From the cubicle at the end of the hall to the front page…

Note - above image is from Library of Congress, and is public domain[i].

If you’re anything like me, you know what I mean by “the cubicle at the end of the hall”. Those responsible for or involved in Trade Compliance often feel like the unwanted guest at the party. No one is too sure what exactly we do, but they know it’s usually bad news when we get involved! I think sometimes they place us as far as possible from the action, but maybe that’s paranoia!

In all seriousness, most of us have had those conversations over the years when asked “what do you do”. I’m sure I’m not the only one who’s seen glassy eyes in response when I say “NAFTA”, or Customs Compliance. Cross border trade compliance just hasn’t been a well known or understood topic historically. Maybe this sounds familiar to you too:

“So, what do you do?”

“Oh, I look after customs and trade compliance, NAFTA, that sort of thing”

“Hmmn?”

“You know the North American Free Trade Agreement?”

“…”

“Forget it, just pass the crackers please…”

Similarly, many companies that take “compliance” seriously, historically haven’t considered “trade compliance” much. A recent survey by PWC showed that only 32% of companies with a corporate compliance function, include “Export compliance” under the umbrella of “Corporate Compliance”[ii]. (I’m proud to say I work for one of those 32%!).

Well, whether you consider it good news or bad news, I believe things are changing, and changing quickly. Since the beginning of the 2016 Presidential race (which feels like it started in 1916!), I have heard people comment on the benefits/costs of NAFTA that I swear had never heard of it before. Similarly, in Canada right now, it is big news discussing whether or not we will sign the CETA free trade deal with the EU. For those not following, a province in Belgium called Wallonia is sticking to their guns and refusing to ratify, which means the whole agreement may fail. As I write this, my Prime Minister has cancelled his trip to Europe for the signing. I guess there must be a ``Make Wallonia Great Again” movement going on[iii]… A good article on it can be found here:

http://www.economist.com/news/europe/21709330-failure-ceta-heralds-age-vetocracy-if-eu-cannot-do-trade-what-can-it-do

Returning to the US Presidential race, as anyone following knows, deals like TPP and NAFTA have been front and center in the debates. I haven`t seen this level of public discussion on free trade since NAFTA was first debated in the Clinton campaign… (Oh, am I having déjà vu…)

Beyond free trade, several other high profile events have affected trade compliance recently. From the activity in the Ukraine, to Syria, to Cuba, foreign policy decisions seem to be affecting the rules we trade by almost daily.

On the enforcement side, several significant court decisions and US CBP announcements promise to bring trade compliance into the public litigation sphere. For example, the recent court decision on False Claim Act application to Marking Duties:

http://whistleblowerlawinsights.com/2016/10/13/customs-fraud-whistleblower-case-victaulic-appeals-court/

And the recent US CBP statement re: AD/CV duty enforcement:

https://www.federalregister.gov/documents/2016/08/22/2016-20007/investigation-of-claims-of-evasion-of-antidumping-and-countervailing-duties

Based on these developments, we may see a new cottage industry for lawyers. I tried hard to think of an import/export equivalent to “ambulance chasers” but came up empty – any ideas?

As I said earlier: all of this may be good or bad news for you. If you liked your quiet cubicle at the end of the hall, maybe this is bad! However, if you’ve been seeking more exposure in your company, and feel ready for increased challenges, this can only be good for you. Best start catching up on what’s going on: wouldn’t want to be unprepared the next time someone brings a newspaper article to your cubicle and says “hey – isn’t this that stuff you do?”

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[i] http://www.loc.gov/pictures/item/ne0108.photos.198654p

[ii] https://www.pwc.com/us/en/risk-management/state-of-compliance-survey/assets/pwc-soc-2015-chart-pack.pdf

[iii] Fear not – I`m not making a judgement on the value of `Make American Great Again`… just trying to point out how much our profession has been hitting the news lately!

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

“NAFTA Season” and the “inconvenient truth” of free trade compliance

It’s November, or “NAFTA season”, and that means most North American companies are knee deep in NAFTA certificate gathering. They are requesting certificates from all their vendors for 2016, and already receiving requests from their customers for the same. If you are involved in the supply chain for a North American goods manufacturer, you are likely familiar with what I’m talking about. The process is simple, but depending on the scale, can be very time consuming. Requesting and tracking the certificates of origin from hundreds or thousands of vendors, while simultaneously responding to requests from the same amount or more of customers.

Article 501 of NAFTA states that a certificate must be completed by the exporter, if the import in question is going to claim NAFTA status. Article 502 requires the importer to have this certificate in their possession at the time of declaration. Since most companies use a 1 year blanket period for their certificates, starting January 1, that means autumn of each year is a scramble to secure certificates for the coming year, so they are in possession by the earliest possible date of declaration (January 1).

That’s the certificate of origin process, but it’s only half the battle (if that much!)...