1. 1 Import & Export April 14, 2005

2. 2 Agenda Customs & Compliance Trade Documents Trade Finance Security

3. Customs Customs Function: Control imports and exports to conform with government regulations Customs Goals: –National security Prevent dangerous goods from entering the country –longhorn beetles in wooden pallets etc. Prevent strategic goods from leaving the country –Controls on exporting encryption technology Protect industries important to national defense –Cabotage –Revenue US Customs funded the government for its first 125 years In 2000, collected $31 billion in duties –Promote economic development Duties to level the playing field

4. 4 Customs Contd –Gray market & smuggling –Illegal imports Summary: Customs is a complex combination of issues and objectives –Financial –Security –Political & Economic –Diplomatic

5. 5 Customs tools Ports of Entry – where goods and people are allowed to enter the country Limits –Embargo: Entry prohibited –Quota Absolute limit Tariff rate quota –Visas – export countrys response to quota –License Duties Information

6. 6 Customs Clearance Actors –Shipper: party that contracts carriage –Carrier: party that moves the goods –Consignee: party that receives the goods –Exporter: fulfills export regulations –Importer: fulfills import regulations –Importer of record: the single party held responsible

7. 7 Export Clearance Some goods are restricted Some destinations are restricted Export Declaration –Enforcement –Trade statistics Typically managed by a customs broker

8. 8 Import Clearance Where to clear customs –Port of entry –In-bond –Free Trade Zone Duties –Classification Harmonized Tariff Schedule (HTS) www.usitc.gov/tata/ Based on classification according to the international Harmonized Commodity Description and Coding System (HS), administered by the World Customs Organization in Brussels

9. 9 Import Clearance Duties contd –Value What is actually paid or payable Transfer price for intra company transfers Does not include international transport costs Can be abused to manipulate corporate taxes –Country of Origin Last country where the goods underwent a substantial transformation Last country where the goods underwent a change in tariff classification CKD (complete knock down)

10. 10 Bonded Activities Admitting merchandise provisionally to a country without payment of duties The duties are collected when the goods are withdrawn for delivery or consumption. Duties paid on the value of the goods at the time of withdrawal If the goods are withdrawn for exportation or for exportation, no duties are required. Can clean, sort, re-label, re-package, and do other operations (but not manufacture)

11. 11 Advantages Delay payment of duties Can re-export without paying duties Can lower duty rates –dried, sorted, graded, cleaned, repackaged

12. 12 Foreign Trade Zones Areas where domestic and imported goods can be stored and manufactured free from duties and customs procedures until they leave the zone. As though the entire area were bonded.

13. 13 Uses of FTZs Transhipment points Assemble foreign (and domestic) goods for export Holding goods for import Inverted Tariff. If the finished product has a lower duty than the foreign inputs Goods held for export are exempt from state/local inventory taxes. FTZ status may also make a site eligible for state/local benefits which are unrelated to the FTZ Act. Roughly 250 in the US

14. 14 Trade Documentation Both the documents and the process to –Enforce regulations, –Manage liability and risk –Provide records –Ensure common understanding Types: –Transport: physical movement –Banking: financial transaction –Commercial: sale and purchase terms –Government: regulatory Evolution: From paper to electronic documents

15. 15 The Main Documents Purchase Order: a contract between buyer and seller that includes terms of sale Bill of Lading: title to and receipt of goods and contract for carriage Waybill: contract for carriage without conveying title Invoice: List cargo and its characteristics Certificate of Origin: Certifies nationality of cargo Sanitary Certificate: to ensure the goods will not transmit noxious pests Carnet: Permission for sample goods to enter without paying duties Export Declaration: Documents exports

16. 16 Insurance and Liability Many parties from many jurisdictions –Seller –Buyer –Bank –Shipping line –… When something happens, whos liable

17. 17 Liability Historically, the carrier owned the goods and provided the insurance Negotiated away liability with disclaimers in the Bill of Lading

18. 18 Bill of Lading Issued by the carrier or integrator Components: –Contract of carriage –Documentary evidence of title –Receipt of goods Cargo description –Written by carrier –Important for customs, documentary credit, … ICC Uniform Customs & Practice for Documentary Credits (UCP500)

19. 19 Liability Commercial terms of sale determines who owns the cargo at any point in time and so has the risk Historically, ocean voyages took so long and were so uncertain, that captains owned and insured the cargo. Carrier had all the liability 1892 Harter Act limited carriers liability 1924 The Hague rules also limited carriers liability –$9.07/lb –$500/package 1978 Hamburg rules not widely adopted Visby Ammendments –$1000/package

20. 20 Trade Finance More risk involved in international trade: –Multiple jurisdictions –Difficulty and expense in collecting debt –Distance, time and expense in resolving issues

21. 21 Financing Options Cash-in-Advance Cash-on-Delivery Consignment Open Account (sellers credit) Letter of Credit

22. 22 Letters of Credit Letter to the seller from the bank on behalf of the buyer, promising to pay the seller if he conforms with conditions of sale ICCs UCP – not law, but accepted standard Rely on Banks credibility, Provides liquidity

23. 23 LC Transaction Buyer sends PO Buyer applier to Issuing Bank for LC Issuing Band delivers LC to Notification Bank Notification Bank informs seller LC was issued Seller ships goods and gives documents to Notification bank Notification bank delivers documents to Issuing Bank including Draft Issuing Bank pays seller, Buyer pays Issuing Bank

24. 24 LC Issuing Bank is extending credit to the buyer Sets terms on the LC –Caution necessary –Terms may state: Proof of delivery Buyer accepts delivery (may refuse cargo) –BL, Draft, Insurance certificates, etc. Either pays or issues an Acceptance

25. 25 Kinds of LCs Documentary LC (all commercial transactions) Irrevocable LC (all parties must agree to changes) Confirmed LC (both Issuing bank and sellers bank agree to honor it) Revolving LC Back-to-Back LC (Buyers customer must also obtain an LC)

26. 26 Discrepancies Any discrepancies in the documents can nullify the LC!

27. 27 Other Issues Currency Issues Insurance Issues Security Issues