7

Foreign Trade Zones, Bonded Warehouses, Free Trade Agreements, and Business with China

Foreign trade zones and bonded warehousing are opportunities that the United States government provides to importers, exporters, manufacturers, and distributors to gain advantages in the running and managing of their global supply chains.

MAKING THE FREE TRADE ZONE WORK FOR YOUR IMPORT/EXPORT SUPPLY CHAIN

Foreign trade zones (FTZs) are economic free areas where goods can be inventoried without entering the commerce of the country they are in. More importantly, FTZs allow a domiciled company to work on goods in these areas for various benefits. One benefit is that taxes and duties are deferred until such time as the goods are cleared and entered into that country, which could be months after initial arrival.

Cash flow is the obvious advantage.

A secondary benefit of the FTZ is that local labor works on the goods, adding local content and value. For example, a manufacturer imports watch components but the finished timepiece is assembled in the FTZ. The goods are ready for sale, quality controlled, packed, and shipped. In many countries that have FTZs, tax relief would be provided to the importer who added local value to the imported timepieces.

This could save the importer literally millions of dollars in tax liabilities, making the FTZ a significant cost-saving tool for lowering the landed cost for the imported goods.

All countries have different rules on how the FTZs operate. There are national and international FTZ organizations that are conduits for information on world-wide locations and capabilities. Additional information can be obtained from the websites listed in the appendix.

Another benefit is that the freight is positioned in the foreign market, which will shorten the delivery schedule in your global supply chain. This mitigates the advantages of local competition.

An additional benefit tied into local positioning is the ability to have showrooms. Touchy, feely onsite capabilities can prove advantageous with certain product lines, like automobiles, cosmetics, and computers.

Areas in Europe, Asia, and Latin America are developing FTZ capabilities in numerous gateways, like, but not limited to Monterey, Mexico; Singapore; Montevideo, Uruguay; Amsterdam; and Panama City.

U.S. exporters, in working with their agents, distributors, direct customers, and subsidiary facilities, are finding that FTZs mean gaining competitive advantage while providing local economic benefit. This has short- and long-term political and economic advantages for the United States and the local country operating the FTZ.

Working with preferred FTZ organizations, like the Rockefeller Group in Mt. Olive, New Jersey, is an excellent conduit into quality expertise and account management. The advice and counsel of these organizations, combined with side development, is well worth the effort.

WHAT SUPPLY CHAIN MANAGERS SHOULD KNOW ABOUT CUSTOM-BONDED WAREHOUSES

Custom-bonded warehouses (CBWs) provide many of the same benefits as FTZs. The difference between FTZs and CBWs is that in most countries bonded warehouses are more temporary and typically limit access to the freight. One cannot typically change the nature of the product in the bonded facility. One might be able to view the cargo, relabel it, or repack it, but its form, shape, or makeup cannot be changed.

There are multiple uses for CBWs for exporters. They can be made into a foreign consolidation center. Goods are held in bond, in that they have not entered the U.S. economy. A U.S.-based manufacturer/distributor may be selling to Latin America but sourcing products from the United States and Europe. The U.S. company could import product from Europe into a bonded facility, say in Miami. The product would be held at this facility until it is combined with the domestic sourced/manufactured product and then shipped to Latin America with the cost benefits of a consolidated shipment.

A U.S.-based importer may bring in product with the eventual purpose of exporting a portion to Mexico, Canada, or the Caribbean. The bonded facility would be used as a storage warehouse until a decision is made to export. A CBW could be used as a warehouse to hold the freight, deferring tax/duty obligations until a decision is reached to import into the United States or export. The goods that are imported have the benefit of tax deferral until the time of actual import, and the exported goods never entered the U.S. economy, so no taxes/duties would be obligated. For the export, the goods would transit from the bonded facility to the outbound port by a bonded carrier and then by international carrier to the overseas market.

Custom facilities also can serve as “holding pens” during disputes with customs or until final determinations are made as to where and when the goods will be exported.

Exporters need to consider CBWs in conjunction with their logistics departments, freight forwarders, third-party providers, and carriers to determine the benefits applicable to their export operations.

CUSTOM-BONDED WAREHOUSES

An important provision of the Customs Act, 1962 is that relating to the warehousing of imported goods. The object of warehousing is to allow the facility of deferred payment of customs duty on the dutiable imported goods until they are cleared into the domestic area or are exported. It also provides customs control over the movement of dutiable imported goods and accounting thereof with a view to a safeguard revenue. Chapter IX of the Customs Act, 1962, comprising Sections 57 to 73, details the warehousing provisions relating to the dutiable imported goods. Sections 2(43), (44), and (45) of the Customs Act, 1962, are also relevant.

The warehouses are commonly referred to as customs-bonded warehouses. These may be of two types, public or private. Whereas the former are appointed, the latter are licensed under the authority of Sections 57 and 58 of the Customs Act, 1962, respectively. Public warehouses are usually set up by public bodies like public sector enterprises, although private operators are also allowed to establish public warehouses, as clarified vide Circular no. 68/95 Customs dated 15.6.95. These warehouses provide a common user facility, and goods imported by anyone may be stored therein.

In contrast, the private warehouses are licensed to private persons and only the goods imported by or on behalf of the licensee are stored within. However, other imported goods, in respect of which the facility for deposit in a public warehouse are not available, may also be deposited in a private warehouse.

Setting Up the Bonded Warehouse

The essential prerequisite of establishing a warehouse, public or private, is that the place where it is situated must be declared as a warehousing station by the CBEC under Section 9 of the Customs Act, 1962.

Application in respect of appointment of a public warehouse is made under the authority of Section 57 of the Customs Act, 1962. These are dealt with at the level of the assistant commissioner of customs. The public warehouses are appointed subject to ensuring the fitness of the premises from the viewpoint of security and safety of the goods to be stored, arrangements for posting of customs staff for supervision of the activities, execution of bond, and so on.

The application for grant of a license for a private warehouse is made to the jurisdictional assistant commissioner of customs under authority of Section 58 of the Customs Act, 1962. In this context, Circular no. 119/95 Customs dated 22.11.95, which specifically clarifies that the assistant commissioner of SEEPZ is the competent authority to decide applications for grant of private-bonded warehouse license in SEEPZ, is also relevant.

Per the guidelines, the private warehouses may be licensed when there is no public warehouse nearby, it is required for export production, and the goods are of a special nature (perishable or dangerous for example), requiring special storage facilities. The following documents, as applicable, must be enclosed with the application:

1.Copy of LOA/LOA issued by the development commissioner/BOA (in the case of an EOU)

2.Copy of industrial license, if received by unit

3.Copy of land ownership/lease document including the “no objection” certificate from the owner in case of rental/lease property and copy of site plan indicating go downs, manufacturing area, office space, and such

4.Copy of project report including implementation of schedule of manufacture and of import of goods

5.Process of manufacture, with input to output ratio, percentage of wastage, and so on

6.Details of go down, with the area and capacity for storage of imported goods, indigenous excisable goods, packing materials, scrap, rejects, and finished goods separately

7.Schedule of import of machinery, raw materials, and such, along with details thereof

On receipt of the application, the assistant commissioner will depute the range superintendent (or go himself) to inspect the premises and submit the verification report. Essentially, it is to be seen that

a.The premises are secure, safe, and well lit and have fire safety equipment and there is no threat to the revenue from the possibility of leakage of goods to the DTA or damage thereto; and

b.The furnished office space for customs staff is available.

Based on the verification report and subject to the place having been declared as a warehousing station, the applicant will be required to

1.Execute the requisite bonds under Sections 59 and 65 of the Customs Act, 1962, respectively (the latter section deals with the use of the imported goods for purpose of manufacture)

2.Pay one-year advance of the amount of cost recovery charges for the customs staff to be posted for supervision of the unit

3.Purchase locks (2.5 inches) for the go downs and the unit, each with a duplicate key, one for the assistant commissioner and one for the inspector of customs

On fulfillment of the above requirements, the assistant commissioner will issue the license for the warehouse, together with a grant of sanction for manufacture in bond, if necessary. However, should the verification report be in order and the place does not happen to have been declared as a warehousing station under section 9, it would be necessary for the assistant commissioner to first refer the matter to the commissioner of customs, who will take necessary action in the matter. Likewise, if the verification report is in order and the place is also in a warehousing station but availability of staff is the constraint, the assistant commissioner will take up the staff issue with the commissioner, who will refer the matter to the CBEC, if required.

It has also been clarified vide Circular no. 1/96 Customs dated 1.1.96 that a license for a private-bonded warehouse is to be decided on merit and no objection from a public-bonded warehouse is not required. Further, once granted, the renewal of the private-bonded warehouse license is to be considered by the commissioner of customs, as indicated in Circular no. 35/95 Customs dated 7.4.95.

However, grant of a license for a warehouse is not a matter of right. Circular no. 28/96 Customs dated 14.5.96 explains that a warehousing license may not be warranted if violation by the party is deliberate, irrespective of the period of violation. In this context, Circular no. 68/95 dated 15.06.95 is also relevant.

WAREHOUSING TIME FRAMES

Section 60 of the Customs Act, 1962, provides for the permission of the proper officer of customs to deposit the imported goods in the warehouse. It is only after this order is obtained that the goods may be deposited in the warehouse. The period of warehousing is also determined with reference to the date of this order, as clarified vide Circular no. 30/95 Customs dated 30.3.95.

Section 61 of the Customs Act, 1962, indicates the period for which the imported goods may be warehoused (that is, the period for which the imported goods may remain in the warehouse). If the said goods lie in the warehouse, no duty is payable. Whereas in the case of EOUs, the imported capital goods may be warehoused for a period of five years, for the other goods the warehousing period is one year. In the case of goods likely to deteriorate, the period may be reduced to less than one year. On the subject Circular no. 99/95 Customs dated 20.9.95 as also period is one year. In the case of goods likely to deteriorate, the period may be reduced to less than one year. On the subject Circular no. 99/95 Customs dated 20.9.95 as also Circular no. 68/95 Customs dated 15.6.95 which mentions the guidelines for storing sensitive and nonsensitive goods in private-bonded warehouses are relevant. Also, Circular no. 20/96 Customs dated 4.4.96 clarifies that it is the commissioner of customs who is to decide whether a commodity is sensitive or not for the purpose of warehousing.

Whereas the initial warehousing period of five years and one year, as the case may be, is specified, it may be necessary to keep the imported goods in the warehouse for a longer period. For instance, an EOU whose export obligation is fixed for a ten-year period would require the capital goods for a period longer than the initial period of five years. Therefore, it is often the case that the extension to the initial warehousing period of the imported goods is required. Hence, there is provision for extension to the warehousing period for the first six months by the commissioner of customs and thereafter for any further period by the chief commissioner of customs.

Application for extension to the warehousing or bonding period is to be made to the concerned assistant commissioner of customs. The application must be made in advance of the expiry of the warehousing period, and all details of the imported goods in terms of import particulars, including quantity and value thereof, consumption during the period, and balance quantity and value thereof. The expiration date of the warehousing period is also to be mentioned, together with reasons justifying the need for extension to the bond period. Further, in the case of perishable goods or goods with limited shelf life, the expiration period thereof is also to be mentioned. This last detail is important since the grant of extension will invariably be limited to the validity of the shelf life of the item.

Whereas the application for extension of the warehousing period is to be filed well before its expiration, in exceptional circumstance extension can be granted by the chief commissioner of customs even after expiration of initial/extended warehousing period, as mentioned in Circular no. 12/98 Customs dated 5.3.98.

It is pertinent to note that in respect of the units carrying out the manufacturing operations in customs bond as per the EOU scheme, CBEC has instructed that the extension in warehousing periods of the imported goods is to be considered liberally. Further, the private-bonded warehouse license should also be issued for the entire export obligation period, as per the LOA issued to the unit by the BOA.

DUTY INTEREST ON WAREHOUSED MERCHANDISE

As per the proviso to the Section 61 of the Customs Act, 1962, where any warehoused goods remain in a warehouse beyond the initial period of warehousing (that is, five years in case of capital goods and one year in case of other goods) by reason of extension or otherwise, interest at the specified rate shall be payable on the amount of duty payable at the time of clearance of the goods for the period from expiration of the initial warehousing period until the date of payment of duty on the warehoused goods. The rate of interest is specified under Section 47 of the Customs Act, 1962, which at present is 20 percent per annum. At the same time, it is provided that the CBEC may either

1. Waive the interest by order in case of exceptional circumstance and in the public interest, or

2. Specify the class of goods, by notification, for which it is satisfied in the public interest that no interest shall be charged. Vide Notification no. 33/94 Customs dated 1.7.1994, the powers of the CBEC of waiver of interest on the customs duty in respect of any warehoused goods in cases in which the amount of interest does not exceed Rs.15 Lakhs have been delegated to the chief commissioners of customs.

Further, Notification no. 67/95 Customs dated 1.11.1995 has been issued specifying the goods imported duty free by an EOU (including EHTP/STP units) and warehoused, which are exempt from payment of interest. In other words, these goods do not attract interest liability if they continue to remain in the warehouse for a period beyond the initial warehousing period.

To sum up, the policy in respect of interest on warehoused goods is that where due, the interest is to be collected at the time of clearance of the goods. In other cases, where the interest is being waived great as per policy, the demand notices are to be issued but not enforced. Circular no. 31/96 Customs dated 7.6.96 read with Notification no. 67/95 Customs NT dated 1.1.95 refers.

U.S. CUSTOMS SUPERVISION OF WAREHOUSE

Traditionally, it has been prescribed that the CBWs must necessarily operate under constant supervision of the customs staff posted for that purpose at the warehouse. No receipt or issue of goods is allowed from the warehouse unless under customs supervision. The warehouses are also to be kept locked at all times and opened for receipt or issue of goods only in the presence of the customs officer. However, there has lately been some relaxation in this area in respect of warehouses wherein manufacture in bond takes place, like in case of EOUs. By an amendment to the Manufacture and Other Operations in Warehouse Regulations, 1966, a move has been made toward audit-based control.

PERMISSIBLE ACTIVITIES TO WAREHOUSED MERCHANDISE

Section 64 of the Customs Act, 1962, mentions that the owner of the warehoused goods may inspect the goods, separate damaged or deteriorated goods from the rest, sort the goods, or change their containers for purposes such as preservation or export, to show the goods for sale, to draw samples, and so on. However, this facility is subject to obtaining the sanction of the proper officer of customs and on payment of prescribed fees.

In this context, Circular no. 40/99 Customs dated 28.6.99 clarifies that activities of mixing, sieving, assortment, cleaning, and so on are allowed in public-/private-bonded warehouses set up under paragraph 8.13 of the EXIM Policy before re-export.

DISPOSAL OF WAREHOUSED MERCHANDISE

The facility of warehousing is for storage of the imported dutiable goods. But the storage is with a purpose. In this regard, Sections 67, 68, and 69 of the Customs Act, 1962, read together provide that warehoused goods may be dealt with by way of transfer to another warehouse or by clearance for home consumption or by export. The clearance for home consumption and export is as per the normal procedure prescribed for such activities. However, goods (including diamonds) imported by and into the private-bonded warehouses in EPZ are allowed to be re-exported subject to permission of Development Commissioner/BOA, as clarified by Circular no. 84/98 Customs dated 10.11.98.

Insofar as the removal of goods to another warehouse is concerned, the same is governed by the Warehoused Goods (Removal) Regulations, 1963, issued under the authority of Section 157 of the Customs Act, 1962. This regulation indicates the conditions of removal of the goods from one warehouse to another, the terms of the bond to be executed, the security or surety to be provided, and so on. Based on this, it is provided that the transfer of imported goods for re-warehousing from port to inland warehousing station is subject to a transit bond and an insurance policy, as clarified vide Circular no. 38/98 Customs dated 21.5.98 read with Circular no. 72/97 Customs dated 23.12.97. In this context, Circulars No. 68/95 Customs dated 15.6.95 and no. 41/97 Customs dated 19.9.97 are also relevant.

MANUFACTURING OF WAREHOUSED MERCHANDISE

Section 65 of the Customs Act, 1962, provides the facility for the “manufacture in bond,” which allows the owner of the imported goods to undertake manufacturing activities in the licensed-bonded warehouse with the sanction of the assistant commissioner of customs. But for this facility the said goods can only be lodged in a CBW and not used in any manufacturing activity. It is to implement the provisions of this section that the Manufacture and Other Operations in Warehouse Regulations, 1966, have been framed laying down the conditions governing the manufacture in warehouse operations. Some important conditions herein are the execution of a bond with the customs authorities, the supervision of the operations (in the warehouse) by the customs authorities by the customs officer, and maintenance of detailed accounts of goods used.

The chief commissioner of customs may also get the accounts of the warehouse, office, store, factory, and so on, audited by a cost accountant nominated for this purpose. The expense thereof is to be determined by the chief commissioner and paid by the manufacturer.

Finally, it is required that the manufacturer shall give one month’s notice in writing to the assistant commissioner of customs before suspending or discontinuing the manufacturing process. However, in any case, the assistant commissioner may reduce the one-month period. Also, if a manufacturer or any person in his employ commits a breach of the provisions of the Customs Act, 1962, or the terms and conditions imposed under the regulations or fails to fulfill the conditions of the bond, the assistant commissioner may cancel the sanction. This is subject to the condition that before cancellation of sanction the manufacturer shall be given a reasonable opportunity of being heard.

As seen, the said regulations provide the framework for a manufacturer to undertake manufacturing and other operations in a CBW wherein the duty-free imported and other goods are stored. Initially, the facility was extended subject to strict involving close supervision of the activities by customs officers posted for the purpose at the warehouse itself. Lately, there has been a move away from physical control by customs officers toward audit-based control.

Circular no. 132/95 Customs dated 22.12.95 clarifies that the facility of manufacture in bond is to be permitted by commissioner subject to guidelines.

BOND INSPECTIONS

Whereas the activities in a warehouse are carried out under supervision of the customs officer, it is provided that the EOUs under customs bond must be subject to periodic checks by the customs staff. Accordingly, the CBEC has determined the periodicity of checks, as follows:

1.Inspector of customs & central excise is to inspect the bond/manufacturing unit daily. In this context, it may be seen that but for certain exceptions it is provided that the unit must obtain the services of an inspector on a cost-recovery basis.

2.Superintendent of customs & central excise is to inspect the bonded premises/manufacturing unit once a month and verify stock.

3.Assistant commissioner of customs & central excise is to visit the bonded premises/manufacturing unit once in three to six months and inspect the records maintained.

Further, the unit must furnish a monthly/quarterly report regarding the stocks held.

MISUSE OF THE WAREHOUSING FACILITY

Section 72 of the Customs Act, 1962, deals with the situations when the warehoused goods are improperly removed from the warehouse, are not removed from the warehouse in the stipulated time, or are not properly accounted for. It is provided that in such cases the owner of the goods shall be required to pay on demand the duty on the goods together with interest penalties, rent, and such. The procedure to be followed for checking irregularities in respect of clearances of goods from warehouses has been clarified vide Circular no. 52/98 Customs dated 27.7.98.

As regards the levy of duty on the goods cleared from the warehouse after the expiration of the warehousing period, it has been clarified by Circular no. 31/97 Customs dated 14.8.97 that the date of payment of duty is the date of expiration of warehousing period or the extended period. This is the present position. Incidentally, the position held earlier as per Circular no. 98/95 dated 18/09/95 had been that the relevant date shall be as given under Section 15(1)(c) of the Customs Act, 1962.

Circular no. 13/96 Customs dated 28.2.96 details the instructions on extension of the warehousing period and issue of a demand notice on expiry thereof.

PRACTICAL APPLICATIONS IN LEVERAGING LOGISTICS: FOREIGN TRADE ZONES, BONDED WAREHOUSES, AND FREE TRADE AGREEMENTS

Foreign Trade Zones

An excellent opportunity exists for companies competing in global trade to leverage their business model through reviewing their supply chain process options.

One such option is the utilization of foreign trade zones, not only in the United States but also available in most key trading centers of the world.

The primary reasons for considering FTZs in your global supply chain are

Ease of moving freight to and from the borders between trading countries

Reduction or elimination of duties, taxes, and other import/export costs

Financial incentives on a local level

Lowering of the “landed costs” in your import/export business model

There are other advantages that may be unique to geographic location and industry verticals.

The automotive industry, which is dominated by foreign competition, has been one of the major industry verticals to capitalize on FTZs in the United States as well as many countries abroad.

The basic FTZ model allows a company to manufacture or assemble finished products in a country abroad utilizing local labor for the specific purpose of reducing landed cost.

For example, a German car manufacturer sells a car in the United States for $50,000. Duties and taxes can add another $1,500 to the landed cost.

Through the utilization of a FTZ strategically placed here in the United States, that German car manufacturer could import parts from Germany and utilize U.S. labor to work in its U.S. factory.

Upon entry into the U.S. FTZ, duties and taxes on the parts are deferred. Upon assembly completion, the car leaves the FTZ for ultimate sale, and that is when the deferred portion of the tax and duties are paid. If labor costs make up 50 percent of the $50,000 value, only $25,000 is applicable to duty and tax.

This model reduces the “landed cost” by approximately $750 per vehicle. Compare this against 200,000 units, and the savings could amount to over $150,000,000 annually.

There are numerous other benefits to FTZs that would need to be considered in any business model assessment.

In the above FTZ model, the utilization is assembly and manufacturing. More recent options allow high-volume importers to have their goods pass through FTZs as they transit from the gateway through to their warehouses and distribution facilities.

This step allows a “weekly manifest clearance,” which reduces entry fees and merchandise processing fees (MPF), creating a significant financial savings impacting landed cost.

Bonded Warehouses

Bonded warehouses are a supply chain option that allows importers and exporters to temporarily hold freight where the import is deferred along with duties, taxes, and other import costs, until such time that the goods enter the country or are exported from that country.

For example, let’s take a Cleveland-based electronics distributor importing consumer music products from Asia, totaling over 200 million annually, with an average duty rate of 4.5 percent. Approximately 20 percent of the products are then re-exported to Canada, the Caribbean, and Latin America.

Under its current supply chain model, it utilizes CBPs drawback program to obtain up to 99 percent of the duties and taxes for those exports, totaling 1.8 million annually. While drawback is a great program, it can be arduous and costly to manage and takes time to receive the refund of duties.

As an alternative, the distributor can apply to CBP to make its warehousing facility a bonded location. This will defer the duties and taxes to goods entering the warehouse to the point in time when they are extracted from the facility. Additionally, the 20 percent of the goods that are re-exported come in and leave the United States in bond, and no duties or taxes are obligated to be paid, providing significant savings in supply chain costs.

Bonded warehouses provide additional benefits, but the operations permitted in a bonded warehouse are limited to sorting, weighing, and repacking. If the goods enter the warehouse as a widget, they must leave as a widget.

Leveraging with Free Trade Agreements

FTAs offer numerous advantages to both importers and exporters. Currently the United States participates in over thirteen agreements, with numerous ones pending. The most well-known FTA is NAFTA, which underwent considerable scrutiny in the 2016 presidential debates.

When the three participating countries, United States, Canada, and Mexico, trade with one another, there is a serious reduction of duties and taxes on qualified goods and merchandise.

The most advantageous benefit in the FTAs are the free movement of goods between participating countries, where duties and taxes are reduced or eliminated.

“Near Sourcing” is the recent phenomenon in global trade where trade is coming back to our NAFTA partners or here in the United States. FTAs provide a more level playing field, particularly against lower Asian-based sourcing models.

Lower freight costs, reduced lead times, and elimination of duties and taxes can very easily make manufacturing in Mexico or in a U.S.-based FTZ a much more competitive option, thereby leveraging critical logistics business model options.

This is covered in greater detail in chapter TK.

MANAGING SHIPPING ACTIVITY WITH CHINA

China Means Opportunity

China is quickly moving to be one of our largest exporting markets.

While we think of China as our greatest supplier, in fact there are several factors in play that make them a perfect market to export to:

They have increasing need for technology, industrial equipment, raw materials, and manufacturing capability.

They are developing a consumer based economy—20 percent of the world’s population (almost 1.4 billion strong).

There is a very defined need related to agriculture, food products, pharma, energy, technology, and a host of consumer products.

Westernization of the culture is driving the need for Western products and services.

E-commerce is growing more rapidly than any other export market.

The United States, irrespective of political issues, remains their largest trading partner, with favored trade relations and a successful supply chain profile.

But having said all of that from a global trading perspective, there are risks and challenges that come with all this opportunity.

A partial listing of the risks in exporting to China are as follows:

Dealing with China’s customs

Distribution internally, particularly to remote western areas

IPR

U.S. export controls

Contract culture

Communications

Logistics spending

Managing service providers and carriers

E-commerce challenges

Dealing with China’s Customs

ISSUES:

For U.S. exporters, dealing with customs in any country is fraught with risk and exposure. China is no exception, and the mere size and number of inbound gateways presents a scenario where inconsistency, regionalization, and imbalance of customs scrutiny present their own issues.

For exporters who have specialized needs, the clearance process can be more daunting. Agriculture, food, pharmaceuticals, time sensitive products, and E-commerce all present potential delays and difficulties.

SOLUTIONS:

Utilize Incoterms where customs clearance is controlled by the importer

Utilize service providers that have specific experience in the trade lanes and products you are dealing with

Find out and comply with regulations in China, which could vary significantly from the United States for

HTS

Valuation

Documentation

Packing, marking, and labeling

Record keeping

Duties, taxes, and VAT

Landed cost calculations

Pay attention to detail, do not take shortcuts, and continually turn stones for the right answers

Distribution Internally, Particularly to Remote Western Areas

ISSUES:

China has set up a very specific capability in the global supply chain to export their products to world markets but lags in internal structure for distribution to their own markets, particularly with respect to the following areas:

Scope of geographic market and population base

Time-sensitive products

Consumer distribution (E-commerce)

Perishables

Special needs

SOLUTIONS:

Prepare diligently and study your supply chain options, utilizing all of the private, government, and consulting resources available, for which a conference like this one makes all the connections.

Find experienced service providers that have capabilities that tie directly and comprehensively into your supply chain needs and vet carefully.

In the China supply chain, experience and capability are more important than brand name, size, or price.

IPR

ISSUES:

Intellectual property rights are a major issue in companies doing business in China.

SOLUTIONS:

Work with qualified attorneys and trade consultants who can guide you through the China IPR maze.

Find solutions other than contractual that provide relief on IPR, such as but not limited to time frames for introducing new products and innovations, forming direct ownership and partnerships in lieu of distribution agreements.

U.S. Export Controls

ISSUES:

The United States, through a number of agencies and departments, controls the flow of exports to the world and, more specifically, China.

What we can export, how we export, and who we export to are all part of U.S. export controls.

Government agencies such as the Departments of State, Treasury, and Commerce through the BIS, ITAR, and OFAC, along with CBP, Census, and the DOT, all place regulatory control over our export initiatives to China.

In many cases, there are specific restrictions; in other cases, we must complete detailed documentary procedures to make the export happen.

SOLUTIONS:

Understand the basics of export regulations. The U.S. government mandates we act with due diligence, reasonable care, and supervision and control.

Have the capability to check the various lists referred to as the Denied Party Listings before you engage in export activity.

Only utilize service providers with trade compliance expertise.

Watch out for the “red flags” of exporting, and know who your customers are.

Contract Culture

ISSUES:

Contracts do not have the same meaning in China as they do in most Western countries. Contracts under Western culture are an “end all.” In China, a contract can be construed as the “starting point,” which may allow them to modify the agreement as needed without both parties buying in from the start. They will negotiate the change when it becomes a problem.

SOLUTIONS:

This is not a “right” or “wrong” issue, just a cultural difference that needs to be understood and managed.

Creating quality and intimate relationships with all those you sell and export to is the best way to manage contract issues that will develop over time in any business relationship.

Trust and familiarity will allow any issue to be successfully worked on and brought to favorable closure.

Communications

ISSUES:

Fortunately for Americans, English is the language of business, and most customers based in China who will be importing your products and services will speak English.

But speaking English does not guarantee that they understand what you have just said nor that they have agreed to what you think they have.

Solutions:

Learn the English capability of those you are dealing with and recognize the limitations.

Utilize professional translation services, when warranted.

Learn to ask questions that will quickly tell you if they got it right, in their own words, such as:

Please tell me, what did we just agree to?

Can you send me an email confirming your understanding of what we just discussed?

Logistics Spending

ISSUES:

Logistics and freight costs can be a considerable component of the overall “landed cost” to the China-based importer.

It will determine how competitive you can be compared to both domestic and other foreign sources. IT WILL ALSO IMPACT MARGINS!

SOLUTIONS:

Find and utilize service providers with specific expertise in China.

Look to service providers that have a large presence through owned or agency offices in all major cities with distribution capabilities that reach into both eastern cities and western provinces.

Try and leverage “freight spend” on exports to China with carriers and service providers that offer capabilities to other export markets. Quantity can lower transactional costs.

Do comparison shopping and RFPs and spend time learning what options you have available.

Managing Service Providers and Carriers

ISSUES:

Moving your freight from the United States to China poses certain challenges.

Utilizing and managing the service providers and carriers well will produce lower costs and lessen shipping exposures.

SOLUTIONS:

Vet your service provider options carefully. Many will extoll China’s prowess but lack the experience and infrastructure to do it consistently right.

Hard freight is a very negotiable commodity and service.

For those companies with special needs—food, agricultural, pharma, high tech, time sensitive, business to consumer, and others—there are only a handful of experienced providers and carriers who can work these areas successfully. Learn who they are and create working partnerships with them. They will make your supply chain run smoothly and cost effectively.

E-Commerce Challenges

ISSUES:

As China expands exponentially with consumer sales, E-commerce is a booming business with little expertise available to provide comprehensive support.

Recently China has impacted regulations that have opened the doors to E-commerce sales in China that originate from foreign sources. The market will be greater than $500 billion in just a few years.

SOLUTIONS:

Find experienced E-commerce solution companies.

Our “lead Diamond sponsor” for this event, Apex Global, is one of a handful of service providers, along with Scarbrough International, who have committed significant resources to handle E-commerce successfully. Handling companies like Amazon, Alibaba, and eBay, they have created a niche that all E-commerce exporters can take advantage of.

Utilize technology solutions that ease administration and documentary concerns and keep costs minimized.

Look for bulk distribution capabilities that can place consumer products sales in locations that ease local shipping and decrease freight costs to the consumer, and allow for the likely “returns” when they happen.

SUMMARY

China is currently a huge export market for America. Our products and services are in great demand.

This all means opportunity as our presence expands. But with this export growth arrives some real challenges with risk and spending in our export supply chain.

Acknowledging the issues and managing and taking steps in mitigation will produce very favorable results:

More export sales

Less risk(s)

Enhanced margins

I think we would all be happy with those results in such a difficult but opportunistic market!