Software and other automation solutions exist to make it easier to manage complex tasks or functions. The more complex, the more upside to using software to manage the details. But when it comes to the complex processes involved in international trade compliance, a large swath of the importer community continues to manage the function with spreadsheets and file folders.
To find out why, we chatted with Dimerco trade compliance consultant, Karen Kenney. Read on to learn the role of technology in international trade compliance and strategies you can use to reduce your company’s costs and risks.
Q: What is trade compliance?
It’s making sure you adhere to the regulations controlling international trade to avoid delays, fines and, ultimately, legal action. Basically, US Customs and other government agencies want a few things: an accurate classification of the product with the correct Harmonized System Code, commonly known as an HS code; accurate reporting of the volume and value of imported shipments; and accurate information on the goods’ country of origin. Read more in our article: Global Trade Compliance: Understanding the Basics.
Q: Do most companies use some sort of technology to manage international trade compliance?
The bigger companies do because the downside is greater in terms of supply chain risk and penalties. And no major brand wants the negative PR fallout from falsely classifying their goods or sourcing from banned regions associated with the use of forced labor.
But most smaller companies (that’s the vast majority of importers) either do nothing or manage international trade compliance using spreadsheets or other rudimentary methods. Believe it or not, plenty of companies import goods and, when the commercial invoice comes in with no U.S. Harmonized Tariff Schedule (HTS) code, will rely on the customs broker to figure it out. The “better” importers might keep their relevant HTS codes and country of origin data in a spreadsheet, but it’s still a very seat-of-the-pants approach rife with potential pitfalls and missed opportunities.
Q: What’s the downside of this manual approach?
There are several:
- It’s incredibly inefficient. If your people are constantly on the phone answering the same questions – “What’s the HTS code?” or “What’s the country of origin?” – these are labor costs you can avoid. That’s not even considering the opportunities created when you free your people from these mind-numbing clerical tasks.
- Unless you’re paying close attention to things like country of origin, 301 tariff exclusions, and free trade agreements, you could be paying too much for duty costs. You want to know the most compliant, duty-friendly HTS code in advance and use it every time.
- If your paperwork is incorrect, it could lead to inspections that disrupt your supply chain. Hefty fines could be levied if an issue is found.
- Worst case, there could be 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 duty-savings opportunities, lost revenues and fines.
Q: What technology is available to help?
There are basically three buckets:
THE FREE STUFF
U.S. Customs and Border Protection (CBP) has its own system, called ACE (Automated Commercial Environment), that automates the processing of import and export transactions. The system can be used to track which HTS codes you’re using and other compliance details. It’s wise to export your data from ACE at least quarterly to make sure all the transactions in your account are actually yours. Identity theft doesn’t just apply to humans.Also in the free category is the help available from your freight forwarder or customs broker. Many, like Dimerco Express Group, have a portal where you can access all your customs brokerage data. You can look at things like whether your broker classified the same product under different codes, how much duty you’ve paid, whether you’re taking advantage of duty savings opportunities (like Free Trade Agreements and 301 exclusions), how much you’ve imported from each supplier and country, and more.
BASIC COMPLIANCE SOFTWARE
These systems allow you to maintain a database of your HTS codes. When HTS codes change or when a 301 exclusion is added, the software automatically notifies you. The software tells you if you might be eligible for Free Trade Agreements or other Trade Preference programs. And these systems allow you to run reports based on historical data to do some basic planning and budgeting if a tariff rate changes or the government decides to impose new or higher tariffs. The software also allows you to exchange this data with your Customs broker to ensure the right, most compliant and cost-effective HTS codes and duty rates are applied to every shipment.
HIGHER-END TRADE COMPLIANCE SOFTWARE
The fancier software packages for international trade compliance go beyond managing trade compliance details and do some of the thinking on your behalf. They use AI to help classify products, answering questions like “Is there a more tariff-friendly, compliant HTS code for my product?” or “Which tariff code are other companies like mine using for this product?”NOTE: Recently, an outdoor lifestyle company received a half-million-dollar retroactive refund from the U.S. government because they had overpaid duties despite being eligible for a 301 exclusion. Manual systems and lackluster communication with their customs broker both played a role in what was initially a missed opportunity.
Another area where advanced trade compliance software assists is country of origin and supply chain tracing. As CBP enforcement continues to drill down into the true country of origin (not just the country the goods are exported from) of both products and their component materials, it will be incredibly hard to keep pace with CBP targeting without your own tracing software.
Q: How can the U.S. ACE portal help?
The benefits are many. But that’s a subject for another article. And guess what? We already wrote it. Check out our blog: “Not Using the CBP ACE Portal? That’s a Mistake.”
Q: What’s the price point of mid-level trade compliance software?
The costs will depend on several factors such as your number of foreign suppliers, imported SKUs, countries of origin, and transactions.
Q: What are the barriers to investing in international trade compliance software?
The biggest is perhaps inertia. Companies get used to doing things in a certain way and it’s difficult to change. Other reasons?
- Trade compliance functions are historically underfunded.
- Time and energy. Compliance functions are under-resourced and often handled as a part-time task by someone whose primary role is logistics or purchasing or finance. It’s hard for them to find the time to manage such a project.
Q: When is it worth it for companies to invest in international trade compliance software?
If a company has four or more customs entries a month, it’s likely worth investing in at least some software to automate trade compliance.
Q: How can you convince the bosses to invest?
Speak their language: numbers and money.
- Examine your current annual duty payments and the potential to reduce these significantly.
- Calculate the labor costs that could be saved through elimination of manual tasks (data entry, record keeping, phone calls and emails with brokers/forwarders/suppliers).
- Quantify the downside risk. For example, the maker of a sweetener product that non-compliantly imported from overseas paid out a USD $575,000 fine to CBP.
Q: What’s the best place to start when it comes to leveraging technology for international trade compliance?
Let’s set aside software for a moment and just talk about how the world has changed in recent years. Military conflicts have led to trading bans with specific countries. Trade tensions have led to tariffs, retaliatory actions, and new sourcing strategies. Major trade agreements like RCEP are leading companies to rethink supplier networks.
The pace of change in trade compliance has increased exponentially, making it nearly impossible to keep up without help from at least some automation. Trade compliance is becoming more and more complicated and it’s time to take this function seriously. That means providing your people with the tools they need to manage it well. It also means putting one person in charge of trade compliance. That person may wear other hats, but someone must be accountable.
As for software, if your trade compliance management approach is still largely manual, start by leveraging the free resources and systems available from CBP and your customs broker.
Do you want to assess your company’s international trade compliance program?
As part of our international customs brokerage services, Dimerco offers advice and ways to leverage our systems to manage your customs transactions. Contact us today to start a discussion.
