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Import & Export

April 14, 2005

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Agenda

• Customs & Compliance

• Trade Documents

• Trade Finance

• Security

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”

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Customs Cont’d

– Gray market & smuggling– Illegal imports

• Summary: Customs is a complex combination of issues and objectives– Financial– Security– Political & Economic– Diplomatic

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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 country’s response to quota– License

• Duties• Information

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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

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Export Clearance

• Some goods are restricted

• Some destinations are restricted

• Export Declaration– Enforcement– Trade statistics

• Typically managed by a customs broker

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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

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Import Clearance

• Duties cont’d– 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)

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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)

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Advantages• Delay payment of duties• Can re-export without paying duties• Can lower duty rates

– dried, sorted, graded, cleaned, repackaged

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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.

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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

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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

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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

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Insurance and Liability• Many parties from many jurisdictions

– Seller– Buyer– Bank– Shipping line– …

• When something happens, who’s liable

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Liability

• Historically, the carrier owned the goods and provided the insurance

• Negotiated away liability with disclaimers in the Bill of Lading

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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)

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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 carrier’s liability• 1924 The Hague rules also limited carrier’s liability

– $9.07/lb– $500/package

• 1978 Hamburg rules not widely adopted• Visby Ammendments

– $1000/package

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Trade Finance

• More risk involved in international trade:– Multiple jurisdictions– Difficulty and expense in collecting debt– Distance, time and expense in resolving

issues

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Financing Options• Cash-in-Advance

• Cash-on-Delivery

• Consignment

• Open Account (seller’s credit)

• Letter of Credit

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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

• ICC’s UCP – not law, but accepted standard

• Rely on Bank’s credibility,• Provides liquidity

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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

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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

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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 (Buyer’s customer must

also obtain an LC)

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Discrepancies

• Any discrepancies in the documents can nullify the LC!

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Other Issues

• Currency Issues

• Insurance Issues

• Security Issues