Chapter 10
Customs and Regulations
Customs and Regulations
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Government agency and the function of
controlling imports and exports to conform to
government regulations
Plays a special role in international logistics.
The ports where cargo and people enter and exit
a country are the places where a government can
control and regulate many activities.
Customs and Regulations
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Two approaches to customs:
In US, border is a place where laws are
enforced.
In Europe, border is considered as a
checkpoint; regulatory goals are pursued
internally.
Customs and Regulations
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Customs refers to cargo; immigration refers
to people.
US Citizenship and Immigration Services
(formerly INS) deals with people.
US Customs and Border Protection deals
with cargo.
In other countries these may be the same
agencies.
What does customs do?
1. National security:
 U.S. Customs and Border Protection’s (CBP) top priority is to keep
terrorists and their weapons from entering the United States.
 While welcoming all legitimate travelers and trade, CBP officers and
agents enforce all applicable U.S. laws.
 CBP prevents narcotics, agricultural pests and smuggled goods
from entering the country and also identifies and arrests those with
outstanding criminal warrants.
 On a typical day last year, CBP officers welcomed 1.2 million
people at the nation’s 314 land, air and seaports while denying
entry to more than 3,000 inadmissible visitors protecting our
borders against terrorism.
2. Revenue collection: taxes collected on trade is a major revenue
source for the governments.
What does customs do?
3. Managed trade and competitiveness: policies to
promote the nation’s economy.
 Dumping: a practice of selling in another market
at a price which is lower than the price or cost in
your home market.
 Dumping may be without motive or may have
such economic purposes as putting rival suppliers
out of business.
 Foreign subsidies: occur when an exporter
receives some type of subsidy to improve their
competitive position in foreign markets.
What does customs do?
4. Gray market importing (parallel importing) is the
practice of importing a product contrary to the
wishes of the producer.
 High value branded consumer goods are prone to
gray market importing.
 Parallel importing is regulated differently in
different jurisdictions; there is no consistency in
laws dealing with parallel imports between
countries.
5. Protection of national interests: control of wildlife
products, narcotics. Security and social issues.
How does customs operate?
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Entry restrictions: certain products may be
completely restricted from entry or only
under certain conditions.
Rates: duties vary.
Information: certain information is needed
to be provided on imports and exports to
collect data on economic trends and to
control the import/export of some products.
How does customs operate?
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The rates charged by Customs are known as tariffs, duties, or taxes.
Tariffs are decided by the federal government.
Payments that go into the general government fund (ex: fees a carrier pays to use a
port).
Quotas are a common way that Customs can control the amount of a product that is
imported.
Applies to a product.
Absolute quotas: Absolute quotas limit the quantity of goods that may enter the
commerce of the United States in a specific period.
When an absolute quota is filled, further entries are prohibited during the remainder
of the quota period.
Some quotas are global while others are allocated to specified foreign countries.
The Tariff rate quota: Tariff-rate quotas permit a specific quantity of imported
merchandise to be entered at a reduced rate of customs duty during the quota
period.
There is no limitation of the amount of the quota product that may be imported into
the U.S. at any time, but quantities entered during the quota period in excess of the
quota quantity for that period are subject to higher duty rates.
How does customs operate?
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Visas are one way the exporters’ government
controls who gets to sell their goods under a
quota.
A document issued by a government to the
businesses in its country to grant them permission
to export that product under quota.
Dual monitoring: if a country controls the amount
of a product that can be exported.
How does customs operate?
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Enforcement by Customs is done in a variety of
ways:
Customs agents routinely board ships, planes,
and other vehicles to inspect the cargo.
The documentation provides many clues to the
possibility of violations.
IT is used to search for the trends indicating
smuggling.
Customs operations
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Shipper: contracts with carriers for movement of
goods.
Exporter: the one responsible for fulfilling export
regulations of that shipment.
Importer: the one who imports the cargo.
Importer of record: the one held responsible for
fulfilling most of the regulations associated with
Customs compliance.
Customs operations
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Export clearance: most countries control the export of some goods.
The US requires an Export Declaration form which describes what is being
exported.
The Shipper’s Export Declaration (SED), Commerce Form 7525-V, is used
for compiling the official U.S. export statistics for the United States and for
export control purposes.
The exporter (U.S. principal party in interest) or its authorized agent is
responsible for completing SED.
The freight forwarder performs services that facilitate the export of the
goods.
This includes arrangements for the transportation and delivery.
To prepare SEDs for shipments to foreign countries, the forwarder must
have a power of attorney or written authorization from a principal party in
interest, or the U.S. principal party in interest must sign the authorization on
the paper SED.
Customs operations
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Export restrictions:
Complete ban on the product from being exported.
The commodity may be approved for export to certain countries.
Carnet an international customs document that permits the
equipment or merchandise to clear customs without the payment of
duties and taxes.
Payment is not necessary because the Carnet guarantees that the
merchandise or equipment will be re-exported within a year.
Merchandise Covered by Carnets:
Virtually all goods, including commercial samples, professional
equipment, and items for tradeshows and exhibitions, including
display booths.
Customs operations
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Import clearance:
More complex than export clearance.
The port of entry is where Customs exercises its controls.
In some cases they may inspect cargo after it has been imported far
from the port of entry.
For the vast majority of transactions the importer/exporter will need
to file paperwork and pay duties.
In the US, duties are compiled in a book called Harmonized Tariff
Schedule (HTS).
It is now available online.
http://www.usitc.gov/tata/hts/bychapter/index.htm
The HTS comprises a hierarchical structure for describing all goods
in trade for duty, quota, and statistical purposes.
Customs operations
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Duties are based on three factors:
Classification: The General Rules of Interpretation (GRI) are the rules that
describe in detail how to read the HTS.
The General Rules of Interpretation outlines the method used to determine
a product's classification.
Customs decide how it is classified by the essential characteristics of the
commodity.
Essential characteristics are the aspects of a product that determine what it
is in terms of customs classification.
Duty rates vary based on how products are classified.
All goods that enter the United States must be categorized according to the
Harmonized Tariff Schedule (HTS).
The act of placing goods into the correct category is called classification.
Classification determines how much duty will be collected.
Customs operations
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Cargo value:
How much the shipment is worth.
The customs value of cargo should be the
price actually paid or payable, when sold
for export to the country of importation.
Customs operations
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Country of origin:
Duty rates and other laws may be different for the products of different
nations.
Country where an article was grown, mined, produced or manufactured.
The last country where the goods underwent a substantial transformation.
The “substantial transformation” test is intended to identify the country of
origin of an imported product when the product is manufactured in more
than one country and/or incorporates materials, parts, or components from
more than one country.
More particularly, the test is intended to identify that country where the
most significant manufacturing or processing operation took place; that is,
the country in which the imported product was given its essential character.
“new name, character, or use”
Customs operations
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Any corporation, company or individual wishing
to import goods into the United States, or
engage in other import related activities or
operations, is required to post a surety bond or
its cash equivalent with the U.S. Customs.
The bond guarantees that the importer will
faithfully, and in a timely manner, abide by all
laws and regulations governing the importation
of merchandise into the commerce of the United
States.
Enforcement and inspections
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Pre-shipment inspections: the value, quality
and quantity of a shipment is determined at
the exporter’s location, and it is transmitted
to the importing country’s custom
authorities.
Many countries have requirements
regarding the marking of the products.
Enforcement and inspections
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International Trade Prototype (ITP) is under way.
The ITP began in 1996 as a means to standardize and simplify customs procedures in order to facilitate
international trade, while at the same time allowing customs services around the world to monitor goods
and collect duties.
A major innovation of the ITP is that it requires close coordination of customs agencies in both the
importing and exporting countries, with the ultimate goal of allowing companies to supply only essential
data on a one-time basis.
The hope is that the ITP eventually will allow trading partners to engage in "seamless transactions”.
Major trading nations want to make import/export data interchangeable.
Members of the Group of Seven countries — the United States, United Kingdom, Canada, France, Italy,
Germany and Japan — want to ease the customs burden on trade, while still maintaining their border
enforcement missions.
They have successfully whittled 800 pieces of data used in their import procedures to about 125 pieces.
The goal is to have a "single interface between government and industry" through a "seamless data
flow" for ordinary shipments, which allows export data requirements and the respective electronic export
declaration of all participating countries to satisfy import data requirements and electronic import
declarations.
This would allow shippers to exchange this data without reformatting it.
Enforcement and inspections
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Accountability of customs agencies has been a major
concern.
Intellectual property is intangible creations.
Music, article, book, software, art.
A counterfeit is an imitation that is made usually with the
intent to deceptively represent its content or origins.
It is a common practice.
Companies sometimes work with Customs to teach agents
how to identify counterfeit goods.
Proposal of requiring invoices to state what trademark is
used.
Managing the Customs Operations
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The first step is to know about the rules of
importing/exporting and how the Customs agency operates.
The second step is to decide where to clear customs.
Customs can be cleared at the port or move in-bond.
Import shipments moving into or through the United States
which have not cleared Customs at the border and therefore
travel under a Customs (Treasury) bond are identified as inbond shipments.
Done to relieve port congestions, to delay paying fees.
Managing the Customs Operations
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When the United States enacted the Customs Modernization Act in
1993, it transferred responsibility for classifying goods from U.S.
Customs to the importer of record.
Now importer must be sure to properly classify all imported goods,
accurately report the value of them, and determine and pay the
appropriate duties.
The Customs Modernization Act continues to redefine the
relationship between Customs and the import community.
Customs has advised the international trading community that it
must use "reasonable care" in classifying and valuing imports,
based on a policy of "informed compliance".
This process allows Customs to verify the accuracy of transactions
through post-audit, rather than by individual entry scrutiny.
Managing the Customs Operations
Customs House Broker (CHB) is an individual or firm licensed by
the U.S. Customs to act for importers in handling the sequence of
custom formalities and other details critical to the legal and speedy
exporting and importing of goods.
Services provided by CHB:
 Computer interface
 Immediate delivery
 Paperless release
 Door-to-door service
 Classification
 In the US there are heavy penalties for mistakes so CHBs are used.
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Managing the Customs Operations
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Non-tariff barriers to trade are restrictions to
imports but are not in the usual form of a tariff.
Non-tariff barriers may be in the form of
manufacturing or production requirements of
goods, such as how an animal is caught or a plant
is grown, with an import ban imposed on products
that don't meet the requirements.
Examples are the European Union restrictions on
genetically modified organisms or beef treated
with growth hormones.