Customs Brokerage and FTAs

• This lecture covers customs brokerage, Free Trade Agreements (FTAs), and trade compliance within intermodal freight transportation and logistics.

Module Overview

• Lecture 7 focuses on customs brokerage processes, the relevance of the World Trade Organization (WTO) and FTAs, and describing FTA processes.
• Lectures 8-10 cover topics, such as the Control Tower, emerging technology, E-commerce logistics, transportation sustainability, international transport risks, and supply chain risks.
• Lectures 11-13 are dedicated to group assignment presentations.

Group Presentation Schedule

• Group presentations will occur, with presentation dates and times given
• Each group is assigned a combination of industry and company across various sectors, such as consumer health, electronics, aerospace, and automotive.

Customs Clearance

• Export customs procedures typically occur before cargo loading.
• Import customs usually happen when the container is at the terminal and ready for consignee pick-up.
• Pre-customs clearance can be arranged depending on the country.
• The customs process involves documentation and potentially physical inspection.
• Customs processes can differ among countries.

Role of a Customs Broker

• Customs brokers assist importers and exporters by processing declarations through customs and associated border agencies.
• Brokers handle required documentation, duty and tax calculations, inspections, and delivery arrangements.

Customs Brokerage Activities

• Activities encompass preparation/submission of declarations, checking/verification, payment of duties, cargo inspection/release, handling formalities, document legalization, compliance assessment, duty/tax programs, diplomatic cargo clearance, and the certificate to release goods.
• Required documents include a draft bill of lading, packing list, commercial invoice, and Certificate of Origin (COO).
• A preferential Certificate of origin (PCO) for FTA duty savings and a license or permit might be needed.

Trade Compliance

• Customs brokerage involves day-to-day activities to ensure trade.
• Trade compliance is vital to ensure that all parties in the supply chain follow trade rules.
• Trade compliance involves HS classification, review of the Denied Party List (DPL), export control, and licensing.

World Trade Organization (WTO)

• The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement with 23 countries in 1947.
• GATT addressed various trade issues and disputes before 1995 and conducted eight negotiation rounds, with the Uruguay Round being the longest.
• The benefits of GATT were significant tariff reduction and world peace.
• On January 1, 1995, the WTO replaced GATT as the trade-governing body.
• GATT remains a cornerstone that provides rules for the WTO.
• The WTO's role expanded beyond trade in goods and includes trade in services, intellectual property, and movement of people.
• WTO is essentially a negotiating forum with a set of rules that helps to settle disputes.
• The WTO framework is based on the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), Trade-Related Aspects of Intellectual Property Rights (TRIPS) and Trade-Related Investment Measures (TRIMS).

Tariffs and Trade Agreements

• Tariffs are at their lowest levels as nations adhere to the WTO's Most Favored Nation (MFN) principle.
• Average tariffs vary across countries.
• There has been growth in preferential trade agreements in the last few decades.

Preferential Trade Agreements

• There are many overlapping trade agreements, creating a 'spaghetti effect', and making customs brokerage and trade compliance more difficult.
• Major regional trade blocs and emerging developments include the European Union, GCC, ASEAN+1 FTA, RCEP, TPP-11 and NAFTA FTA.
• The largest FTA trade bloc by combined GDP is the NAFTA FTA.
• The exercise involves identifying multilateral FTAs and the countries they represent.

Bilateral vs Multilateral FTAs

• Bilateral FTAs: Country-to-country agreements allowing FTA savings for direct shipments with straightforward documentation.
• Multilateral FTAs: Multi-country agreements allowing FTA savings for both direct and regional re-export shipments.
• Documentation involving RDC is more complex, and companies are trying to use these agreements.

Free Trade Agreements (FTAs)

• FTAs cover trade in goods and services, investment protection, intellectual property protection, movement of business persons, mutual recognition of standards and qualifications, and government procurement.
• A crucial benefit of FTAs is the elimination or reduction of import tariffs.
• Tariff savings from FTAs are only achievable if consignment, origin, and documentation requirements are met.

FTA Conditions

• The shipping route needs to conform to FTA consignment requirements
• Products need to satisfy FTA Rules of Origin.
• The product must have been wholly produced, or underwent substantial transformation
• Products must meet HS code specifications.
• Required documentation that should be presented include the Preferential Certificate of Origin (PCO), bill of lading, commercial invoice, and packing list.

Import Duty Savings Example

• An example is provided for import duty savings for apparel machinery parts manufactured in Singapore and exported to Australia, comparing the MFN rate and preferential rates under the Singapore-Australia FTA and the ASEAN-Australia-New Zealand FTA.
• The MFN rate is applied consistently to all WTO member nations.

Rules of Origin

• Preferential certification of origin (PCO) is applied at the manufacturing country.
• Manufacturers need to submit cost statements as proof that a product is eligible to receive PCO
• Rules of Origin (ROO) are used to evaluate product eligibility, under: Wholly Obtained, change in Tariff Classification, Regional Value Content, and Process Rule.
• The PCO is submitted along with the bill of lading (BL) and commercial invoice (CI) to be assessed for FTA duties at the point of inbound customs.

Originating Goods

• Rules of Origin (ROOs) help determine the "nationality" of a good and its eligibility for preferential treatment under an FTA.
• Goods satisfying ROOs under an FTA can pay lower or no import tariffs.
• ROOs vary from one FTA to another.
• An originating good in an exporting Party can be classified under one of two categories: Wholly Obtained (WO) or a good manufactured using non-originating materials.
• A good considered Wholly Obtained (WO) occurs naturally, is harvested, or is an animal that is born and raised.
• Examples of wholly obtained goods are waste derived from production in the country of export, or plastic bottles in Singapore that have also been collected there.
• Goods using non-originating materials will have to undergo substantial transformation.
• Methods to measure the transformation change are: Change in Tariff Classification (CTC), Regional Value Content (RVC), and Process rule.
• These methods can be used in combination or standalone, depending on the origin criteria for the good in a Free Trade Agreement (FTA).
• Origin of these goods depends on the country where the last substantial transformation is performed.

Change in Tariff Classification (CTC)

• The CTC method applies only to non-originating materials.
• Non-originating materials used to produce a good cannot have the same HS classification as the final product to qualify.
• Depending on FTA requirements, a change in chapter, heading, or subheading is required to qualify for preferential treatment.
• Manufacturers and exporters need to know the HS classification of the final good and the non-originating raw materials.

Harmonized Codes

• There are many Harmonized Tariff Schedule (HTS) codes to choose from.
• Duty rates may differ on these codes.
• Fleeces for example may or may not be considered a knitted material, which may lead to appeals for reclassification and a push for lower duty rates.

Regional Value Content (RVC)

• Regional Value Content (RVC) requires that a certain minimum percentage of the good's value originates in a party.
• This party is defined in the Free Trade Agreement (FTA) for the good to be considered as originating.
• The calculation includes the FOB value, the value of non-originating materials.

Process Rule Method

• The Process Rule Method is generally applicable for chemical goods.
• Goods will be considered as originating if it is produced through a specific chemical process that occurred in a Party to the Free Trade Agreement.

Trade Compliance

• Trade compliance is operating within global regulations for trading activities, imports, and exports.
• It means complying with international export, trade, and financial laws.
• It's a responsibility for all businesses, especially those importing and exporting.
• The larger the business, the higher the compliance expectations.

Key Elements of Trade Compliance

• Tariff Classifications, Preferential Origin, Incoterms, Licenses and permits, Export controls, Screening, Customs management, Valuation

Key Elements of Trade Compliance - Tariff classification

• Correct classification using commodity and tariff codes is fundamental and helps establish duty rates, origin of goods, export controls, and other customs procedures.
• Wrong classifications, can lead to red flags raised by customs authorities.
• Tariff classification errors can lead to fines, penalties, and incorrect payments of customs duty.
• This is an area where companies "do not rely on your broker to get the tariff classification right".

Key Elements of Trade Compliance - Preferential Origin

• Preferential origin involves a specific trade agreement between countries.
• If goods are of preferential origin, they get reduced duty rates upon entry to the customer's country.
• The exporter is responsible for following rules of preferential origin to the letter.
• A failure to process data and paperwork could lead to 3 years' worth of unpaid duties, a liability.
• If goods are classified as "Non-preferential origin", it dictates what country the product was shipped from and the rules associated with it.
• Errors can lead to the product's origin being declared incorrectly, and lead to fines and penalties.

Key Elements of Trade Compliance -Incoterms

• Incoterms are trade terms used to clarify buyer and seller responsibilities during the shipment lifecycle
• The 2 main things they clarify are (1) delivery and (2) costs, risks and responsibilities.
• Incoterms should be established, read, and applied across import and export to reduce risk of misunderstanding
• Errors in incoterms can lead to overpayment and confusion within the supply chain.

Key Elements of Trade Compliance - Licenses and permits

• When importing or exporting certain products, it needs to be checked as to whether a license or permit is required
• Specific controls exist for military/paramilitary goods, technology, medicines, chemicals, artworks, plants and animals.
• Exporting and importing without the right license could be a criminal offense, lead to delays and possible confiscation.
• A key to staying compliant is to establish specific license management controls.

Key Elements of Trade Compliance - Export controls

• Certain products and underlying tech may be subject to export control.
• Export control legislation is for the classification of all products against the appropriate legislation (to ensure the right license requirements are established).
• Different controls apply to goods under ITAR (International Traffic in Arms Regulations) or EAR (Export Administration Regulations).
• If this compliance is not followed, substantial fines and imprisonment may occur.

Key Elements of Trade Compliance - Screening

• Screening customers, vendors, and transaction data against sanctioned entities will help ensure one is not inadvertently doing business with an undesirable person or party.
• Companies should compare all data against external lists from entities, such as the Office of Foreign Assets Control and the United Nations.
• Screening should occur not only at the start of a relationship, but daily and when dealing with transactions.
• Sanction breaches are criminal offences that can lead to fines, and imprisonment.

Key Elements of Trade Compliance - Customs management

• Customs management focuses on a quick and smooth resolution to trade compliance issues.
• Effective relationship with a broker is very important, if your business happens to be the subject of a customs investigation

Key Elements of Trade Compliance - Valuation

• It's important to establish a value for imported goods in order to calculate customs duty, import VAT and trade statistics.
• Every shipment has to have the appropriate value associated with it for scrutiny.
• Valuation must comply to the methodologies approved by the World Trade Organisation (WTO) and Single Administrative Document (SAD or form C88).
• Errors can lead to fines, penalties, under/over payment of duties and lead to challenges from custom authorities.