Monday, January 29, 2007

Radio Update

Here is a link to the radio broadcast. It is a very big MP3 file of the show (1 hour long).

Overall, I am happy with the discussion. There was a diversity of views on trade and good calls from the audience. Obviously, there are lots of issues involved and it is difficult to separate one's own job situation from the bigger economic picture. I think we could have talked for another couple hours.

Maybe there is room for a followup show.

Sunday, January 28, 2007

Larry on the Radio

I know this is short notice, but . . . .

I'll be a guest on Archdiocese Radio WCSN 820 AM on Monday January 29th from 9:00 AM to 10:00 AM. The topic for discussion is "Free Trade: Good for Americans? Good for the Poor?"

After the show is broadcast, it will be available as a podcast and I'll provide a link.

Friday, January 26, 2007

Is the 2007 HTSUS Rate Neutral?

I have a tendency to assume that everyone has the big ticket items covered. I have not, therefore, been running around screaming about the impending deadline for implementing the 2007 changes to the HTS. Most everyone I have spoken to is aware of the changes and is working diligently to update databases. For the record, the new tariff schedule goes live February 3 and Customs and Border Protection expects everyone to have it implemented by February 20.

The tariff schedule is an extremely odd beast. It is statutory in nature in that it fits in the U.S. Code at 19 U.S.C. sec. 1202. Unfortunately, if you click the link you will discover that this section of code is blank. That is because the tariff schedule migrated out of the U.S. Code and into a separate International Trade Commission publication. If you want to check the HTSUS online, you go here. Making it even odder, Congress does not really get involved in the process of drafting the vast majority of the document. Rather, the U.S. works with its trading partners at the World Customs Organization to update the international components of the tariff and then the ITC completes the U.S.-specific work. When that is all done, the President "proclaims" it to be the law. It's probably not what the founding fathers had in mind, but it works reasonably well. And, by the way, despite being odd, it is a legal delegation of authority to the President.

There are several checks on the ITC to make sure it does not engage in policy making that really should be left to Congress. One of those checks is that ITC is supposed to make changes to the tariff schedule that are rate neutral. In other words, changes to the HTS should not result changes in duty rates. This is explicitly stated in 19 U.S.C. sec. 3005(d)(1)(c), which requires that the ITC "ensure substantial rate neutrality."

Granted, there is a little room to maneuver in there because rate neutrality has to be "substantial" rather than "absolute." And, the next section says that "Any change to a rate of duty must be consequent to, or necessitated by, nomenclature modifications that are recommended under this section." So clearly some rate changes are permitted.

What does all this mean to importers? Take a look at your updated 2007 HTSUS database. Did the changes in the tariff schedule result in any rate changes for your products? If so, you need to consider whether the rate change is a necessary result of the change in the nomenclature. If your product moved from one relatively discrete classification to another and there was a rate increase, or you moved from a discrete tariff item to a basket provision with no breakout for your product, you might be able to fight the change.

I'm not saying you will necessarily win. Nevertheless, there are rules the ITC needs to follow and in any project as big as this round of modifications, there are bound to be examples of things that did not work exactly as planned. If you are about to be on the receiving end of one of those odd cases, consider what it might cost you and whether you are interested in challenging the rate. You might be in a position to make a point and save your employer to money.

Tuesday, January 23, 2007

University of Dallas, What Up?

Suddenly, I am getting a bunch of visitors from the University of Dallas. It appears that a posting on this blog is being used as part of a course. That's great, I'm happy to be of help. I am, however, curious about the class. Could someone please drop me a comment or note and let me know what's going on?

Monday, January 22, 2007

Welcome to the EU, Sorry About GSP

Bulgaria and Romania are now members of the European Union. Being part of the EU means these countries are no longer eligible for benefits under the Generalized System of Preferences. Here is the Federal Register notice to prove it. If you have been importing from Bulgarian or Romanian suppliers and claiming GSP, make sure that your broker knows to stop. More important, make sure you have recalculated your total landed cost. It may be that the loss of GSP makes new supplier relations advantageous.

The more important thing to keep in mind is that Customs and Border Protection seems to have made GSP a compliance focus. Customs seems to believe that importers are not always entirely scrupulous about confirming the supplier's assertion that the goods qualify for GSP. Keep in mind, that means 35% of the value added qualifies as originating in the beneficiary developing country and that the merchandise is shipped directly from the BDC.

Exactly what an importer needs to do to exercise reasonable care with respect to making a GSP claim is somewhat unclear. It is, however, clear that simple reliance on the assurance of the supplier is not enough. The importer needs to work closely with the supplier to gather documents supporting the claim. This could be as simple as a spreadsheet showing the cost of originating and non-originating materials plus labor to arrive at a calculation of the BDC value added. Of course, the supplier will need to retain backup documentation to support the summary calculation.

It is not uncommon for suppliers--who are quick to assure customers that the goods qualify for GSP--to balk at providing any cost of production information to the customer. Fair enough. There are a few options. First, the importer who has satisfactory general information, only needs the details in the event of an inquiry from Customs. So, they might be able to agree by contract that the supplier will make that data available to Customs upon request. Another option is to make it available to a trusted third party such as the broker or a lawyer, who can work with Customs to confirm the claim.

If you rely on GSP for significant duty savings, it makes sense to review with your suppliers the information available to support the claims. The reason for that is simply that it is more likely than not that Customs will eventually come calling for your backup. You may as well be ready.

Tuesday, January 16, 2007

Comment on Zoellick's AAFTA and a New Link

I've added a link to the new-ish International Economic Law and Policy Blog. The blog is the collective work of a number of leading academics in the trade arena including my occassional guest lecturer Todd Weiler (who may be the hardest working lawyer doing NAFTA arbitration work). His site is invaluable to those interested in the topic.

The blog includes an excerpt from former USTR Zoellick's WSJ op-ed piece advocating an association of existing western hemisphere free trade agreements. Essentially, this seems like a way to pour the old FTAA into a slightly new decanter. Rather than negotiate a new deal, Zoellick's idea is to forge links between the existing agreements. As a political matter, this seems like a dubious prospect. The current congressional leadership appears to be very sceptical of free trade either as a matter of economic philosophy or political strategy. Either way, the idea of an AAFTA seems unlikely to get much political traction.

Is it really a good idea? Probably. Unrestricted trade in goods and services allows countries to benefit from their comparative advantage. If that is labor, natural resources, or technical innovation, countries will profit from what ever it is they do best and outsource the areas in which they can't efficiently compete. Of course, the difficulty is in preventing countries in need of foreign investment dollars from using lax labor and environmental standards as their comparative advantage. That means addressing labor and the environment in these agreements to prevent the proverbial race to the bottom.

In NAFTA, we did this by agreeing not to reduce standards and by setting up an elaborate (and largely ignored) bureaucracy to monitor compliance. The better model is the so-called "Jordan Standard" found in the U.S-Jordan FTA. That agreement requires that the parties "strive to ensure" that their labor laws meet international standards AND permits the use of the built-in dispute resolution process to possibly impose sanctions for failing to do so. While it remains to be seen whether there are any actual teeth in this provision, at least it holds out the possibility for labor standards to be protected in an FTA. That is something the Democratic congress' traditional constituency might be able to get behind even in the context of a free trade agreement.

Wednesday, January 10, 2007

NAFTA Upside Down

It is good that Customs and Border Protection publishes information to help the public engage in informed compliance. Really, that is a good thing. The trade and those who serve the trade appreciate it.

But, sometimes they use publications to promote a specific legal agenda. Usually, that is made clear in the documents. Other times, CBP does things that just look sneaky.

CBP just put out this handy document and an attachment to help people decide when it is appropriate to claim NAFTA preferential treatment. To me, this looks sneaky.

The problem is that it completely muddles the question of who is responsible for the accuracy of NAFTA claims. Is it the importer or the producer/exporter? Admittedly, the importer must use reasonable care in making the claim. So, an importer should reject a facially false certificate. If the importer has reason to suspect the certificate of origin is incorrect for some reason, it should take reasonable steps to verify it. But, the producer/exporter who certified the goods agreed, according to the terms of the Certificate of Origin, to prove the claim and be liable for false certifications. Under the NAFTA scheme of things, the producer/exporter is the party who has to do the heavy lifting on NAFTA qualification issues. The importer should be able to rely on a facially valid and complete Certificate of Origin.

In its notice, CBP refers to a court decision, Golden Ship Trading Company, in which an importer got in trouble for making GSP claims it could not support. Apparently, Customs wants importers to have the same responsibilities under NAFTA as under GSP. This is essentially the gist of what it is trying to prove in the Ford case.

The problem is that NAFTA just doesn't work like that. The Agreement requires that Customs presume a NAFTA claim is valid unless CBP conducts a verification and finds the claim to be invalid. Verifications require action by the certifier, not the importer. Customs is apparently unhappy with this part of the agreement and has latched on to reasonable care and Golden Ship as a way to put this responsibility on the importer.

Customs seems to have learned its lesson. Importer focused verifications are written into the newer free trade agreements. If Customs wants to change the NAFTA rules, it should be up front about it. Rather than try and create legal obligations through public notices and litigation, Customs should either (1) work to get the Agreement changed or (2) live up to its obligations and conduct verifications of the certifiers.

Tuesday, January 09, 2007

Annual Check Up

The start of a new year is a good time for a quick internal review. Here are some thoughts on things to consider. Trust me, this is not an audit plan. It is more like a draft menu for a compliance buffet.

Broker Relations
  • Who has a power of attorney from you?
  • Are there POAs that should be revoked?
  • Are there any that expired and need to be re-executed?
  • Was the service from my brokers satisfactory for the cost?
  • Is there a clear channel for communicating to the broker prior to the first import of new merchandise?

Entry Processing

Grab three random entries from each month of 2006. That's a total of 36 entries. For the first line item of each entry, do the following:

  • Confirm the HS classification. Don't just check your parts database. Instead, get a sample, picture, drawing or spec and look at the classification fresh. Have you properly applied all the relevant General Rules of Interpretation, Section and Chapter notes? Is you conclusion consistent with Customs and Border Protection rulings and the Explanatory Notes?
  • Check the reported value. Does the 7501 value match the commercial invoice and the proof of payment? Again, don't believe your system unless it ties directly into Accounts Payable. Are any non-dutiable charges supported by real documentation (rather than estimates)? Check with your finance people and see whether there were any payments to the supplier that are not reflected on the invoice. These might constitute dutiable assists, royalties, or indirect payments. If the goods were not actually sold to you, how was value determined?
  • Is the duty rate supportable? If you claimed, NAFTA, CAFTA-DR, GSP, AGOA, or any other duty reduction program, can you prove that the merchandise qualifies? Same goes for 9801 and 9802 entries. If your random sample does not include any duty preference programs, go pull some entries that do.
  • If antidumping or countervailing duty deposits were necessary, were they made and correct?
  • Check your inventory records. Does the quantity received match the quantity reported on the 7501?
  • Does the country of origin on the 7501 make sense given the location of the supplier and the shipping documents? Now go look at a sample and see if the item is properly marked. If not, what exception applies?
  • If the merchandise is branded, do you have proof of authorization to import from the trademark holder?

Post-Entry Activity

  • Review any communications you had with CBP last year. Did you respond to all inquiries and notices (e.g., CF28 and CF29)?
  • Do you have liquidation information on entries over 314 days old?
  • Do you have any supplemental information letters or protests outstanding with CBP? What's happening with them?
  • Review the (a)(1)(A) list. Where are your records? Are you confident you can respond to Customs in the event of a request for information?

Cost Savings

Make yourself a corporate hero by looking for duty and other cost savings opportunities.

  • Send a memo to purchasing explaining what countries get duty preferences and under what circumstances.
  • Review your export operations for drawback opportunities.
  • Can you consolidate shipments to reduce the Merchandise Processing Fee?
  • Consider changing product specifications to change classifications to favorable duty rates (i.e., tariff engineering).


Lastly, go have lunch. Invite your colleagues from purchasing, engineering, receiving, and accounts payable. Explain to them the kind of information you need from them before merchandise shows up at a port. Tell them how grateful you will be if they keep you in the loop on new product development and changes in suppliers, prices, etc. Ask them to copy you on the routine reports they generate, even if they will rarely be of use to you because occassionally they will be very useful. These people need to be your friends. You might consider repeating this lunch quarterly.

Happy new year.

This Seems Wrong

Boing Boing, possibly the second best blog in the world, linked to this Reuters news story about a college student who was arrested in the airport in Philadelphia when a search of her bags turned up three condoms filled with a white powder. This does not involve CBP or the customs laws, but stick with me. The student spent three weeks in jail while Philly police determined that the white powder was flour and that it was all a big funny joke.

Upon her release, the student sued the City of Brotherly Love for violating her civil rights. The City settled for $180,000.

My only thought on this is that there should be some kind of offset from the settlement for being stupid and causing your own trouble. If I stand on the corner of State and 16th Street here in Chicago (not far from Police HQ), and sell small plastic bags of white powder to passing motorists, two things should happen. First, the buyers should come back and kick my sorry tail when they find out the bags contain sugar. Second, the police should do the same. Why? Because I look like a drug dealer, AND I KNOW IT. In fact, I am trying to look like a drug dealer.

This is not like the panicky traveler who faints when he or she overhears someone in the airport use the word "hijack" in a purely innocent context. "Hi, Jack. Did you pack a suit and tie?", for example. Or who calls security upon hearing "I heard Adam Sandler has a real bomb on his hands."

Condoms filled with flour in your bags will make you look like a drug runner. The "student" from Philly knows that. TSA knows it. Any jury would have known it, too. The city probably should have gone to trial. Maybe she spent too much time in jail; but it sure sounds like she deserved it.

Thursday, January 04, 2007

More on the North American Union

I am not particularly interested in writing political commentary. My previous gasp of frustration about the alleged conspiracy to trade away the U.S. in favor of a North American Union should stand as an exception to that rule. I want this blog to help readers deal with real business issues involving customs and trade law compliance.

That said, this issue irks me. Those who see a plan to form a NAU are misrepresenting important business inititatives aimed at improving regional competitiveness and security and are taking academic discussions to be governmental policy. It's all crap.

A rational voice on this in Michael Medved, a film critic and right-leaning commentator with whom I would likely disagree on most questions of actual policy. The issue here, however, is not about an actual policy. Rather, it is about identifying those who are either lying to create fear for their personal or political gain or who are truly misinformed.

OK, I hope I am done with this.

It's a new year. Everyone should be thinking about whether their legal house is in order. Let's talk about compliance reviews next.

Tuesday, January 02, 2007

Interesting Articles

First, from today's New York Times comes an op-ed piece in which the writers argue that it is time to repeal the Merchant Marine Acts, which limit coastwise shipping to American flag vessels built in the United States. The authors suggest that this has effectively reduced the the attractiveness of shipping as a means of transport within the U.S. and leads to energy waste and lost transit time at higher costs.

This article, from the St. Petersburg (Florida) Times explains how Customs and Border Protection mis-allocated so-called Byrd Amendment funds to shrimpers on the Gulf Coast. In one case, a shrimper who should was expecting $210,000 received a check for $2.1 million. It appears that CBP processed the requests without much review. The honest person who received the erroneous refund returned it to CBP, which has now commenced an audit of the refund process. Too bad the Byrd Amendment turned out to be illegal about a dozen different ways (e.g., WTO, NAFTA, free speech, equal protection), because it seems like a good opportunity for less honest entrepreneurs.