Global Trade Compliance: What Every Freight Manager Should Know

The Basics of Trade Compliance

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 make it hard for freight managers to stay on top of this critically important requirement.

This section takes the complex subject of global trade compliance and breaks it down – in a question-and-answer format  – to provide you with a foundational understanding of the subject.

What are the core elements of global trade compliance?

Customs and other government agencies want to know the answer to four basic questions:

1. 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.
2. 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.”
3. Where was the product made? The Country of Export is not necessarily the product’s actual Country of Origin, and it’s up to the importer to report the accurate origin of the goods to Customs. Accurate reporting of the country of origin is critically important and may cause an increase or decrease in the duty.
4. 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 4 questions all boil down to one thing: MONEY. Customs authorities audit companies to ensure the US government receives the money it is owed.

HS Code + Origin = Duty Rate.

Duty Rate + Value + Quantity = Money you owe the government.

What are the consequences of noncompliance?

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 USD in fines on this enforcement action.

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 the importer.

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 applicable laws.

Whose job is trade compliance 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.

Why? Because the function itself is mistakenly viewed as just a cost center – a necessary evil. In reality, superior trade compliance can give a company a real-world competitive advantage. It can speed customs clearance, avoid supply chain disruption, and reduce customer complaints – all revenue-enhancing, profit-enhancing benefits.

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. When the Trump Administration added US 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 valuable 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.

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

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 often offer affordable seminars that help you master this complex subject and enhance your value within your company.

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.

Understanding HS codes

The World Customs Organization publishes the Harmonized Tariff Schedule, which lists every variety of product type and assigns each a 10-digit code. A product’s HS code determines how much it will cost you to clear customs.

Most of your shipping documents will require an accurate HS Code to tell officials about the cargo and, therefore, how much you need to pay. For the same product, the first 6 digits are usually the same in every country, but there could be differences in the last four.

HS codes define what duties you pay.

Some products are subject to duties when you import them. Others enter for free due to special tariffs and trade agreements.

HS codes define your regulatory obligations.

Sometimes, agencies outside Customs take an interest in imported products. For example, in the US, the Food and Drug Administration (FDA) regulates imports of foods, pharmaceuticals, medical devices, cosmetics, and certain other products. The Environmental Protection Agency (EPA) regulates chemical products. Such regulations trigger more paperwork and, possibly, extra fees.

The importer of record is ultimately responsible for assigning the right HS code to imported products. But unless you understand the Harmonized Tariff Schedule very well, it can help to work with someone who does. A licensed customs broker can make sure your documentation provides the correct product classification and that you pay exactly what you owe and no more.

Don’t have time to dig into the details of HS codes? Many freight forwarders have a customs brokerage division and can assist you with choosing the right HS Code and staying compliant.

Importer of record responsibilities

An Importer of Record (IOR) is the business or individual responsible for compliance with all laws and regulations that apply to imports. For this section of the guide, let’s assume it’s a company importing into the US, where US Customs and Border Protection (CBP) has established detailed requirements that must be followed.

At the heart of these compliance details is a very simple idea. You need to know your business partners.

CBP wants evidence of exactly where the products were made, an ability to trace products back to component materials, a manufacturing process that meets established legal standards (e.g., no forced labor), and a safe, secure shipping process. The IOR also needs to clearly and accurately state the type and value of products being imported.

The following Q&A will elaborate on Importer of Record responsibilities.

What’s the downside of noncompliance with Importer of Record responsibilities?

You risk CBP audits, fines, penalties, and, in extreme cases, a loss of importing privileges. While rare, import bans do occur. For example, the CBP banned US imports from Malaysia’s Top Glove Corporation, the world’s largest glove manufacturer, when it found evidence that products were being made by forced labor. This was a huge financial hit to the company since the US accounts for nearly one-quarter of its approximately $1 billion USD in global sales. The import ban was lifted in September 2021 when the company provided clear evidence that it had addressed CBP concerns.

How frequent are CBP questions and audits?

There is no set timetable or average. If your company’s imports fall under one of CBP’s Priority Trade Issues (like apparel, antidumping, trade agreements, etc.), or if you’ve had a recent surge in import activity, you should be prepared for CBP outreach.

What does an IOR need to import into the US?

IOR responsibilities include providing your company’s Importer of Record number, which is either your IRS business registration number or, if your business is not registered with the IRS or you do not have a business, your social security number. You may also request a CBP-assigned number by completing a CBP Form 5106.

While a customs broker is not required to clear goods imported into the US, the complexity of the process and regulatory obligations make using such an expert a smart investment. When using a customs broker, you must sign a Customs Power of Attorney, authorizing the broker to act on your behalf.

All commercial shipment clearances in the US require a customs bond, which can be posted for a single entry or for multiple transactions throughout the year (continuous bond).

CBP does not require an importer to have a license or permit, but other Partner Government Agencies (PGAs), like US Fish and Wildlife or the Food and Drug Administration, may require a permit, license, or other registration, depending on the commodity you are importing. CBP usually acts in an administrative capacity and gathers information for these other agencies.

What are Importer of Record responsibilities?

In 1993, the Customs Modernization Act introduced the concept of “reasonable care.” It requires IORs to enter, classify, and determine the value of imported merchandise, and to provide other information necessary to enable CBP to properly assess duties, collect accurate statistics, and determine whether all legal obligations have been met. A customs broker or other expert can help with this process, but the IOR owns the ultimate responsibility.

If you don’t have the staff to give this issue the attention it deserves, then hire an expert for international customs brokerage and compliance to ensure you meet the legally required reasonable care standard.

What are practical steps to demonstrate reasonable care?

It comes down to implementing a documented Customs Compliance Program at your company – comprehensive processes and procedures that ensure your company meets the reasonable care standard. Here are some examples of items that should be included in your compliance program:

• Clear record-keeping processes. CBP requires specific records be kept for five years. If they ask for paperwork regarding specific imports, the agency will usually give you at least 30 days to provide it. Common records sought are international shipping documents like a bill of lading, an airway bill, a commercial invoice, a packing list or a customs entry summary.
• Procedures to ensure proper classification (HS CODES) and valuation. For more on this, see our primer on global trade compliance.
• Procedures to ensure proper country of origin declaration. This must be declared to CBP and marked on your products.

For importers of record, there’s a lot at stake if you don’t follow clearly established responsibilities. You risk fines, penalties, delays, damage to your brand, and, ultimately, the inability to service your customers.

Key International Shipping Documents

No one loves paperwork. But when it comes to global commerce, international shipping documents are essential to getting goods delivered successfully and making money.

If you’re arranging global shipments of imports or exports, don’t think of paperwork as a necessary evil; think of it as PROTECTION. Incomplete or inaccurate paperwork could trigger a range of negative consequences. These could include delayed shipments, inflated duty rates, or disputes about damage and liability. A little attention to detail at the front end can avoid these costly headaches.

One thing is for sure: Your cargo can’t move unless the right information moves with it. To help you master all paperwork requirements, here’s information on five of the most important international shipment documents, the role of each in the shipping process, and why each is important.

Shipper’s Letter of Instruction

The Shippers Letter of Instruction (SLI) is what the name implies. It’s your detailed export shipment instructions summary for your freight forwarder to follow. It’s sort of a cover memo for your other paperwork. The SLI is not actually a required document by law. However, it could be the most important global shipping document you prepare.

When you start the shipping process, you should list all relevant details such as commodity, weight, value, and special handling requirements. The SLI provides written proof of who needs to do what in the transaction.

If you don’t have your own SLI template, most forwarders can provide one.

Why is the Shipper’s Letter of Instruction important?

You contract with a freight forwarder to expertly handle the many details of the shipping process. But, due to cargo ownership and legalities, no forwarder can just step in and make decisions on your behalf.

The Shipper’s Letter of Instruction provides a limited Power of Attorney to your forwarder to serve as your agent for actions involving carriers, ports, cargo insurance, customs and other matters.

The SLI documents your request in detail so that, if the instructions are not followed, clear evidence exists. Details matter in SLIs. For instance, if you want to ship from Hong Kong to Chicago via LA but don’t specify the exact routing, the shipment could be routed via the East Coast, taking more time and money. SLIs spell out the details to minimize the potential for errors.

Bill of Lading

The Bill of Lading (BOL) is a legally binding agreement between the shipper and the transportation provider. The Shipper’s Letter of Instruction is created by the shipper for the carrier, whereas the BOL is issued by the carrier to the shipper.

Different types of BOLs exist – a trucker’s BOL (Freight bill) for over-theroad shipments, an ocean BOL, or OBL, for sea freight, and an Air Waybill, or AWB, for air freight shipments.

The BOL contains a lot of the same information as an SLI. They both include origin, destination, shipping date, and shipping instructions with shipper, consignee, commodity, piece count, weight, and measurement details. If information is incorrect in the SLI, the mistake will likely carry over to the BOLs and create problems.

Why is the Bill of Lading important?

In international trade, an original negotiable order bill of lading is an instrument of title and provides ownership of the cargo to the holder of the BOL. All other types of BOLs serve as evidence of receipt for two things: receipt of goods as well as the contract of carriage. The issuance of the BOL is proof that the carrier has received the goods from the shipper or their 3PL in good order and condition.

Consequences of an inaccurate BOL include exposure to claims, unclear liabilities or inability to identify the party at fault. Disputes arise when a BOL indicates that goods are received in good condition, but the consignee says otherwise. For example, a BOL might state “5 pieces.” Actually, it should clearly spell out the details, like “20 cartons on 5 pallets.” It will be hard to get your full freight claim paid or prove you have not received the correct freight if the BOL is incorrect or unclear.

Commercial Invoice

In international trade, a Commercial Invoice is used as a customs document by the exporter or importer. It’s the proof of sale between a seller and a buyer. It acts like your freight passport and allows global shipments to clear customs. There is no standard format, but a Commercial Invoice must include:

• Name and address of the buyer and seller
• Detailed description of the goods
• Country where the goods were manufactured
• HS code for the commodity being shipped
• Value of the goods
• Terms of Sale (Incoterm)

You could add additional details if you have them, such as order number, purchase order number or any other customer reference number.

The Commercial Invoice is important because it’s required for customs clearance to determine the duties and taxes due. Inaccurate information on a Commercial Invoice may lead to underpayment or overpayment of the duties and taxes. An incorrect customs declaration can lead to legal consequences as well as lengthy shipment delays.

Ultimately, these shipping documents are designed to protect you from shipment delays, compliance violations, and liability. Align with a global freight forwarder that understands what documentation is required. They will work patiently with you to ensure all the necessary details are handled.

Packing List

Like a Commercial Invoice, a Packing List is generated by the seller/ exporter and contains similar information. While the Commercial Invoice reflects the financial transaction, the Packing List mentions the count, weight, measurement, and description of the cargo being shipped. It allows parties to verify, all along the supply chain journey, that what was shipped is what was received.

The Packing List is important because it’s the original source document to check for discrepancies with the commercial invoice, BOL, and actual cargo received.

Certificate of Origin

Depending on where your cargo is going, the Certificate of Origin (or Country of Origin Certificate) could be a very important international shipping document. It certifies that goods were manufactured or processed in a particular country. Typically, Certificates of Origin are issued by an official organization, like a country’s Chamber of Commerce.

Based on the cargo destination and the applicable trade agreements in place, the Certificate of Origin will determine what duties are applied to the shipment. For instance, the US has 14 free trade agreements with 20 different countries where US goods get reduced or zero duty rates.

The Certificate of Origin is important because, should you make an incorrect origin declaration or misrepresent the origin country, your shipment may be refused, assessed a penalty fee, or become subject to a rigorous compliance program.

In a busy global shipping department, it’s tempting to skip or rush through paperwork details.

Don’t do it.

Simplifying Compliance with the Right Freight Forwarding Partner

Trade compliance can feel overwhelming—but it doesn’t have to be. With countless regulations, country-specific rules, and critical documentation requirements, it pays to have an experienced partner by your side. A knowledgeable freight forwarder like Dimerco not only keeps your cargo moving but also helps ensure every shipment is fully compliant. From accurate HS coding to importer responsibilities and risk mitigation, we support your trade compliance efforts so you can avoid delays, reduce costs, and focus on growing your business in global markets.