally binding on CBP (although CBP does have some flexibility on that front). More important, they tell the importer and CBP how the courts would analyze a question if brought before it.

Classification is important. Don’t take it for granted and don’t assume all your goods are classified in a certain provision. Most machine parts are not classified as parts of something but under headings specific to their nature. This applies to all sorts of things like gaskets, pumps, valves, bearings, transmission shafts, switches, and just about any other piece of hardware that has a name.

Take my advice (which is not legal advice in this context because I don’t know who you are or what you are doing): Be careful with your classifications.

Thursday, April 21, 2005

Am I a Crime Victim?

This is off my main topic, but I said I would include the odd random thought. I promise my next post will be hard hitting and timely. Really.

I received one of those alarming letters from Lexis-Nexis today. The letter says that my personal information may have been stolen. This info potentially includes my Social Security and driver's license numbers. Great.

To help out, Lexis has arranged with Equifax to give me a year of free credit reporting and some sort of fraud watch service. Trouble is, signing up is a giant pain. The Equifax site is so chock full of stuff that it is nearly impossible to find the correct thing to select. Then, there is a lot of information to fill in.

Wouldn't it make sense for Lexis and Equifax to have created a single landing page for people in this situation with one single offer to select. If Equifax wants to sell other services, it could have a link on the page.

So now I have seen my credit report. I have had an astounding number of lame credit cards that I could not find now if I needed to. Also, when you refinance every six months, there are lots of banks involved. Happily, there are no recent odd transactions or new accounts.

Tuesday, April 19, 2005

Capital Ideas

There is a difference between Customs and customs. I alluded to this in my last post, so I may as well get it on the record.

The word "customs," in the context of duties and tariffs, refers to the money collected by a government agency upon the importation of merchandise. One online law dictionary gives the following definition:

CUSTOMS. This term is usually applied to those taxes which are payable upon goods and merchandise imported or exported.

So, when referring to the general notion of money paid as an import duty, we talk about "customs." Usually, it is modified to something like "customs duties," customs laws," or "customs regulations."

The agency now known as the Bureau of Customs & Border Protection is known by the short hand name of "Customs." So, Customs collects customs pursuant to the customs laws and regulations.

The place where this transaction takes place is a customhouse, which is often misspelled customshouse. The same dictionary uses a hyphen I have never seen and gives the following definition:

CUSTOM-HOUSE. A place appointed by law, in ports of entry, where importers of goods, wares and merchandise are bound to enter the same, in order to pay or secure the duties or customs due to the government.

Customs has traditionally used some strange exceptions to permit the spelling as two words (i.e., Custom House"). Here is what they have to say:

The word "customhouse" means the building or the office where customs duties and other charges are paid, and is the central place where most of the Customs work and transactions are performed and where all moneys, of every nature and wherever collected, are accounted for. The customhouse is the office of the Collector of Customs, and, at certain Customs ports and stations, of some or all of the other Customs officers and personnel. The word "customhouse" has frequently been misspelled on Customs buildings, on directories of federal buildings, in correspondence, and in magazines and newspapers. It has also been mispronounced in conversation. The official spelling in correspondence text is as one word, i.e., "customhouse." However, in an address, or on a building, tacit approval apparently has been given to "521 Custom House" or "CUSTOM HOUSE," as two words, to indicate the Customs building or room in such a building. The word is never properly spelled as "customshouse" or "Customs House."

The other question is the use of apostrophes. Is it correct to say "Customs' vehicles," or "Customs' position" when referring to the agency in the possessive sense? Customs has also issued an answer to that question:

And . . . never use an apostrophe after "Customs" or "U.S. Customs" when followed by a noun modifier . . . as in "Customs duties."

This one, I just don't follow. I don't see any reason not to apply the normal English rules of grammar on this point.

Happily, all the quoted material referenced above comes from 1939. Maybe there has been some softening on that front.

Monday, April 18, 2005

Safety in Numbers

Today, Customs (the agency) is all about securing the borders against terrorist attack. There are plenty of good reasons for this, the most notable having occurred on Sept. 11, 2001. But, even before that, the relevance of traditional customs duty collection activity (and the related recovery litigation) was threatened. The main culprit before 9/11 was the continuous trend downward for duty rates. As the total duty collected decreases, the interest in expensive audits, investigations and court battle wanes.

But the new focus brings new questions. Primarily: are we safer now than before? I'm not sure anyone knows. Anthrax in the mail and snipers in Virginia seem like decent models for terrorists seeking to avoid Customs.

Obviously, Customs can't go around telling the world (and, therefore, the bad guys) exactly what they are doing to sure up the border. I suppose there is a lot going on in the background. But, here is what we see in the foreground:

This program seeks to have companies volunteer as "partners" to protect us all through a self secured supply chain. The idea is to get companies to voluntarily agree to take reasonable steps to make sure suppliers, carriers, warehouses, distributors and everyone else in the global supply chain is secure. Customs is asking participants to take steps relating to access to facilities, personnel checks, shipping and receiving operations, carrier security and information systems. All of these things should be addressed through written procedures and implemented in real action.

This all makes sense and is probably a good thing. In return, C-TPAT members are supposed to get faster clearance at the border. The actual infrastructure at the ports, however, is making that difficult. Right now, the benefits seem somewhat tenuous. Also, Customs recently tightened the rules and is requiring that C-TPAT members secure commitments from their unrelated business partners to either participate in C-TPAT or meet similar "criteria" for security. Anyone who fails to do so, might be kicked out of the program. It is starting to look a lot less voluntary.

This one is sort of a no-brainer except for the interesting questions it raises about sovereignty. Under CSI, U.S. Customs & Border Protection personnel are stationed at foreign sea ports to be involved in the review of cargo before it is shipped to the U.S. No one ever says this, but the idea is to have the bomb go off in Rotterdam rather than Raleigh.

Back in my days as a political science major in Urbana-Champaign (which was previously known as Champaing-Urbana), I learned that controlling one's borders is a primary indicia of statehood. A country that doesn't control its own borders can't claim to be fully sovereign. I guess the U.S. has worked this out with our CSI partners, because we now have inspectors in 18 countries.

Does it help? I can't see how it could not.

This is a deal we have worked with the Canadians and Mexicans to quicker truck clearance at the border. It requires that the importer be a C-TPAT participant and that the driver be specially licensed. Once that happens (along with sundry other requirements), the drivers get to bypass some of the slower aspects of waiting around for clearance.

Kudos to everyone for coming up with an program name with a meaningful acronym.

There are other things going on. One other program involves the transmission of cargo manifests to CBP before it is loaded on a conveyance. The exact time transmission varies depending on the mode of transport. For ships, it is 24 hours before loading. Hence, this is uniformly known as the "24 hour rule."

So, CBP is hard at work. And, as a tax payer and a citizen who chooses to let the government bear arms for me, I appreciate the effort to keep me safe. But . . . I wonder if it works. The 9/11 hijackers smuggled nothing other than themselves into the country and they did not do that in a cargo container. If the bad guys are here already, there is nothing Customs can do to prevent an attack.

Customs is making serious efforts at border security. Companies will generally volunteer to help in that effort. As one executive recently told me, they don't want to see their truck as the one being used as a missile or bomb. Plus, it is generally just the right thing to do.

Do you feel reassured?

Thursday, April 14, 2005

Comparative Advantage: Should we Hate NAFTA?

I grew up in Massachusetts, a lovely state dotted with old mill towns that no longer have mills. A lot of the mills were textile mills that turned southern cotton into fabric. This was a hot spot for the industrial revolution. Take cotton from the agrarian south and use it to produce goods in the industrialized north. Why not grow the cotton in Massachusetts? Because the land is not good for it, the weather is no good for it, and labor is too expensive. That's why.

Most of these stately old mills are gone now; but they did not go to Mexico or China. At least not right away. No, the much troubled American textile industry moved them to the Carolinas, for example. Why? Because it was cheaper to operate there. Maybe it was the cost of land in New England but a lot of it likely had to do with the cost of labor, benefits, union representation, etc. In other words, the south had a comparative advantage in agriculture while the north had one in manufacturing.

Where were the anti-globalization forces when the mills were moved from Massachusetts? Did people march in the streets of Framingham? Where were there organized anarchists with pierced cheeks and knickers? No doubt the folks in New England protested in one way or another. After all, their livelihood was being taken from them. But did anyone blame the corporations or argue on philosophical grounds that the move was immoral? Maybe. What do I know, I am not an economic historian? I'm just a lawyer.

But here's my point. Is there any difference between moving from Bedford, Mass. to Raleigh in 1950 and moving from Raleigh to Nuevo Laredo, Mexico in 2000? The thinking behind the move is exactly the same.

Now I know what you will say: But in Mexico, labor rates are kept artificially low through lax labor laws and production costs are artificially low because of poor environmental, safety, intellectual property and other regulations. Maybe. I don't know and my guess is that most of the rock throwers don't either. But, and trust me I hate to say this, isn't comparative advantage a fact of life that the company has a limited ability to control? And, doesn't it have a legal obligation to maximize shareholder value? The answer to that last question is "yes."

That sounds terrible. But you have to keep a couple things in mind.

  1. I am as quick to hug a tree as anybody. As an aside, I just read Michael Crichton's "State of Fear" and have to start checking his citations. I listen to NPR and read the NYT. OK, so don't get on my case.
  2. Free Trade Agreements like NAFTA provide some leverage to force partner countries to improve on these fronts. NAFTA contains specific provisions requiring the enforcement of intellectual property rights. It also has related side agreements on labor and the environment. I know there is not much there in the way of teeth to enforce labor and environmental controls, but there is more now than before NAFTA. And, the side agreements create a mechanism for bringing violations out into the light of day.
  3. Lots of stuff coming into the U.S. is duty-free anyway. That means the production companies would look to Mexico, Central America, Morocco and similar countries anyway. But most of these countries have high duties for U.S. goods entering their markets. On that front, we might be getting the better deal.
  4. Big companies are aware of the public relations impact poor factory conditions in low wage countries can have. Nike recently produced a report on its corporate social responsibility activities. So did BP. Starbucks is working on climate change issues. Some companies export their U.S. health, safety and pollution requirements to their foreign production facilities (although not necessarily to unrelated suppliers). Many don't, but there are companies out there trying to do the right thing.
  5. And, think about what NAFTA (and other trade agreements) does: it encourages the use of North American materials and labor. That keeps jobs and revenue in the neighborhood (if that really matters). Moreover, it helps to create markets in partner countries for U.S. exports and also services. That is some job protection here we would not have otherwise.

Maybe NAFTA is yesterday's news. Mexico is finding it hard to compete with China even though there is no trade agreement with the U.S. Someday, China will be too expensive or too unpredictable for business. When that happens, watch factories move to Vietnam. After that, who knows, maybe Nigeria. It all depends on who has the comparative advantage. These trade agreements the anti-globalization forces hate so much can't stop that. So, we should at least use them to protect what we can and encourage positive developments in our trade partners.

Now that I sound like a Bush Administration functionary, I need to go wash my virtual mouth out and renew my Amnesty International membership.

Wednesday, April 13, 2005

Why a Customs Law Blog?

I am a customs lawyer. This is a rare breed of American lawyer that concentrates on issues relating to the regulation of imports by the United States Bureau of Customs and Border Protection (formerly known as the Customs Service). I say "concentrates" because rules of professional ethics prevent me from saying I "specialize" in customs matters, so don't for one moment think that I am saying that.

I suspect that if you collected every lawyer in America who was actively engaged in the practice of customs law, you would not exceed the needs of a large ballroom in a major metropolitan hotel. We tend to know one another. Also, the folks who work for the government tend to know us. That means I will not be tossing any virtual molotov cocktails at any of my colleagues in the field and especially not at those few judges before whom I regularly have to appear. That just won't happen.

I will, however, from time to time, post my thoughts on developments in the area. I hope this is useful for in-house counsel, compliance managers, and other folks involved in the trade. If you happen to be a lawyer competing with me, please go away.

Of course, that does not answer the question posed above: Why a customs law blog? To that, I answer, why not? The technology is readily accessible and free. I might have a thing or two to say. I like to write and I like to hear myself talk. I might be a perfect blogger, or maybe not. We'll see how it goes from here.