Customs Clearance Our 2nd to last chapter is Customs Clearance.

Customs Clearance Duty Non-Tariff Barriers Customs Clearing Process
Foreign Trade Zones We have heard a lot about this topic… in this chapter we are going to discuss details like Duty, Barriers, Clearing customs and foreign trade zones.

Foreign Trade Zones The first topic is duty.

Duty free in the Dubai airport (Watch 1-2 minutes)

Duty The tax an importer must pay to allow goods into a country, based upon a tariff schedule. Three criteria determine the tariff (the duty rate) to be charged on an imported product: Classification Valuation Country of Origin Duty is a tax… similar to sales tax that must be paid to allow goods to enter the country. Unlike sales taxes… the amount of duty charged changes based on three factors… Classification of goods, the value, and the country of origin.

Duty Classification Products are classified using a worldwide coding scheme called the Harmonized Commodity Description and Coding System, or Harmonized System. Each product has an HS code; the HS is updated annually by the World Customs Organization. The HS Code uses up to 10 digits: First six digits of a product code are the “root” digits—they are the same for all countries Last four digits are country-specific Lets talk about classification first. It all starts with the Harmonized Commodity Description and coding system… this is a classification for each product. This is a ten digit code used to identify the product… the first part is the product the last part is the country specific information. Lets look at a quick video.

Harmonized number video

Duty Harmonized System
System is divided into 21 sections logically determined by type of product and material. Sections are divided into one or more chapters (totaling 97 chapters). For example, Chapter 64 is for “footwear, gaiters and the like,” and subchapter is for “other sport footwear.” Golf shoes for children are classified as The system is divided into 21 parts… and each section is divided again into 1 or more chapters… the total number of chapters is 97. The chapter number is the first two digits of the HS number. For example 64 is Chapter 64 and it stands for footwear. To find more detail you will see that is sports footwear… Getting country specific info for the country and specific size… for children (90).

Duty Rules of Classification
Importer and customs officers interpret classification according to a number of rules of classification: Classification of an unfinished product is that of a finished product The correct classification of a product made of different parts, each classified differently, is the one that gives it its “essential character” If no classification is available, the correct classification is that of a product “most like it” Containers of products are not classified separately (camera cases), unless they have a separate purpose, in which case they are classified separately When the importer or custom agent is looking at the item (or the description of the item) they must make a call regarding its classification. It is not always easy to classify something. If the products are unfinished… they are classified as the finished product. If the product has different parts.. Only classify it as the essential characteristic. If nothing is available, classify it as what it is most like.

Duty Binding Rulings U.S. Customs will issue a Binding Rule on correct classification of good prior to entry into the country. Only applicable to the United States It classifies a specific product and assigns it a tariff rate, before the goods are imported. The ruling is binding on the United States Customs, which means that it cannot “change its mind” after the product is imported. The US Customs department may have a different interpretation of the classification. They may look at the title of the product and give it a different classification, prior to import. This binding rule, means that it has classified the product and the ruling can not change its mind after the import. Called the binding rule.

Duty Valuation Countries of World Trade Organization base product value on the value of the transaction (invoice). The value of an import, though, can be increased by the value of assists: An assist is an item provided by the importer (customer) to the exporter (seller) so that the exporter can manufacture the goods: a mold or a die, for example The value of an assist must be included in the valuation of the imported goods for U.S. Customs’ purposes (value of the assist divided by the number of items made by the assist) We discussed the first topic, classification, now we move to valuation. If you are in the World Trade Organization the base value (on the invoice) is how the value is determined. This value may be increased if the item is considered an assist. For example, the item maybe a mold or a die to create other items, this is charged more. This assisted item may be divided by the number of items plan to be made by the assist.

Duty Valuation If Customs suspect incorrect valuation on invoice, it can: Use the Comparative Method: the value of goods is based on value of identical or similar goods imported into the country Use the Deductive Method: the price at which identical or similar goods sold for within 90 days of importation Use the Computed or Reconstructed Value Method: the value of goods determined by computing manufacturing costs of goods plus usual profit and expense Use the Method of Last Resort: Customs officials determine the value in some arbitrary fashion The Customs department may question the value on the invoice… it can do a few things in this instance: Use the comparative method: looking at the price of similar items (or identical) in similar quantities imported in the country. Use the deductive method: look at the price of similar items sold in the last 90 days. (assume normal markup) Use the Computed or reconstructed value method: determine the manufacturing costs and add more for admin and profit (for similar class items) Last Resort: the customs agent guesses on the price.

Duty Country of Origin The country of origin is the country in which the goods were made. It is determined through the Rules of Origin of Customs: Substantial Transformation: the country of origin is the country where the most substantial transformation of a product takes place Change in HS classification: the country of origin is the country where the last change in Harmonized System classification occurred. This method is always used by the United States for textile imports Often it is difficult to determine country of origin of a complex product. The last item is the country of origin: We are talking about where the majority of transformation occurs.. That is determined the country of origin. This is often difficult to determine. If a chair is made in Brazil and then painted in Peru. The building takes 5 hours and painting 15 hours… who is the origin. Does the woodworking make the product or the paint. Another method is when the HS (Harmonized System) classification changes. When the wood is turned into a chair it changes.. When a wood chair turns to a painted chair… it probably doesn’t change. Complex products are challenging to determine the country of origin. Often the want certain countries of origin stated. Cloth in Italy are deemed better than out of Taiwan.

Duty Tariffs Tariff Schedule
An importing country usually manages its imports under a tariff system that is dubbed “N-column tariff system,'' with N, the number of columns, corresponding to the number of different classes of countries that the importing country considers. Tariff Schedule A document listing all the possible Harmonized System classification categories, as well as their associated tariff rates for the different classes of countries. The tariff is something that an importing country charges for imports. The process normally uses a N-column system. N could be 2, 3, 4 or whatever number of columns they need. Each column is getting charged a different rate. The tariff system normally uses the Harmonized System of classification… we will look at an example.

http://www. usitc. gov/publications/docs/tata/hts/bychapter/1002C01
US Live animal tariffs.

Duty Tariffs The United States is considered to operate under a 2-column Tariff Schedule, with the Most-Favored Nations [MFN] subject to column 1 tariffs and other countries to column 2 tariffs. In 2000, the MFN designation was officially changed to Normal Trade Relations [NTR], but this terminology has not yet been universally adopted. The number of columns is often quite an oversimplification of the actual tariff system; Column 1 for the United States also includes tariff rates for more than a dozen different multilateral agreements with other countries, some of which can import duty-free in the United States. As you saw with the last website… the US has a two column tariff schedule. The 2 columns include “most Favored Nations” which has officially been changed to “Normal Trade Relations” and other nations. The other nations includes only North Korea and Cuba. While the US system only has two columns, the first column is actually split into sub categories… these categories represent arrangements with other nations. We will look at these in the next slide.

As you can see the first row (Watch springs) has a 7
As you can see the first row (Watch springs) has a 7.4% tax for favored nations and a 65% for other (N. Korea and Cuba). There are also some agreements with a few countries that reduce the rate to free. Australia, Canada, Mexico and a few trade relationship s established…. Caribbean, African growth, Drug eradication, and others)

Duty Tariffs Tariffs are generally calculated ad valorem or as a percentage tax on the value of the goods imported (see “Springs for watches,” H.S on the next slide). Other methods exist: A fixed amount per unit imported (see “Plates and Bridges,” H.S ) A fixed amount per unit in addition to a percentage of the value of the goods imported; such a tariff is called a compound duty rate (see “Dials not exceeding 50mm in width,” H.S ) Some other method: Switzerland calculates duty by using the weight of the product When Tariffs are calculated… it is normally done AD VALOREUM,,, This is a percentage of the price. Just like sales tax. There are other options… a fixed rate. Or at times by the weight of the product.

First 2 are ad valorem… Plates and bridges are per unit. Nothing with weight.

Duty Dumping The strategy followed by some exporters to sell the products they are exporting at a price that is considered “too low” by the importing country’s Customs Office Depending on the importing country, the products’ price is considered too low when it is either below their manufacturing costs or below their “normal” wholesale price. In cases of dumping, Customs can add an “anti-dumping” duty. Customs can also use a “countervailing” duty to tax products that the exporting government is found to have subsidized. There is a worry that goods will be dumped into a foreign country. The goods that are thought to be dumped enter the market at much lower prices than normal. Low is considered below the manufacturing or wholesale cost. It is possible that the importing country can add a “anti-dumping” tax that will raise the price to compete against the domestic goods. This is often a problem when the exporting country is subsidizing the products being imported. We will see a video on this.

US and China dumping

Duty Dumping The United States has a process to determine whether anti-dumping duty will be assessed: A complaint has to be filed with the International Trade Commission by a competitor The Department of Commerce has to determine that the complainant was economically “injured” The United States also has the “Byrd Amendment” which takes the anti-dumping duty collected by U.S. Customs and gives it to the injured firms in the industry. The US has a policy that assesses whether an anti dumping duty can be assessed. You can imagine that that all domestic companies want antidumping taxes applied to low priced foreign goods. In the pas the “Byrd Amendment” made the situation that much better for domestic companies. It took the tax assessed from the foreign companies and issued it out to the companies effected by the foreign company. The Timken company made $66 of its $98 million from antidumping income. WTO stated that this violated international trade and the amendment was repealed in 2007.

Duty Other Taxes Some additional taxes can be collected by the importing country. They are designed to get more revenue while still “complying” with the General Agreement on Tariffs and Trade (GATT) and rules of the World Trade Organization (WTO). Examples include: Punitive duty -- a tax in retaliation to another country’s trade action Border traffic tax -- Russia taxes all goods crossing its borders Safeguard tax -- Argentina has a special tax to make up for WTO-influenced reduction of duty rate on footwear Temporary protection tax -- a temporary tax to protect a domestic industry There are some other taxes that can be collected that do comply with the WTO regulations they include: Punitive duty: This is to punish another country… US had a problem with Europe giving favor to caribean bananas and but a punitive duty on blue cheese and cashmere. Border traffic tax: a small fee to cross the border. Safeguard tax: to protect an industry against foreign competition. Temporary protection tax; a short term tax to allow domestic firms to increase productivity in effor tot compete. US did the on Mexican brooms then repealed when US firms made no improvements.

Duty Value-Added Tax (VAT)
A tax that is very similar to a sales tax, but that is collected whenever the product’s value is increased Only the final consumer eventually pays the tax, but every company involved in the production or supply chain is required to collect the Value Added Tax that its customers pay and pay the Value Added Tax to its suppliers. The difference between what a firm collects and what it pays must be sent to the government. The Value Added Tax on imports is collected at the point of entry in the country. The basis for the tax is the sum of the value of the goods and of the duty paid. The value added tax is a lot like sales tax… it is used when value is added to the product. The increase in value is taxed. In reality this tax is continually passed on until it makes it to the final customer (who is unable to pass it on). Importers pay the VAT when the product enters the country.

Vat… to 3:30

Foreign Trade Zones Next we will move on to non-tariff barriers…

Non-Tariff Barriers Quotas
A limit, set by the importing country’s government (sometimes in agreement with the governments of the concerned exporting countries), on the quantity of a specific commodity that can be imported in a given year. There are two different types of quotas: An absolute quota, which limits the quantity of goods imported, and beyond which no good can be imported A tariff-rate quota, which places a low duty rate on goods imported until the quota is reached, and a very high duty rate on quantities of the goods imported beyond the quota The Quota is a limit set by the importing country. This is normally a number of a particular commodity that is allowed each year. This can be completed two ways: 1. The absolute quota is a limit of how many items can be imported. When the limit is hit… then no more imports are allowed. 2. There could be a tariff-rate quota. This is a low duty rate for products under the quota amount and then the duty rate is increased to be very high after the quota number.

Import duty- 2 min

Non-Tariff Barriers Adherence to national standards
Countries demand that products sold within their borders meet the standards that their governments have enacted. Countries' efforts to make imports adhere to national standards are often considered to be trade barriers. The adherence to national standards is another non-tariff barrier. It is stating that a good must meet certain standards. These are normally looking at safety standards, health standards, or environmental standards. For example, the US deems that all vehicles must have airbags.

Non-Tariff Barriers Other Non-Tariff Barriers
Countries can slow the Customs clearance process in order to deter imports and increase importers' costs. Countries can require a mind-numbing number of documents and approvals. Countries can require additional forms that are not readily available or that are close to impossible to gather. Countries can threaten importers with income tax audits. Countries can require that each individual item be inspected, when it is essentially impossible to achieve a 100% inspection rate. Then there are some other barriers… My favorite is the slow customs process. In the 1980s the French decided they need to protect their VCR industry… so they set up an inspection process for imported VCRs. This was a one man operation. He had to inspect every imported VCR… slowing import sales. Next you can have the importer complete lots and lots of documents. For example, in the 1990s India required 54 documents to be filled out for import. You could also have forms that are difficult to obtain (one such “sewing ticket” required all the time cards of the employees in the textile company to determine the origin of the product) The next is a tax audit. In Korea they are trying to keep the residents from buying US cars by (almost) threatinging that if you buy one you will be audited of the cars in Korea are from the US. There can also be a 100% inspection criteria to slow importing… this was the case for chicken parts (legs and wings). That is a lot of chickens to inspect.

Non-Tariff Barriers Pre-shipment inspections
Some countries require that all of their imports be inspected by an independent inspection firm in the port of departure: The country wants an expert opinion on the classification and the value of the products that are about to enter its territory The country wants to fight corruption in its own ports of entry and wants an independent party to certify classification, value and country of origin The country wants an estimate of the currency requirements it will face in the short term, and uses the value of the shipments subject to PSI to forecast its foreign currency needs Another barrier is a preshipment inspection. This is an inspection completed by an independent inspection firm in the Port of Departure. This allows the importing country to really know the classification of the goods prior to being imported. This can be used if there are problems with corruption in the importing country or if the country needs to have currency available for the goods. Remember in some foreign countries they do not have unlimited available currency.

Foreign Trade Zones The clearing process is next on the list.

Customs Clearing Process
General Process May start with an import license that the importer has to acquire Process usually starts when importer files an entry. The importer has to include documents with the entry: Invoice Certificate of inspection (when required) Certificate of insurance Certificate of origin In most developed countries, importer is responsible for: Classifying goods according to tariff schedule of importing country Determining amount of duty We will start with the general process to clear customs… It likely starts with an importer license… Then the importer files some paperwork stating they plan to import some goods… The paperwork likely includes: Invoice Inspection certificate Insurance And Certificate of origin The goods will need their Harmonized System classification number to help determine the duty amount.

General Process Once the goods are imported in a country and the importer has paid the duty that was due on those goods, the goods are said to have cleared Customs; they were released by the Customs authorities. Once an entry has been successfully reviewed by Customs authorities and the duty has been paid, the entry is said to be liquidated. No further processing is required. If an importer requests Customs to reconsider the classification, valuation, or country of origin, the importer is said to file a protest. A protest is generally filed when an importer feels that the amount of duty paid is excessive, or when a good is not allowed in the United States because a quota has been met. When the goods arrive… the importer will need to pay the duty (which clears them through customs) At this point there is no additional requirements by the importer. Although it is possible that the importer disagrees with the classification of the goods. They may have though the goods were combs (taxed at 4%) and the government changed the classification to brush (10% tax).

Customs Brokers Customs brokers are experts hired by importers (or employees of the importer) whose responsibilities include interacting with Customs. Customs Bond A bond is an amount of money that the importer puts in escrow with Customs, so that Customs is certain to be paid the duty due. For many time-sensitive imports, a bond is posted, so that the clearance of the imported product is expedited. There is a lot of complexity in the customs process.. It is possible that you will need a customs broker to assist you with your efforts. This person (or agency) is hired by the importer to interact with customs. You may also need to use a Customs bond… the is money put into escrow with the customs department. The customs process is not always really fast, and your goods may expire while waiting to be cleared. If you pay this bond you get the goods and then pay the rest of the duty when the paperwork is processed. This bond can also fast track your goods to be imported at a faster rate.

Reasonable Care If an importer has practiced informed compliance and shown it is exercising reasonable care in importing goods, U.S. Customs often will exempt its shipments from inspection. Both terms refer to efforts by the importer to ensure that the employees or agents who interact with Customs are competent, thorough and ethical. Reasonable Care is out of the Customs Modification Act of It states that if the Importer exercises reasonable care to follow all customs processes then the goods will be moved through customs as fast as possible (many times with out inspection).

Required Documentation There are three documents required of all imported shipments: A form designated for entry (specific to the record-keeping requirements of the importing country) A Certificate of Origin to ascertain the country of origin A Commercial Invoice with enough information to determine value and classification There is always going to be documentation with importing… the three documents required in every country are: The countries importing paperwork. The certificate of origin(where are the goods from) An invoice (what is the price of the goods and how are they classified) With this information most duties can be assessed.

Required Markings Products imported in a country will generally require a marking --“made in [country] or “product of [country]” to inform the final customer of the origins of the product. Such label should be printed or affixed on the product itself or its packaging. The imported product generally requires a marking on the country where the goods are made. “mad in [country]” or “product of [country]” These labels are on the products if that is feasible. In a world where so many items have parts made in different areas it is often difficult to determine the country it is made in. If you want the “made in the USA” you need all or virtually all of the product from the US.

Made in china

Merchandise Visas A document provided by the government of an exporting country for a product that is subject to a quota in the United States It is a document granting the exporter the “right” to export such goods. The United States Customs will not allow the import of a product subject to quotas if the shipment is not accompanied by a visa from the exporting government. Sometimes it is required for products to be released form the exporting country. This is when a merchandise visa is required. If an item has a maximum number of items that are allowed to be imported each year, they are concerned if that good is exported. They do not want to change the requirements. For example, lets say there is a sugar quota of 1 million lbs. If you want to export sugar from the US they need to be confident that the lbs you export will not negatively impact the is. If they feel it will not,,, you get a visa.

Duty Drawbacks In U.S., The Customs Service will refund 99 percent of the duty paid by an importer in one of three cases: For merchandise that is rejected by the importer as non-conforming to the original purchase order For imported products that are reexported unused For imported parts that are used without substantial transformation There are a few duty drawbacks…. This is not negative aspects to duty it is the tax break on duty be the government. You do not have to pay duty on items that do not conform to the original purchase order (wrong or broken parts) If you do not use the items and then export, no duty is assessed. Say you create a beers of the world gift basket) Imported parts that are turned into a final product that is exported.

Foreign Trade Zones We talked about the foreign trade zones in the past we are going to touch on the subject again.

Foreign Trade Zones FTZs are specific locations of a country that have acquired a special Customs status. Such FTZs are physically located in the importing country, but are not part of the country from Customs’ perspective: goods that have entered an FTZ have not cleared Customs and have not paid duty. It is only when these goods leave the FTZ to enter the importing country that duty is collected and the goods clear Customs. The most common form of FTZs is that of a location where cargo transits; in those cases, most of the goods never formally enter the country in which the FTZ is located. FTZs are sometimes also called Free Trade Zones. This FTZ is a specific location that is outside the customs process. Think of it as a staging area right next to the port of entry (even though it is inside the country). If the goods move into the country they are charged the duty… if they move out to another country then the duty is not assessed. Some reasons that this is good… you would get assessed duty on all the parts you import or you could assemble in a FTZ and then just pay the final product duty (which could be much less than the parts). This is often called the Free Trade Zone.

Customs Clearance Our 2nd to last chapter is Customs Clearance.

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Customs Clearance Our 2nd to last chapter is Customs Clearance.

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