Follow up # 2 on US CBP forced labor seizures

Just a quick entry here, to give an update on some new developments on this subject, since my first two posts:

First post on forced labor

Second post on forced labor

Since those posts, a couple key developments tell me this is a story that has yet to be fully told.

First, on July 27, CBP Commissioner Kerlikowske raised the matter in his opening remarks to the Commercial Customs Operations Advisory Committee (COAC)[i]:

“And as you know, enforcement of the nation’s trade laws is a core mission for CBP, and I want to announce the new Forced Labor Working Group focusing on this key enforcement priority.

Following the Custom’s Bill’s repeal of the “consumptive demand” loophole, we have been working with industry, civil society organizations, and others to rigorously enforce the law and prevent the import of goods made with forced, convict, or child labor into the United States.”

He further went on to say:

“The role of industry in this issue is clear, and we must work closely with importers, brokers, and companies who want to do the right thing to clarify standards for their supply chains.”

I find this second statement very interesting. Is this hinting at a trusted trader type strategy? Perhaps a CTPAT type model, but targeting forced labor in supply chains? How about CTPAFL? No, to many letters…. Regardless of my conspiracy theories, this is just further evidence that CBP has no intention of dropping the matter, whatever their future plans are exactly.

Another development comes from the private business side. Recently Descartes’ SPL division “Descartes MK Denied Party Screening” added a new list type to their offering, called “Customs and Border Protection Forced Labor”.  They explain the list as: “The manufacturers listed have Withhold Release Orders (WRO) issued by the Commissioner”.

Descartes MK is a leader in the generation of SPL content[ii] for automation, such as in SAP GTS, and their inclusion of this content is a good indication that we can expect to see the list grow.

I’ll keep checking in on this subject, and I encourage anyone reading this to start the process of a supply chain review for forced labor. As I mentioned in my last post on the subject, there are other good reasons to do so.

P.S.: I’m a little surprised that Descartes called the list “… Forced Labor”. I was really hoping to see “… Forced LaboUr” from a Canadian company, eh! Ok. If you’re not Canadian, you probably didn’t get that one….

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[i] https://www.cbp.gov/newsroom/speeches-and-statements/2016-07-27-000000/commissioner-kerlikowske%E2%80%99s-opening-remarks

[ii] https://www.descartes.com/documents/descartes-mk-denied-party-screening-list-offerings

Follow up on US CBP forced labor seizures

On April 23, I posted about an unexpected result of the Trade Facilitation and Trade Enforcement Act of 2015, which had passed in February. See here:

http://intltradecompliance.blogspot.ca/2016/04/import-controls-on-products-produced.html

In that post I predicted that this would become a more significant factor in global trade then it had been previous to TFTEA. I just wanted to follow up on that with a couple observations; however, the jury is still out on whether or not I was accurate in my prediction!

At the time I wrote the original post, there had been 2 "withhold release" orders since TFTEA, in contrast to only 39 times in 85 years (and not at all in 15 years previous to TFTEA). How many times has this power been used by US CBP since my post? Well, as far as I can tell, only 1 more time[i], which is still significant (no activity in 15 years, 3 times since TFTEA), but not earth shattering. However, I still feel confident that this is a new dynamic for global supply chains that compliance officers need to take seriously.

Perhaps more telling than the enforcement in the last 3 months is the amount of communication and publicity around the subject. Here are some highlights that may convince you the new reality is here to stay:

·         On May 2^nd, following the TFTEA, US CBP announced the creation of a new task force. This Trade Enforcement Task Force will “focus on issues related to enforcement of antidumping and countervailing duty laws, and interdiction of imported products using forced labor”[ii]. (My emphasis)

·         On May 2^nd, US CBP Commissioner R. Gil Kerlikowske referred to the following in his remarks to the Joint Annual Meeting of the American Iron and Steel Institute: “core priorities like interdiction of products manufactured using forced, convict, or child labor”[iii]

·         The Commissioner warned the public of the following, in a June 1^st announcement: “It is imperative that companies examine their supply chains to understand product sourcing and the labor used to generate their products,” and followed this with: “CBP is committed to ensuring U.S. values outweigh economic expediency and as part of its trade enforcement responsibilities, will work to ensure products made with forced labor do not cross our borders”[iv]

The reader must make their own appraisal, but it seems to me that US CBP is signalling to trade to get ready: this is going to be a significant initiative.

As you consider whether or not this is significant, I want to remind the readers about the similarly intended California Transparency in Supply Chain Act[v]. This California law, effective since 2012, requires affected companies to disclose what efforts (if any) they are taking to combat slavery and human trafficking throughout their supply chain. This law stops at the requirement to disclose, and makes no minimum effort requirements. Therefore, you could be 100% compliant simply by stating you have absolutely no plan to eradicate slavery from your supply chain. However, that may be bad PR, and so most companies do in fact speak to some level of effort.

This is where the risk appears: your statement (as required under the law) must be accurate and truthful or you risk a lawsuit (such as the class action lawsuit against Costco[vi]) or worse: could this be a False Claims Act violation?

Lastly, I just wanted to mention another new possible development: Canada may very well end up with similar laws. A recent World Vision report[vii] demanded that Canada enact laws to restrict commerce that uses forced labour. There is no indication yet that this will happen, but as a Canadian I can say doing so would fit squarely with the agenda of the current government.

If you take one thing away from this, I hope it is that your company needs a strategy for dealing with possible forced labour in your supply chain. You need it to ensure the new US Customs enforcements don’t affect you. You need it to comply with California’s law. And you just may need it to comply with new laws we haven’t yet seen. I happen to think it’s also just the right thing to do….

Please leave comments on this if you disagree: I’m curious to know what the rest of the industry thinks!

Kevin Riddell

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[i] https://www.cbp.gov/trade/trade-community/programs-outreach/convict-importations

[ii] https://www.cbp.gov/newsroom/national-media-release/2016-05-02-000000/cbp-creates-trade-enforcement-task-force

[iii] https://www.cbp.gov/newsroom/speeches-and-statements/2016-05-02-000000/commissioner-kerlikowske%E2%80%99s-remarks-joint-annual

[iv] https://www.cbp.gov/newsroom/national-media-release/2016-06-01-000000/cbp-commissioner-issues-detention-order-stevia

[v] https://oag.ca.gov/sites/all/files/agweb/pdfs/sb657/resource-guide.pdf

[vi] https://www.consumerproductmatters.com/wp-content/uploads/sites/13/2015/11/Sud-v.-Costco.pdf

[vii] https://nochildforsale.ca/resource/supply-chain-risk-report/

An unexpected outcome of the rise of populist protectionism?

Anyone paying attention has noticed a significant trend this year in Western politics: protectionism. In international trade references, the definition of “protectionism” is:

“the theory, practice, or system of fostering or developing domestic industries by protecting them from foreign competition through duties or quotas imposed on importations”[i]

I can cite several examples this year of protectionism in Western politics:

1.       The “Brexit” vote by Britain to leave the EU

2.       The appeal of Donald Trump’s anti-free trade message in the USA

3.       The rise of the National Front in France

In case you are getting worried – don’t! I will not be making any comments on the value of any of these political movements! This is a trade compliance blog, and I intend to leave it at that…. This political movement is real, and I just want to focus on what impact it may have on us trade compliance folk.

With that said, you have probably already formed a conclusion about where this is going: clearly he is going to talk about free trade, specifically the TPP and the TTIP, right? Well, as much as that deserves its own post (hmmmnn…) I actually wanted to talk about something a little different: existing US country of origin product marking regulations.

Many in our industry can recite from memory the country of origin “marking rules” found in 19 CFR 134[ii]. These rules govern what country of origin must be shown on an imported foreign good, and how that needs to be shown. These rules explicitly only apply to goods of non-US origin (19 CFR 134.11 directs an importer to ensure that any “article of foreign origin” is appropriately marked with the country of origin). These regulations actually make no requirements or even offer guidance about the marking of a US origin good. Does that mean that you are free to mark a US origin good however your marketing group prefers? Not according to the Federal Trade Commission (FTC).

According to the FTC, for most items of US origin[iii], you have absolutely no obligation to state that US origin. However, they caution that if you choose to do so, then the “FTC Made in USA standard applies”. I fear that too many businesses are making claims of US origin on their packages, without fully understanding this FTC standard.

The FTC standard for a Made in USA claim is extremely strict. Their standard is:

“For a product to be called Made in USA, or claimed to be of domestic origin without qualifications or limits on the claim, the product must be "all or virtually all" made in the U.S”[iv]

What does this mean? It means that:

“all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no — or negligible — foreign content.”

I don’t know about you, but I have a feeling that a walk around your local big box retailer will find many items marked “made in USA” that actually contain more than a “negligible” amount of foreign content…. So how can this be? Surely any businesses in violation of the requirements would be penalized and ordered to change their label? The truth is, the FTC has not enforced this standard very much historically. A quick look at the press releases in the FTC web site will show you that they have a long way to go, to catch up with other trade regulating agencies like BIS, Customs and State in the enforcement game….

Ok, so you can take a breather right? This is not a big deal. Well, historically that may be true. However, in an environment of increased protectionism, and public distrust of globalisation and multinational corporations, can you be sure these rules will continue to be ignored? As we have seen with the recent US Customs seizures of goods manufactured with forced labor, sometimes the rules don’t need to change: they just need to be enforced more (See here: http://intltradecompliance.blogspot.ca/2016/04/import-controls-on-products-produced.html).

I think now is an excellent time for any company making US origin claims to have a good look at their products and ensure they are compliant. Waiting for the political winds to change is not great risk management, in my opinion…. Something else to keep in mind is the recent rise of False Claims Act enforcement. This sure sounds like a pretty close fit with the False Claims Act, and those penalties are significant.

Oh – and one final parting shot. If you make products that you sell globally and need to mark their US origin for other national requirements (i.e. Canada or Mexico country of origin marking rules) you have a real decision to make. Do you make two separate skus? (One with “Made in USA” on it and one without) Or come up with another creative solution? Whatever your personal solution, I recommend you start thinking about it now: 2016 could be a big deal in trade compliance.

Kevin Riddell

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[i] http://www.dictionary.com/browse/protectionism

[ii] http://www.ecfr.gov/cgi-bin/text-idx?rgn=div5&node=19:1.0.1.1.28

[iii] As they state at the following link, some products of US origin such as textiles are in fact required to state their origin due to other regulations: https://www.ftc.gov/news-events/media-resources/tools-consumers/made-usa

[iv] https://www.ftc.gov/tips-advice/business-center/guidance/complying-made-usa-standard

TPP vs. NAFTA

I was going to name this entry “TPP vs. NAFTA for TCPs[i]”, but honestly we trade compliance folk have to deal with enough acronyms already….

Unless you have been living under a rock the last year or so, you have no doubt heard of the Trans-Pacific Partnership (TPP). Most of the press has revolved around the political implications of TPP, such as impact on jobs and sovereignty. As a trade compliance professional you need to start thinking about the “how” of TPP. In other words, how are you going to implement TPP at your company, and is your automation prepared for it?

TPP is a free trade agreement, like many others, but there’s some aspects to it that may seem new or unusual to many. I’m writing this primarily to a North American audience, so I’ll use NAFTA as my model to contrast against the TPP model. This is just a blog entry, so it will not be comprehensive, but my goal is to alert the reader to significant differences between NAFTA and TPP, that they should investigate further. I apologize in advance to anyone unfamiliar with some of the terms used here: this write up is intended for an audience that already has an appreciation for how NAFTA works.

Most companies in North America have had a stable, preferably automated solution in place for NAFTA compliance for some time. Personally, I use SAP GTS, but there are a number of options on the market for automated rule of origin checks. NAFTA rules of origin[ii] (ROO) are fairly consistent, across the range of goods. The rules are driven by the tariff classification (HTS), and there are hundreds of them, but the structure of those rules tends to follow a common theme.

The majority of NAFTA ROO use the following basic tools:

·         % of regional (NAFTA) content

·         Shift in HTS between component and finished good

·         Some combination of both

I’d like to address the issue of % content, and contrast how NAFTA and TPP determine this. There are a couple significant differences. First, NAFTA overwhelmingly measures content by value, i.e. “50% regional value content”. A search of Annex 401 reveals that only 3 product specific ROO require a check of % by weight (as well as a general rule that applies to all of chapter 62).

In contrast, TPP ROO[iii] contains over 3 dozen product specific ROO referencing weight. Furthermore, some of these appear in chapters where NAFTA did not reference weight, such as the rule for HTS 3901. Anyone performing ROO checks on one of these products will have to verify that their systems can handle this. Furthermore, even TPP’s use of regional value content differs from NAFTA. NAFTA had a standard rule where value is checked for 50% if Net Cost is used, and 60% if Transaction Value is used. TPP uses % by value, but the %’s range wildly: I have seen, 30, 35, 40, 45, 50, 55%.... This will present a challenge to any system built around the 50/60 split. TPP also uses different categories of value: instead of Net or Transaction, it uses Net, Build Up, Build Down and Focussed Values. The variety of rule types is significantly more than found in NAFTA.

Apart from the product specific rules, another area of difference is found in the large amount of country specific exceptions. Unlike NAFTA, TPP seems to be much more open to unique exceptions by country. Likely this is due to the significantly larger amount of countries involved, as opposed to just 3 in NAFTA.

I don’t want to make this sound entirely negative or scary: there is good news for us Trade Compliance folk. I live in the chemical sections of the tariff – primarily chapters 27 through 40. In these sections, it is clear from an early analysis that there will be less text based conditions in TPP. What do I mean by this? Here is an example:

In NAFTA, the rule of origin for 3206.49 is very long and depends on a number of non-tariff based criteria (what I call text based conditions). For example, the rule differs depending on whether or not your product is based on Hexacyanoferrates or not. In contrast, with TPP the rule is very simple:

“A change to a good of subheading 3206.11 through 3206.50 from any other subheading.”

It doesn’t matter if you are based on Hexacyanoferrates, Cadmium Compounds or anything you can imagine. This is great news for me, as these conditions pose a problem for automation. For example, in SAP GTS they are called Additional Conditions, and need to be manually set. The system is smart, but not that smart; you need to tell it if any of the conditions apply. Dealing with less of these conditions will be good news for me and many others in my position.

By the way; to end this on a lighter note. Does anyone else find it ironic that the USTR uses this logo on their TPP information page?

Considering TPP encourages US company use of foreign content, I think “Made In America[iv]” is an odd choice. Especially when you realize that the use of the words “Made in America” requires “all or virtually all” of the contents to be US origin[v]! I wonder: could you claim that the USTR misled you if you found yourself in hot water with the FTC over a claim of USA on a good that meets the TPP ROO, through a shift in HTS? Sorry, I did say I was going to try and avoid acronyms, didn’t I…?

Kevin Riddell

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[i] Trade Compliance Practitioners

[ii] http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/ann-401-09.aspx?lang=eng

[iii] https://www.mfat.govt.nz/assets/_securedfiles/Trans-Pacific-Partnership/Annexes/Annex-3-D.-Product-Specific-Rules-of-Origin.pdf

[iv] https://ustr.gov/tpp/#text

[v] https://www.ftc.gov/tips-advice/business-center/guidance/complying-made-usa-standard