CUSTOMS PLANNING FOR A RECESSION John M. Peterson NEVILLE PETERSON LLP New York Washington D.C. Superior Brokerage Services Inc. Eagan, Minnesota November 6, 2008

Customs and Supply Chain Planning in a Recession How Bad is It? –Retailers struggling –Smaller orders, placed later –Continuous price- point pressure –Weak dollar makes imports more expensive –Credit spending down

What does CBP Do in a Recession? Increased emphasis on commercial enforcement; Legal mandates to enforce – 10+2, Consumer Product Safety Improvement Act, Lacey Act Amendments More audits; More intellectual property enforcement “We’re not going anywhere”

Can You Squeeze Savings Out of Your Supply Chain? Review Customs compliance procedures Interaction With Corporate Internal Audit Interaction with Sarbanes-Oxley programs Don’t depend on the “Merchandise Fairy” “Sorry, the Merchandise Fairy is strictly retail.”

Toolbox Item # 1: Documented Procedures and Policies Company should have documented policies for Customs matters; Companies without such policies cannot be scored “highly compliant” Interactive intranet resources should be considered “The right tools for the right job”

Toolbox Item #2: Recordkeeping Program Tariff Act requires import records be retained at least 5 years; “(a)(1)(A)” list items must be kept 5 years under pain of penalty; Customs will approve electronic recordkeeping formats Agree with brokers on document ownership and rights “You’re keeping the records; that’s a start. Now, it would help to organize them”

Toolbox Item #3 – Tariff Classification Program Review your products’ classification; Question old rulings; Examine way you design products; Examine way you ship products; Composite good – See GRI 3(B)

Toolbox Item #3 – Classification Program Suppose you reduce a product’s duty rate from 5% to 1%; That’s a 4% reduction in landed cost; Falls right to the bottom line; or Reduces your price point, drives sales No engineering cost, no compromise of product quality Exercise Equipment – or Toy?

Toolbox Item # 3 – Classification Program Monitoring classification issues Customs rulings; CIT decisions; Decisions of foreign courts and agencies (e.g., European BTIs); World Customs Organization decisions and HS changes Best of its kind --- Now, what is it, exactly?

Toolbox Item #4 – Put Your Customs Value on a Diet Is there “fat” in your Customs values? Are you “bundling” non-dutiable items into the price paid for your goods? Can you restructure transactions to save on duties? Customs valuation – follow the money!

Toolbox Item #4 – Put Your Customs Values on a Diet Diet tips: Unbundle buying commissions, non- dutiable royalties, etc. from price; Examine use of “first sale” valuation rule; Turn middlemen into buying agents Use “American Goods Returned”, , other programs

Toolbox Item # 5 (A,B,C, etc.); Special Trade Programs Which special trade programs does your company use? Which programs should you use? A separate compliance module should be established for each such program Another load of NAFTA goods arriving – assuming you can prove it!

Toolbox Item 5 (A,B,C etc.) Special Trade Programs U.S. Programs Generalized System of Preferences (GSP); Caribbean Basin Initiative (CBI); Andean Trade Promotion Act (ATPA); African Growth & Opportunity Act (AGOA); American Goods Returned (HTS ) “Repairs and Alterations” (HTS /50) Offshore Metals Processing (HTS ) Offshore Assembly (HTS ); Temporary Importation Bonds (TIB) Nairobi Protocol, etc. Bilateral/Multilateral Programs NAFTADR-CAFTA Bilateral Free Trade Agreements: –Australia –Bahrain –Chile –Israel –Jordan –Morocco –Singapore –Other agreements currently being negotiated with S. Korea, Peru and other countries

Toolbox Item #6 – Special Duties and Quotas/TRQs Defensive Tools: Antidumping or Countervailing Duties – do they affect your imports? Are you aware of scope issues? Are you aware of how duties are imposed? Do you obligate vendors to cooperate with AD/CVD investigations? Do you have an “escape clause” in your contract? DANGER: Could lead to a “Brush” with Antidumping Duties

Toolbox Item #6 – Special Duties and Quotas/TRQs Quotas/TRQs: Do you import any products subject to absolute quotas (e.g., textiles or apparel)? Do you import goods subject to TRQ (mostly agricultural)? Are you certain of classification? Are you certain you have proper documents? Lucky Charms – Magically Expensive, Duty-Wise

Toolbox Item # 7: Duty Drawback and FTZs Do you have drawback-eligible export activity? Is it manufacturing or unused merchandise drawback? MPFs, HMTs now eligible for unused merchandise drawback; 3 years from date of export to claim Drawback can turn you around A bit – but can be worth it

Toolbox Item # 8: FTZs, Bonded Warehouses Allow deferral of duty payments; Avoidance of duty payments for exported goods; “Inverted tariff” benefits for manufactured goods; Merchandise processing fee savings

Toolbox Item #9: Protect Your Intellectual Property Counterfeits, knock- offs and gray market goods increase in recessions; You can record your trademark with Customs for import protection from infringing goods; Customs will seize, forefeit and destroy counterfeits – and penalize the importers

Toolbox Item #8 – Protecting Intellectual Property Section 337 of the Tariff Act – the nuclear weapon of International Trade Following ITC investigation, Customs will exclude goods which infringe patents and other IP rights. Funny hat. Serious business.

Toolbox Item 9: Exports Weak US dollar makes US goods attractive overseas; Most foreign countries use Customs laws similar to those in US; You can leverage your US knowledge base overseas

Recessions Stink: Use the Time Well Examine all aspects of the supply chain critically; Look for savings in Customs duties; Protect your Intellectual Property; Look to the past for savings, while planning for the future. Chill – it’ll get better