Driving a car. Filing your taxes. Playing a board game. These and just about every activity you can think of have rules and instructions telling you what you can, can’t and must do. International commerce is no different.
The set of rules governing global business transactions can be broadly referred to as Global Trade Compliance. It’s a system of processes that importers and exporters use to make sure they adhere to the laws and regulations controlling the movement of information between trading partners and worldwide government agencies.
Unfortunately, these processes are not covered in one handy reference guide; they’re different for each country and regulating agency. The size and complexity of this challenge makes it hard for US-based importers to stay on top of this critically important requirement.
This article takes the complex subject of global trade compliance and breaks it down – in a Question & Answer format – to provide you with a foundational understanding of the subject.
Q: What are the core elements of global trade compliance?
Customs and other government agencies want to know the answer to four basic questions:
- What’s the product? Every product you import must have a Harmonized System code (HS code) that classifies the type of product it is and helps to determine the duty, tax rate and other potential government charges or fees. The code selected must be accurate and not based on which code has the lowest duty.
- How much is it worth? This value equals the total amount you, as the importer, paid to the foreign seller. Many importers believe that the value is what is listed on the commercial invoice, but that may not be true. Additional items and services (packaging, engineering services) that are provided by the buyer to the seller are also dutiable. These are called “assists.”
- Where was the product made? The Country of Export is not necessarily the product’s actual Country of Origin, and it’s up to you, the importer, to report the accurate origin of the goods to US Customs and Border Protection (CBP). Accurate reporting of the country of origin is critically important and may cause an increase or decrease in the duty.
- How much of it is there? The quantity, weight or other related data about the items you’ve purchased are typically sourced from the commercial invoice or packing list. The HS code determines which statistical data elements you must report. These are required by both CBP to determine the total duty and tax that is owed and by the Department of the Census to compile international trade statistics.
These 4 questions all boil down to one thing: MONEY. CBP audits companies to ensure the US government receives the money it is owed.
Q: What are the consequences of non-compliance?
If the answers to the questions above are (intentionally or unintentionally) wrong, that could lead to:
- Government inspections that disrupt your supply chain – inspections that you, as the importer, pay for
- Hefty fines should an issue be found
- Penalties for repeat offenders, including a years-long customs audit, seizure of goods, and even debarment (loss of import privileges)
Consequences could easily equate to a 6- or 7-figure profit loss linked to delays, lost revenues and fines.
One recent compliance failure involved a civil enforcement action against an importer that markets a branded sweetener product. The company is alleged to have violated laws that prevent goods made with forced labor from entering the USA. CBP assessed $575,000 in fines on this enforcement action.
Q: Who is responsible for global trade compliance?
The ultimate responsibility for trade compliance lies with the importer. A customs broker can advise you on things like HS codes, but all legal and financial liabilities fall to you.
Let’s say Distributer B buys product from Manufacturer A and sells it to Retailer C. The retailer is importing product based on information provided by Company B, but it remains the retailer’s responsibility to ensure the HS code and quantities are accurate and to vet company A. This may include visiting factories to ensure labor and other practices there are compliant with US laws.
For a role that is so important and so complex, trade compliance is often an under-resourced function. Why? Because the function itself is mistakenly viewed as just a cost center.
Q: Whose job is it within an importer’s organization?
It’s different in each company. For instance, a large company might have a dedicated global trade compliance officer with a staff of supporting people. In other companies, the head of logistics might own trade compliance. In small and mid-sized enterprises (SMEs), it could be the purchasing manager, the finance manager, or even the owner trying to juggle trade compliance duties along with other priorities.
For a role that is so important, with requirements that are so complex, trade compliance is often an under-resourced function.
Q: What is “tariff engineering?”
This question goes a little beyond the basics of trade compliance, but the practice of tariff engineering has gotten more attention recently. Tariff engineering has long been used by best-in-class importers to ensure the lowest possible, compliant duty for their products. More recently, when the Trump Administration added tariffs on certain commodities from certain parts of the world, companies began sourcing products from new regions, re-engineering their products and researching whether they could classify their products compliantly in a different, more appropriate section of the tariff. Changing an HS code for a previously imported product has repercussions, however, and must be considered very carefully.
There are 5300 HS codes, so you would think there would be one single code for your specific product. But there are grey areas. The same product could fall under multiple HS classifications depending on the product’s essential character. An experienced international customs broker will understand these nuances and can provide invaluable advice.
Of course, companies may choose to slightly reengineer the product to enable the change in classification, like adding a plastic coating or decoration to an item to alter its most appropriate HS code, potentially saving thousands of dollars in customs duties.
Q: What are the advantages of investing more time and resources into global trade compliance?
Businesses hesitate to sink more money into a function they already consider a cost center. But investing time into a properly resourced trade compliance program – whether those resources are internal or external – makes bottom-line sense. Among the advantages:
- Keep duty rates as low as compliantly possible through an expert understanding of things like free trade agreements, tariff engineering, foreign trade zones and the many other factors that impact the duties you pay.
- Improve delivery times and avoid supply chain delays that anger customers
- Lower the risk of fines related to compliance violations
- Maintain your reputation – with government agencies and trading partners
Q: How can I learn more about global trade compliance to protect my organization?
Your existing business partners – freight forwarders, customs brokers, 3PLs – are a great (and often free!) source of expert advice. Arrange to meet with them regularly to review your product line and compliance efforts. They can help fine-tune your program and keep you current on changes in compliance requirements. It’s also a good idea to involve these partners earlier in the product development process to ensure you consider the effects that product composition and source country have on duty costs.
Networking with peers on LinkedIn is a great way to stay current and to problem solve.
Trade associations are a cost-effective way to learn trade compliance best practices from peers. They offer affordable seminars that help you master this complex subject and enhance your value within your company. Consider getting more involved in the trade organization for your specific commodity (e.g., Footwear Distributors and Retailers of America). Or join a group that is focused on trade-related issues, for example the American Association of Importers and Exporters (AAEI), The Coalition of New England Companies for Trade (CONECT) or the International Compliance Professionals Association (ICPA).
Get Help with Your Global Trade Compliance Needs
We live in a global economy where businesses depend on the ability to trade seamlessly and efficiently with other companies around the world.
There are ground rules that allow this to happen. Global trade compliance experts understand these ground rules and can give their companies a decided competitive edge.
If your company lacks the time or resources to develop this expertise internally, work with a company like Dimerco that combines global shipping and logistics capabilities with an expert knowledge of trade compliance – particularly between the US and China and other Asian countries. To discuss how Dimerco can assist with your global shipping and trade compliance needs, contact us today to start a discussion.