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Foreign Trade Regulations: Mandatory Automated Export System Filing for All Shipments Requiring Shipper's Export Declaration Information
May 31, 2008 (FIND, Inc. via COMTEX) -- -- SUMMARY: The U.S. Census Bureau (Census Bureau) issues this final rule to amend its regulations to implement provisions in the Foreign Relations Authorization Act. Specifically, the Census Bureau is requiring mandatory filing of export information through the Automated Export System (AES) or through AESDirect for all shipments where a Shipper's Export Declaration (SED) is required.
Implementation Date: The Census Bureau will implement provisions of this rule on September 30, 2008. This will allow all affected entities sufficient time to come into compliance with this rule.
FOR FURTHER INFORMATION CONTACT: C. Harvey Monk, Jr., Assistant Director for Economic Programs, U.S. Census Bureau, Room 8K108, Washington, DC 20233- 6010, by phone (301) 763-2932, by fax (301) 457-3767, or by e-mail c.harvey.monk.jr@census.gov.
SUPPLEMENTARY INFORMATION: The Census Bureau is responsible for collecting, compiling, and publishing export trade statistics for the United States under the provisions of Title 13, United States Code (U.S.C.), Chapter 9, Section 301. The paper SED and the AES are the primary media used for collecting export trade data, and such data is used by the Census Bureau for statistical purposes only. The export trade data reported pursuant to this Part is referred to as Electronic Export Information (EEI). The SED and the EEI also are used for export control purposes under Title 50, U.S.C., Export Administration Act, to detect and prevent the export of certain items by unauthorized parties or to unauthorized destinations or end users. This information is exempt from public disclosure unless the Secretary of Commerce determines under the provisions of Title 13, U.S.C., Chapter 9, Section 301(g), that such exemption would be contrary to the national interest.
This rule provides that all export information for which an SED is required be filed through the AES. The AES is an electronic method for filing the paper SED information directly with the U.S. Customs and Border Protection (CBP) and the Census Bureau. The AESDirect is the Census Bureau's free Internet-based system for filing SED information through the AES. Future references to the AES also shall apply to AESDirect unless otherwise specified. In addition, with regards to postdeparture filing, the Census Bureau and CBP have agreed that the moratorium placed on Option 4 (postdeparture filing) in August 2003, will remain in effect pending further review of the postdeparture filing program.
Electronic filing strengthens the U.S. government's ability to prevent the export of certain items by unauthorized parties to unauthorized destinations and end users, because the AES aids in targeting and identifying suspicious shipments prior to export and affords the government the ability to significantly improve the quality, timeliness, and coverage of export statistics. Since July 1995, the AES has served as an information gateway for the Census Bureau and CBP to improve the reporting of export trade information, customer service, compliance with and enforcement of export laws, and to provide paperless reports of export information.
On November 29, 1999, the President signed into law the Proliferation Prevention Enhancement Act of 1999, which authorized the Secretary of Commerce to require the mandatory filing of items on the Commerce Control List (CCL) and the U.S. Munitions List (USML). Regulations implementing this requirement were effective October 2003 (see 68 FR 42533-42543). On September 30, 2002, the President signed into law the Foreign Relations Authorization Act, Public Law 107-228. This law authorized the Secretary of Commerce, with the concurrence of the Secretary of State and the Secretary of Homeland Security, to publish regulations in the Federal Register mandating that all persons who are required to file export information via the SED under Chapter 9 of Title 13, U.S.C., file such information through the AES.
The Foreign Relations Authorization Act further authorized the Secretary of Commerce to issue regulations regarding imposition of penalties, both civil and criminal, for the delayed filing, failure to file, false filing of export information, and/or using the AES to further any illegal activity. The Act provided for administrative proceedings for imposition of a civil penalty for violation(s) of Public Law 107-228. Finally, the Act authorized the Secretary of Commerce to designate employees of the Office of Export Enforcement of the Department of Commerce (DOC) to conduct investigations and perform the enforcement functions in Title 13, U.S.C., Chapter 9, and the Commissioner of Customs to designate employees of the Customs Service to enforce and conduct investigations under the same provisions. The latter authority is now exercised by the U.S. Immigration and Customs Enforcement (ICE) and CBP officials in the U.S. Department of Homeland Security (DHS). In addition, by Memorandum of Understanding dated September 25, 2005, the Secretary delegated the authority to enforce sections 304 and 305 of Title 13, U.S.C., and 15 CFR, part 30 to the Secretary of Homeland Security. Nothing in this rule is intended to restrict the authority of DHS under Section 343 of the Trade Act of 2002.
In the February 17, 2005, Federal Register (70 FR 8200), the Census Bureau published a Notice of Proposed Rulemaking (NPR) and request for comments on the regulations implementing the mandatory requirement to file export information through the AES or AESDirect for all shipments where SED information is required. Public comments were requested through April 18, 2005. A summary of comments received from the export trade community and the Census Bureau's response to those comments are presented in this rule.
Response to Comments
The Census Bureau received 45 letters and/or e-mails commenting on the NPR published in the Federal Register on February 17, 2005, (70 FR 8200). All the letters and/or e-mails contained comments on two or more issues. A summary of the comments and the Census Bureau's responses are provided below.
The major concerns were as follows:
1. Clarify the filing requirement for Electronic Export Information (EEI). Several commentors questioned whether the filing requirements had changed under the mandatory AES versus filing the paper SED. In addition, the commentors wanted clarification regarding the filing of EEI for Puerto Rico and U.S. territories. The requirements for filing EEI have not changed. All persons currently required
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to file the SED will be required to file the same information through the AES. The requirements to file EEI for goods shipped to the United States from Puerto Rico, goods shipped to Puerto Rico from the United States, and goods shipped to the U.S. Virgin Islands from the United States or Puerto Rico, remain unchanged.
2. Status of the use of the External Transaction Number (XTN) and the Internal Transaction Number (ITN). Commentors wanted clarification on when the XTN and the ITN could be used under the new regulations. Under the Final Rule, only the ITN is acceptable as the proof of filing citation. The ITN confirms that the shipment information has been accepted in the AES. The XTN will no longer be accepted as a proof of filing.
3. Clarify the time frame for filing EEI. Commentors indicated they were unclear about the time frames for filing in the AES. The time frame varies according to method of transportation for predeparture filing. For State Department USML shipments, refer to the International Traffic in Arms Regulations (ITAR) (22 CFR 120-130), [Section] 123.22, for the specific requirements concerning filing time frames. For non-USML shipments, file the EEI as follows: (1) For vessel cargo, the U.S. Principal Party in Interest (USPPI) or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier 24 hours prior to loading cargo on the vessel at the U.S. port where the cargo is laden; (2) for air cargo, the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier, including air express couriers, no later than two hours prior to the scheduled departure time of the aircraft; (3) for truck cargo, the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier no later than one hour prior to the arrival of the truck at the U.S. border to go foreign; (4) for rail cargo, the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier no later then two hours prior to the time the cargo arrives at the U.S. border to go foreign; (5) for mail and cargo shipped by other methods, except pipeline exports, the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier no later than two hours prior to exportation; (6) for pipeline exports, the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the operator of the pipeline within four days following the end of each calendar month; and, (7) for postdeparture filing, by approved USPPIs, in accordance with [Section] 30.5(c), the USPPI or authorized agent shall file the EEI as required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier no later than ten calendar days from the date of export.
4. Clarify Option 4 (Postdeparture) filing requirements. Commentors wanted clarification regarding parties that would be approved for postdeparture filing. In agreement with the Census Bureau and CBP, the moratorium placed on Option 4 (postdeparture filing) on August 15, 2003 (see notice at http://www.census.gov/aes) will remain in effect pending further review of the postdeparture filing program.
5. Amend the regulations to reduce or eliminate the $2,500 exemption level. Several commentors proposed that the Census Bureau remove or reduce the current $2,500 exemption level. The Census Bureau believes that removing the $2,500 exemption level for reporting would substantially increase the reporting burden on the exporting community, especially on small businesses. This change would increase the number of shipments reported each month by approximately 4,000,000. In addition, the Census Bureau and CBP do not have the resources to process the additional workload.
6. Amend the downtime requirements. Commentors were concerned that export shipments would be delayed if the AES became unavailable. The Census Bureau has found that during its 12 years in operation, the AES has demonstrated a high level of reliability in performance. The system has been available to users 99 percent of the time. For this reason, the Census Bureau has determined that mandatory filing through the AES would not cause a substantial delay in export shipments. In the unlikely event that the AES is unavailable, the filer of a USML shipment shall not be allowed to export until the AES is operational and the filer is able to acquire an ITN. See [Section] 30.4(b)(1) for more information. For non-USML shipments, the regulation provides for a downtime filing citation to allow goods to be exported. See [Section] 30.4(b)(2) for more information.
7. Clarify the requirements for power of attorney or written authorization. Commentors were concerned that the language regarding the requirement for power of attorney or written authorization was drafted incorrectly. The Census Bureau reviewed the NPR regarding the requirement and found an instance where it stated "power of attorney and written authorization," and it should read "power of attorney or written authorization." This language has been changed in the Final Rule. In addition, a commentor questioned whether the language had been changed regarding the power of attorney or written authorization requirement. The Census Bureau did not change the language or the requirement for power of attorney or the need for written authorization that currently exists in the regulations.
8. Clarify manner in which fines and penalties will be enforced and how a filer submits a voluntary self-disclosure. Several commentors were concerned about which agency would enforce the penalty provisions of the Foreign Trade Regulations (FTR). Pursuant to the authority in Public Law 107-228, the Secretary of Commerce has delegated authority for enforcement to the Bureau of Industry and Security's (BIS) Office of Export Enforcement (OEE) and the DHS. The Census Bureau has worked with CBP and the BIS to develop regulations implementing the process and requirements for submitting a notification disclosing a violation or suspected violation of the FTR. These regulations are found in Subpart H, [Section] 30.74 Voluntary Self-Disclosure.
9. Amend a number of definitions in the definition section of the proposed rule. Several commentors proposed changes to definitions contained in the NPR. The Census Bureau revised the following definitions in [Section] 30.1:
Booking. The Census Bureau revised this definition to add "truck and train" as methods of transportation. The Census Bureau made this revision as a result of public comments. Carrier. The Census Bureau deleted "non-vessel operating common carriers" because a commentor felt that the term could cause confusion and the Census Bureau agreed. Commerce Control List (CCL). The Census Bureau revised the definition to provide the location of CCL items in the Export Administration Regulations (EAR). Commodity. The Census Bureau deleted this term and the corresponding definition because commentors indicated that it was too general. Domicile. The Census Bureau deleted this term because it is no longer used in the FTR. Exceptions. This term was changed to "license exception" and moved accordingly.
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Exclusions. The Census Bureau added this definition as a result of comments that requested clarification of this term. Export Control Classification Number (ECCN). This definition was revised to clarify the description and purpose of this number. Filers. The Census Bureau added this definition as a result of comments that requested clarification of this term. Filing Electronic Export Information. The Census Bureau added this definition as a result of comments that requested clarification of this term. Foreign Entity. The Census Bureau added this definition as a result of comments that requested clarification of this term. Foreign Principal Party in Interest (FPPI). The Census Bureau revised this definition because it was inconsistent with the regulations defining the responsibilities of the parties to an export transaction. Therefore the Census Bureau revised this definition to ensure clarity.
Merchandise. The Census Bureau revised this term and corresponding definition in accordance with industry standards as commentors indicated that it was too general. Service Center. The Census Bureau added this definition as a result of comments that requested clarification of this term. Transmitting Electronic Export Information. The Census Bureau added this definition as a result of comments that requested clarification of this term. Ultimate Consignee. The Census Bureau revised this definition to expand the definition of ultimate consignee to also include a party or designee that is located abroad and actually receives the export shipment. The definition was also revised to provide examples of the ultimate consignee. The Census Bureau revised the definition as a result of comments that indicated that the definition was inaccurate. Violation of the FTR. The Census Bureau added this definition to clarify what constitutes a violation.
10. Amend the proposed rule to make it a requirement that the agent of FPPI provides the USPPI with a copy of the power of attorney or written authorization from the FPPI. Commentors were concerned about the requirement to provide information to an agent of the FPPI in a routed export transaction. The Census Bureau has revised [Section] 30.3(e)(2) of the FTR to require the agent of the FPPI, upon request, to provide the USPPI with a copy of power of attorney or the written authorization giving the agent the authority to file the EEI on behalf of the FPPI before the USPPI provides the required information necessary to complete the EEI filings.
11. Clarify whether an export license or license exemption is required for exports from U.S. territories. Also clarify whether paper SEDs are required by CBP for items that are controlled by the Department of State or the BIS. The commentor's request for clarification on whether an export license or license exemption or items that are controlled by the Department of State or the BIS is required for export from U.S. territories is outside the scope of the Foreign Trade Regulations. The commentor's question should be addressed to the Department of State and the BIS. Neither the Census Bureau nor CBP requires EEI or a paper SED for goods shipped from U.S. territories including, Guam Island, American Samoa, Wake Island, Midway Island, and the Northern Mariana Islands to foreign countries or areas and goods shipped between the United States and these territories.
12. Amend the proposed rule to address the treatment of split shipments by air. Several commentors were concerned about having to identify the piece count details of shipments that are split among multiple flights. The commentors indicated that the regulations regarding the treatment of split shipments by air would have a substantial impact on air carriers. Commentors provided no further information. The Census Bureau reviewed this section of the NPR and found that the requirement was not changed from the previous regulations and remains appropriate. This requirement has existed for more than 20 years.
13. Amend the proposed rule to relax the security requirements regarding reporting computer viruses and the requirement that the AES Administrator change administrator codes or passwords for security purposes when employees leave the company. Several commentors were concerned that these requirements would be a burden to the AES filers. The requirement to notify the Census Bureau Foreign Trade Division's Security Officer when a virus infection occurs only applies to systems connected to the AESDirect. This procedure is a security requirement for the purpose of maintaining the federal government's system certification for AESDirect. The requirement to change the password when an employee leaves the company only applies to employees leaving the company who had direct access to the AES [Section] 30.5(d)(2). This is not a new requirement and remains appropriate.
14. Amend the regulations by dropping Subpart F--Import Requirements. One commentor believes that having import regulations in 15 CFR 30, and also in 19 CFR is confusing to the trade. More than one federal agency has jurisdiction over imports, therefore, it is appropriate for regulations to exist in more than one place. While CBP regulations (19 CFR) cover most of the requirements for filing import information, there are additional statistical requirements specific to the Census Bureau that are found in the FTR (15 CFR) and that are not the subject of CBP regulations.
15. Amend the proposed rule [Section] 30.52--Foreign Trade Zones (FTZ). Commentors are concerned that language in [Section] 30.52 did not describe some of the activities of FTZs. The Census Bureau reviewed the proposed language changes and replaced the word "enter" with "are admitted into" in the introductory paragraph and the word "mode" with "method" in [Section] 30.52(h) to more accurately reflect the activities of the zones.
16. Create a registration number to be used in place of the Employer Identification Number (EIN) or Social Security Number (SSN). A commentor was concerned about providing the EIN or SSN to a FPPI's agent or placing the EIN or SSN on the proof of filing citation. The Census Bureau agrees that a registration number should be created so that filers', USPPI's, or agents' EIN or SSN can be kept confidential. The Census Bureau is currently working with CBP to develop a system that allows the reporting of registration numbers, and will address this issue in a future rulemaking.
17. Clarify the filing of foreign waterborne in-transit shipments by the U.S. Army Corps of Engineers. A commentor believes that the U.S. Army Corps of Engineers should not be responsible for reporting EEI on export of in-transit shipments. Previously, the Census Bureau, the U.S. Army Corps of Engineers, and the Maritime Administration jointly collected in-transit information for vessel shipments. This joint collection activity dates back to 1948, with the Census Bureau designated as the primary collection agency. In 1996, under joint agreement among the Census Bureau, U.S. Army Corps of Engineers, the Maritime Administration, and the Office of Management and Budget (OMB), the U.S. Army Corps of Engineers was designated the primary data collection agency for vessel in-transit data. Thus, it is the responsibility of the U.S. Army Corps of Engineers to collect data regarding vessel in-transit shipments leaving the United States. This does not, however, affect or alter the
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responsibility of USPPIs and others to comply with other agency in-transit requirements such as those required by CBP. (See e.g., 19 CFR 18)
18. Redesign the Vessel Transportation Module (VTM) of the AES to allow paperless submissions of proof of filing citations and exemption legends and revise the FTR to require the paperless submission of the proof of filing citation and exemption legends. Several commentors from the vessel shipping lines wanted to submit electronic manifests and wanted to receive the proof of filing citation and exemption legends from the filers electronically. The Census Bureau determined that this proposal would require a significant redesign of the AES, VTM, and the AES Commodity Module, and would likely need to be developed as a part of CBP's Automated Commercial Environment development. At this time, neither CBP nor the Census Bureau has the resources available to implement this proposal. Until the implementation of a system that has the capability described by the commentor, the AES will continue to require the filer to provide the vessel carriers with the proof of filing citations or the exemption legends.
19. Clarify the retention of export information and the authority to require proof of documentation of EEI. Several commentors indicated that the requirements of [Section] 30.10 were unclear. The Census Bureau agreed, and the section was completely revised to clarify the requirements for retaining export information and to eliminate the requirement to retain paper certification notices. In the course of clarifying this section, the Census Bureau determined that it was not necessary for filers to retain paper copies of certain documents. In order to reduce the recordkeeping burdens on filers, the Census Bureau eliminated the requirement that AES filers retain a paper copy of the Letter of Intent to participate in the AES and the requirement that AESDirect and/or AESPcLink filers print and maintain a copy of their electronic certification notice. In addition, the Census Bureau modified this section to add a note describing its responsibilities with respect to the retention and maintenance of EEI.
20. Amend the rule to provide exemption from filing EEI for temporary exports including carnets. Several commentors believe that the regulation should state that temporary exports are exempt from filing. The Census Bureau's regulations have always exempted temporary exports, such as carnets, from filing requirements. However, the Census Bureau agrees that carnets should be expressly stated in regulations and thus it has been added to that exemption in [Section] 30.37. However, temporary exports that require an export license, temporary exports destined for a country listed in Country Group E:1 as set forth in Supplement 1 to 15 CFR 740, or an ITAR licensing exemption are not exempt.
21. Amend the filing citation and exemption legend requirements. Several commentors requested changes in language with respect to the filing citations and exemption legends requirement because it was inconsistent with industry practice. The Census Bureau made several changes to the language to reflect industry practice with respect to who must provide exemption legends (see [Section] 30.7).
22. Clarify the procedures for responding to fatal error messages when filing postdeparture. A commentor stated that [Section] 30.9(b) did not take postdeparture filing into account. The Census Bureau has reviewed the section and has revised the Final Rule to address postdeparture filings. If a filer encounters a fatal error when filing a postdeparture shipment, the filer must resubmit the EEI no later than ten calendar days after export.
23. Clarify that estimated date of departure can be used if the actual date of departure is not known. A commentor was concerned that sometimes the filer may not know the actual date of departure. The Census Bureau acknowledges that there are times when the filer may not know the actual date of departure. In these instances, the filer may provide an estimated departure date. However, it is the USPPI's or the authorized filing agent's responsibility to transmit accurate export information as known at the time of filing in the AES and transmit any changes to that information as soon as they are known.
24. Clarify whether export shipments to Mexico and Canada must be filed in AES. A commentor questioned whether SEDs are required to be filed for shipments destined to Canada and Mexico. All export shipments to Mexico valued over $2,500 or shipments that require an export license, a license exemption, or a Kimberley Process Certificate for rough diamonds classified under the 6- digit Harmonized Schedule subheadings 7102.10, 7102.21, and 7102.31, are required to be reported in the AES. Export shipments to Canada are not required to be filed through the AES, unless they require an export license, a license exemption, or a Kimberley Process Certificate for rough diamonds classified under the 6-digit Harmonized Schedule subheadings 7102.10, 7102.21, and 7102.31. See [Subsection] 30.2(a) and 30.36.
25. Amend the proposed rule regarding the annotation of proof of filing citations, 15 CFR [Section] 30.7. A commentor requested that the Census Bureau limit the length of the AES downtime filing citation to no more than 32 characters. The Census Bureau acknowledges that the filing citation may be lengthy, and thus may result in mistakes. Therefore, the Census Bureau has removed the "shipment reference number" from the downtime citation to make the AES downtime filing citation less than 32 characters.
26. Amend [Section] 30.7 Annotating Proof of Filing Citation. The commentor requested that the Census Bureau amend the regulations to define the difference between an authorized agent and an exporting carrier when both roles are fulfilled by the same, affiliated, or controlled subsidiary legal entity. The Census Bureau reviewed the request and [Section] 30.7 was revised to define the different roles of authorized agents and carriers.
27. Clarify that intangible exports of software and technology are exempt from the EEI requirements. A commentor requested that the Census Bureau confirm that EEI is not required for intangible exports of software and technology. The Census Bureau's FTR does not require the reporting of intangible exports of software and technology. However, the Department of State, and/or the DOC may require separate filings for intangible exports of software and technology and technical data that require a license. The Census Bureau recommends that the Department of State and DOC be contacted regarding their specific licensing requirements.
28. Amend the proposed rule by removing the carrier name and Standard Carrier Alpha Code (SCAC) as data elements. One commentor requested that carrier name and SCAC be removed as data elements. The Census Bureau is unable to discontinue collection of these data elements because each remains a statistical and enforcement requirement.
29. Amend the proposed rule regarding responsibilities in a routed export transaction. A commentor requested language be added to [Section] 30.3(e), "Parties are free to structure transactions as they wish and to delegate functions and tasks as they deem necessary, as long as the transactions comply with the FTR." The Census Bureau considered the proposal and decided that the addition of the proposed language would create confusion rather than clarity. In a routed
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export transaction the authorized agent of the FPPI shall be responsible for filing the EEI accurately and timely in accordance with the FTR.
30. Amend the rule by adding a note to [Section] 30.3. A commentor requested that the Census Bureau revise the FTR to be consistent with the EAR. The Census Bureau added a note to [Section] 30.3 to alert filers that the definition used for exporter in the EAR is different from the definition used for the USPPI in the FTR because of each agency's distinct obligations and requirements. Therefore, due to the different mission of each agency, conformity of documentation is not required in the FTR.
31. Amend the proposed rule, [Section] 30.37(a)--Miscellaneous Exemptions. A commentor requested that the Census Bureau confirm if the miscellaneous exemption for goods valued $2,500 or less can be used if the domestic value and the foreign value are each under $2,500, even if their total value exceeds $2,500. The Census Bureau's FTR requires that items of domestic or foreign origin under the same commodity classification number should always be reported separately and listed only if either is valued over $2,500.
Changes to the Proposed Rule Made by This Final Rule
After consideration of the comments received, the Census Bureau revised certain provisions and added several provisions in the Final Rule to address the concerns of the commentors and to clarify the requirements of the rule.
The changes made in this Final Rule are as follows:
1. Section 30.2(a)(ii) is amended to clarify that goods previously admitted to customs warehouses or FTZs moving under CBP bond between Puerto Rico and United States and to the U.S. Virgin Islands from the United States or Puerto Rico shall require filing EEI. This change is in response to concerns addressed in item 15 in the "Response to Comments" section.
2. Section 30.2(a)(iv) is amended to clarify exemptions in Subpart D by deleting (A), specific references to Office of Foreign Assets Control regulations, renumbering existing (B) through (E) to (A) through (D), and adding a new (E) to clarify a BIS requirement. This change was made to provide clarity and consistency.
3. Section 30.2(d)(2) is amended by deleting "* * * when an export license or license exemption is not required," because currently no export license is required for the following U.S. territories: Guam Island, American Samoa, Wake Island, Midway Island, and the Northern Mariana Islands. This change was in response to concerns addressed in item 11 in the "Response to Comments" section.
4. In response to item 20 in the "Response to Comments" section, [Section] 30.3(b)(2)(iv) is deleted because it relates to an exemption for reexports that is addressed in [Section] 30.37. Section 30.3(b)(2)(v) is renumbered [Section] 30.3(b)(2)(iv). A new [Section] 30.3(b)(2)(v) has been added to provide clarification on who shall be the USPPI when goods are imported for consumption and reexported without being changed or enhanced. This change was made during internal agency review.
5. Section 30.3(e)(1) is amended to clarify the language describing the treatment of a routed export transaction if the FPPI agrees to allow the USPPI to file EEI. This change is in response to concerns addressed in item 10 in the "Response to Comments" section. Also, [Section] 30.3(e)(1) is amended by adding a note to paragraph (e)(1) that was inadvertently dropped in the proposed rule.
6. Section 30.3(e)(2) is amended to clarify the authorized agents responsibilities in a routed export transaction. This change is in response to concerns addressed in item 10 in the "Response to Comments" section.
7. Section 30.3(e)(2)(xiii) and (xiv) is amended by adding a clarifying note to this paragraph that was inadvertently dropped in the proposed rule. This change was made to provide clarity and consistency.
8. Section 30.3(e)(1) is amended by adding a clarifying note to this section that was inadvertently dropped in the proposed rule. This change is in response to concerns addressed in item 29 in the "Response to Comments" section.
9. Section 30.3(f) is amended to clarify that in a routed export transaction the USPPI is not required to provide the agent of the FPPI with a power of attorney or written authorization. This change is in response to concerns addressed in item 10 in the "Response to Comments" section.
10. Section 30.6(a)(18) is amended by deleting shipments under carnet from the list of export codes. This listing of carnets in the export codes was in error. This change is made to ensure consistency with the response to concerns addressed in item 20 in the "Response to Comments" section.
11. Section 30.6(b)(13) is amended to specify that an entry number is required for goods withdrawn from a FTZ and exported. This change is in response to concerns addressed in item 15 in the "Response to Comments" section.
12. Section 30.10 is amended to clarify the requirements for the retention of EEI and the authority to require production of documentation of EEI. This change is in response to concerns addressed in item 19 in the "Response to Comments" section.
13. Section 30.37 is amended by adding exemptions (q), (r), (s), and (t) that were not included in the proposed rule. This change was made to provide clarity and consistency.
14. Section 30.4(b)(2)(i) is amended to read: "(i) For vessel cargo, the USPPI or authorized agent shall file the EEI required by [Section] 30.6 and provide the filing citation or exemption legend to the exporting carrier 24 hours prior to the cargo being loaded on the vessel at the U.S. port where the cargo is laden." This change is in response to concerns addressed in item 21 in the "Response to Comments" section.
15. Section 30.4(b)(2)(iv) is amended to read: "(iv) For rail cargo, the USPPI or the authorized agent shall file the EEI, required by [Section] 30.6, and provide the filing citation or exemption legend to the exporting carrier no later than two hours prior to the time train arrives at the U.S. border to go foreign." This change is in response to concerns addressed in item 21 in the "Response to Comments" section.
16. Section 30.45(a) is amended by deleting "* * * U.S. possessions" and replacing it with "the U.S. Virgin Islands." The reference to U.S. territories was too broad. Also language was added to clarify that CBP may require a variety of documents, depending upon the method of transportation, to contain the proof of filing citation or exemption legend. This change is in response to concerns addressed in item 21 in the "Response to Comments" section.
17. Section 30.45(f) is amended to clarify by method of transportation when the carrier must obtain the filing citations or exemption legends. This change is in response to concerns addressed in item 21 in the "Response to Comments" section.
18. Section 30.37 is amended to include carnets as temporary exports that should have been included in the proposed rule. This change is in response to concerns addressed in item 20 in the "Response to Comments" section.
19. Section 30.71(b)(1) is amended by adding a note to paragraph (b)(1), which notes an inflation adjustment to penalty provision of Subpart H. This change was made as a result of the Adjustment for Inflation Final Rule effective December
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14, 2004, and provided for by the Debt Collection Improvement Act of 1996, Public Law 104-134.
20. Subpart H is amended by adding [Section] 30.74, Voluntary Self- Disclosure, to specify how to disclose violations or suspected violations of the FTR. This change is in response to concerns addressed in item 8 in the "Response to Comments" section.
21. Sections 30.2(c)(1), 30.5(a), and 30.5(c) are amended to clarify that the letter of intent to participate in AES must be filed electronically at www.aesdirect.gov. This change was made to eliminate the requirement to submit the paper letter of intent and to be consistent with a pure electronic environment because filing the information electronically reduces the burden on both trade and the government.
22. Section 30.1 is amended to clarify a number of definitions. These changes are in response to concerns addressed in item 9 in the "Response to Comments" section.
23. Section 30.5(d)(1) is amended to clarify that the requirement to change password only applies to employees leaving the company that had direct access to the AES. This change is in response to concerns addressed in item 13 in the "Response to Comments" section.
24. Section 30.9(b) is amended to clarify that fatal errors for EEI filed postdeparture must be corrected as soon as possible, but no later than ten days after departure if filed postdeparture. This change is in response to concerns addressed in item 22 in the "Response to Comments" section.
25. Section 30.7 is amended by deleting the filing citation from the section and adding an Appendix D to Part 30 AES Filing Citation, Exemption and Exclusion Legends. In addition, the Census Bureau limited the length of the AES downtime filing citation to no more than 32 characters. These changes were in response to concerns addressed in item 25 of the "Response to Comments" section and to provide clarity and consistency.
26. Appendix A to Part 30--Format for Letter of Intent has been removed. The Appendix B sample of Power of Attorney and written authorization has been renamed A.
27. Appendix B to Part 30--AES Filing Codes have been added to provide one reference for all the filing codes.
28. Appendix C to Part 30--Summary of Exemptions and Exclusions from EEI filing is being added to provide a summary of all FTR exemptions and exclusions.
29. Appendix D to Part 30--AES Filing Citation, Exemption and Exclusion Legends are being added to provide a summary of all citations and legends.
30. Appendix E to Part 30--FTSR to FTR Concordances are being added to provide a crosswalk between the FTSR and FTR.
31. Appendix F to Part 30--FTR to FTSR Concordances are being added to provide a crosswalk between the FTR and FTSR.
Program Requirements
To comply with the requirements of Public Law 107-228, the Census Bureau is amending in its entirety the FTSR to specify the requirements for the mandatory reporting of all export information through the AES when a SED was required. All future references to the SED shall be referred to as AES EEI.
The Census Bureau is making the following changes to Title 15, Code of Federal Regulations (CFR), part 30:
. Rename the FTSR to "Part 30--Foreign Trade Regulations" to more accurately reflect the scope of the revised regulations implementing full mandatory AES filing, such as the inclusion of Department of State requirements and the advanced filing requirement implemented by CBP.
. Remove requirements for filing a paper SED (Option 1), Commerce Form 7525-V, from Title 15 CFR 30, so that the AES will be the only mode for filing information previously required by the SED.
. Remove requirements for filing the in-transit SED, ENG Form 7513, from 15 CFR 30. Responsibility for ENG Form 7513 was transferred to the U.S. Department of the Army, U.S. Army Corps of Engineers.
. In [Section] 30.2(a)(2), language was included to specify the four optional means for filing EEI. Two of those methods require the development of AES software using the Automated Export System Trade Interface Requirements (AESTIR).
. Section 30.2(d), lists types of export transactions outside the scope of the FTR. The list of out-of-scope transactions included in [Section] 30.2(d) is not all-inclusive, but includes those types of shipments about which the Census Bureau receives frequent inquiries. These types of shipments are to be excluded from EEI filing.
. In [Section] 30.3, language was included to specify that in a "routed" transaction, the USPPI can compile and transmit export information on behalf of the FPPI when agreed upon by the FPPI. This language is consistent with the language of [Section] 758.3 of the EAR and permits the USPPI to act as an agent of the FPPI upon the written authorization by the FPPI.
. In [Section] 30.4, the time and place-of-filing requirements for presenting proof of filing citations, postdeparture filing citations, and/or exemption legends are specified. Specific time and place-of-filing requirements are included in the FTR in accordance with provisions of [Section] 341(a) of Public Law 107-210, the Trade Act of 2002. With the exception of the State Department, USML shipments under the control of the ITAR and shipments approved for postdeparture filing, the appropriate proof of filing citations and/or exemption legends are required to be provided to the exporting carrier within specified time frames depending on the mode of transportation used. For example, proof of filing citations for vessel cargo shall be provided to the exporting carrier no later than 24 hours prior to departure of the vessel from the U.S. port where the cargo is laden. Time and place-of-filing requirements for other modes of transportation also are presented in [Section] 30.4 of the FTR.
. In [Section] 30.4(b)(1) and [Section] 30.4(b)(3) specify how to file EEI and acquire an ITN when AES, AESDirect or the participant's AES is unavailable for filing.
. In [Section] 30.5(c), the postdeparture (formerly Option 4) approval procedures were removed. Certification and approval requirements for postdeparture filing of EEI were strengthened to address U.S. national security concerns and interests. Applications submitted by USPPIs for postdeparture filing will be subjected to closer scrutiny by the Census Bureau and other federal government partnership agencies participating in the AES postdeparture filing review process. Under the revised postdeparture filing requirements: (1) Authorized agents may no longer apply for postdeparture filing status on behalf of individual USPPIs. Only USPPIs may apply; (2) USPPIs must demonstrate the ability to meet the AES predeparture filing requirements by filing EEI through the AES before being approved for the postdeparture filing privilege; (3) USPPIs must meet a minimum number of shipments requirement before being authorized to file postdeparture; and (4) partnership agencies of the U.S. government shall determine whether or not a USPPI poses a significant threat to U.S. national security before granting the applicant postdeparture filing status.
. In [Section] 30.6, language was added delineating the specific procedure for reporting the value of goods to the AES when inland freight and insurance
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charges are not known at the time of exportation. When goods are sold at a point other than the port of export, freight, insurance, and other charges required to move the goods from their U.S. point of origin to the carrier at the port of export must be added to the selling price (or cost, if not sold) of the goods. Where the actual amount of freight, insurance, and other domestic charges are not available, an estimate of the domestic cost must be made and added to the cost or selling price of the goods to obtain the value to be reported to the AES.
. In [Section] 30.6, a Routed Export Transaction Indicator and a Vehicle Identification Qualifier were added to the list of data elements to be reported through the AES. Both the Routed Export Transaction Indicator and the Vehicle Identification Qualifier indicate the conditions of other data elements reported to the AES. The Routed Export Transaction Indicator gives an indication of whether or not the EEI reported represents a routed export transaction. The Vehicle Identification Qualifier, when reported, identifies the type of vehicle number reported.
. In [Section] 30.6, the Date of Arrival and the Waiver of Prior Notice Indicator were removed from the list of data elements that should be reported through the AES. These data elements were previously required to overcome disparities in reporting requirements for certain export shipments sent between the United States and Puerto Rico. With mandatory AES reporting, the Date of Arrival and Waiver of Prior Notice Indicator are no longer required, since shipments sent between the United States and Puerto Rico will no longer be reported differently from other export shipments.
. Subpart B sets forth export control and export licensing issues relevant to 15 CFR 30. This subpart adds references to export control and licensing requirements of the Department of State and other federal agencies. General guidelines for obtaining export control and licensing information also are presented for use by preparers and filers of EEI. The purpose of this subpart is to consolidate references to export control issues. No new requirements are introduced.
. In [Section] 30.29, the language that describes the proper manner for reporting cost of repairs and/or alterations to goods, and the reporting of the value of replacement parts exported was revised. The FTSR did not specifically describe the manner in which these export transactions should be reported. Goods previously imported for repair and alteration only, and reexported, shall only include the value for parts and labor. Goods exported as replacement parts shall only include the value of the replacement part. No new requirements are specified in [Section] 30.29.
. Subpart E sets forth carrier and manifest issues pertaining to provisions relevant to 15 CFR 30. Carrier and manifest issues are consolidated in Subpart E. Requirements for SEDs being attached to the manifest are replaced with requirements for proof of filing citations and/or exemption legends to be shown on the bill of lading, air waybill, or other commercial loading documents attached to the manifest. Specific requirements for annotating the bill of lading, air waybill, or other commercial loading documents are included in [Section] 30.7, Subpart A of Part 30.
. Subpart F sets forth requirements for import shipments relevant to 15 CFR 30, including requirements for the electronic filing of statistical data for shipments imported into FTZs. Currently, requirements for electronically reporting FTZ admissions are included in the Census Bureau's "Automated Foreign Trade Zone Reporting Program" manual. Instructions to import filers on where to obtain information on reporting import data are added to Subpart F. Requirements for information on imports of goods into Guam are excluded from the FTR since Guam collects its own information on goods entering and leaving the area.
. A new Subpart H was created to cover the FTR penalty provisions formerly addressed in [Section] 30.95 of the FTSR. New penalty provisions addressed in Subpart H of this part describe the increase in penalties imposed for violations from $100 to $1,000 for each day of delinquency, to a maximum from $1,100 to $10,000 per violation. In addition, the penalty provisions provide for situations when the filer knowingly fails to file, files false and/or misleading information and other violations of the FTR where a civil penalty shall not exceed $10,000 per violation and a criminal penalty shall not exceed $10,000 or imprisonment for no more than five years, or both, per violation. Finally, Subpart H provides for the enforcement of these penalty provisions by the BIS' Office of Export Enforcement (OEE) and the DHS's CBP, and ICE.
. Other nonsubstantive revisions were made to include language incorporated from the FTSR to clarify the intent of the provisions in the FTR.
The Department of State and DHS concur with the provisions contained in this Final Rule.
Rulemaking Requirements
Regulatory Flexibility Act
The Chief Counsel for Regulation of the DOC certified to the Chief Counsel for Advocacy of the Small Business Administration (SBA) that this rule will not have a significant impact on a substantial number of small entities. The factual basis for this certification was published in the proposed rule and is not repeated here. No comments were received regarding the economic impact of this rule. As a result, a final regulatory flexibility analysis is not required and none was prepared.
Executive Orders
This rule has been determined to be not significant for purposes of Executive Order 12866. It has been determined that this rule does not contain policies with Federalism implications as that term is defined under Executive Order 13132.
Paperwork Reduction Act
Notwithstanding any other provision of law, no person is required to respond to, nor shall a person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the Paperwork Reduction Act (PRA), unless that collection of information displays a current, valid OMB control number. This rule contains a collection-of-information subject to the requirements of the PRA (44 U.S.C. 3501 et seq.) and that has been approved under OMB control number 0607-0152. The estimated burden hours for filing the SED information through the AES and related documents (e.g., the AES Participant Application (APA) and AESDirect) are 752,000. In addition, this rule contains a collection of information that has been approved under OMB control numbers: OMB No. 1651-0022 (Entry Summary--CBP-7501), OMB No. 1651-0027 (Record of Vessel, Foreign Repair, or Equipment--CBP-226), and OMB No. 1651-0029 (Application for Foreign Trade Zone Admission and Status Designation--CBP-214). The public's reporting burden for the collection-of- information requirements includes the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection-of-information requirements.
List of Subjects in 15 CFR Part 30
Economic statistics, Exports, Foreign trade, Reporting and recordkeeping requirements.
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For the reason stated in the preamble, the Census Bureau revises 15 CFR part 30 to read as follows:
PART 30--FOREIGN TRADE REGULATIONS
Subpart A--General Requirements
Sec.
30.1 Purpose and definitions.
30.2 General requirements for filing Electronic Export Information (EEI).
30.3 Electronic Export Information filer requirements, parties to export transactions, and responsibilities of parties to export transactions.
30.4 Electronic Export Information filing procedures, deadlines, and certification statements.
30.5 Electronic Export Information filing application and certification processes and standards.
30.6 Electronic Export Information data elements.
30.7 Annotating the bill of lading, air waybill, or other commercial loading documents with the proof of filing citations, and exemption legends.
30.8 Time and place for presenting proof of filing citations, and exemption and exclusions legends.
30.9 Transmitting and correcting Electronic Export Information.
30.10 Retention of export information and authority to require production of documents.
30.11-30.14 [Reserved]
Subpart B--Export Control and Licensing Requirements
30.15 Introduction.
30.16 Export Administration Regulations.
30.17 Customs and Border Protection regulations.
30.18 Department of State regulations.
30.19 Other federal agency regulations.
30.20-30.24 [Reserved]
Subpart C--Special Provisions and Specific-Type Transactions
30.25 Values for certain types of transactions.
30.26 Reporting of vessels, aircraft, cargo vans, and other carriers and containers.
30.27 Return of exported cargo to the United States prior to reaching its final destination.
30.28 "Split shipments" by air.
30.29 Reporting of repairs and replacements.
30.30-30.34 [Reserved]
Subpart D--Exemptions From the Requirements for the Filing of Electronic Export Information
30.35 Procedure for shipments exempt from filing requirements.
30.36 Exemption for shipments destined to Canada.
30.37 Miscellaneous exemptions.
30.38 Exemption from the requirements for reporting complete commodity information.
30.39 Special exemptions for shipments to the U.S. Armed Services.
30.40 Special exemptions for certain shipments to U.S. government agencies and employees.
30.41-30.44 [Reserved]
Subpart E--General Carrier and Manifest Requirements
30.45 General statement of requirement for the filing of carrier manifests with proof of filing citations for the electronic submission of export information or exemption legends when Electronic Export Information filing is not required.
30.46 Requirements for the filing of export information by pipeline carriers.
30.47 Clearance or departure of carriers under bond on incomplete manifests.
30.48-30.49 [Reserved]
Subpart F--Import Requirements
30.50 General requirements for filing import entries.
30.51 Statistical information required for import entries.
30.52 Foreign Trade Zones.
30.53 Import of goods returned for repair.
30.54 Special provisions for imports from Canada.
30.55 Confidential information, import entries, and withdrawals.
30.56-30.59 [Reserved]
Subpart G--General Administrative Provisions
30.60 Confidentiality of Electronic Export Information.
30.61 Statistical classification schedules.
30.62 Emergency exceptions.
30.63 Office of Management and Budget control numbers assigned pursuant to the Paperwork Reduction Act.
30.64-30.69 [Reserved]
Subpart H--Penalties
30.70 Violation of the Clean Diamond Trade Act.
30.71 False or fraudulent reporting on or misuse of the Automated Export System.
30.72 Civil penalty procedures.
30.73 Enforcement.
30.74 Voluntary self-disclosure.
30.75-30.99 [Reserved]
Appendix A To Part 30--Sample for Power of Attorney and Written Authorization
Appendix B To Part 30--ES Filing Codes
Appendix C To Part 30--Summary of Exemptions and Exclusions from EEI filing
Appendix D To Part 30--AES Filing Citation, Exemption and Exclusion Legends
Appendix E To Part 30--FTSR to FTR Concordance
Appendix F To Part 30--FTR to FTSR Concordance
Authority: 5 U.S.C. 301; 13 U.S.C. 301-307; Reorganization plan No. 5 of 1990 (3 CFR 1949-1953 Comp., p.1004); Department of Commerce Organization Order No. 35-2A, July 22, 1987, as amended and No. 35-2B, December 20, 1996, as amended; Public Law 107-228, 116 Stat. 1350.
Subpart A--General Requirements
[Section] 30.1 Purpose and definitions.
(a) This part sets forth the Foreign Trade Regulations (FTR) as required under the provisions of Title 13, United States Code (U.S.C.), Chapter 9, section 301. These regulations are revised pursuant to provisions of the Foreign Relations Authorization Act, Public Law 107-228 (the Act). This Act authorizes the Secretary of Commerce, with the concurrence of the Secretary of State and the Secretary of Homeland Security, to publish regulations mandating that all persons who are required to file export information under Chapter 9 of 13 U.S.C., file such information through the Automated Export System (AES) for all shipments where a Shipper's Export Declaration (SED) was previously required. The law further authorizes the Secretary of Commerce to issue regulations regarding imposition of civil and criminal penalties for violations of the provisions of the Act and these regulations.
(b) Electronic filing through the AES strengthens the U.S. government's ability to prevent the export of certain items to unauthorized destinations and/or end users because the AES aids in targeting, identifying, and when necessary confiscating suspicious or illegal shipments prior to exportation.
(c) Definitions used in the FTR. As used in this part, the following definitions apply:
AES applicant. The USPPI or authorized agent who applies to the Census Bureau for authorization to report export information electronically to the AES, or through AESDirect or its related applications.
AESDirect. A free Internet application supported by the Census Bureau that allows USPPIs, their authorized agent, or the authorized agent of the FPPI to transmit EEI through the AES via the Internet at http://www.aesdirect.gov.
AES downtime filing citation. A statement used in place of a proof of filing citation when the AES or AESDirect computer systems experiences a major failure. The downtime filing citation must appear on the bill of lading, air waybill, export shipping instructions, or other commercial loading documents.
AES participant application (APA). An electronic submission of an individual or a company's desire to participate in the AES. It sets forth a commitment to develop, maintain, and adhere to CBP and Census Bureau performance requirements and operational standards.
Air waybill. The shipping document used for the transportation of air freight includes conditions, limitations of liability, shipping instructions, description of commodity, and applicable transportation charges. It is generally similar to a straight non-
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negotiable bill of lading and is used for similar purposes.
Annotation. An explanatory note (e.g., proof of filing citation, postdeparture filing citation, AES downtime filing citation, exemption, or exclusion legend) placed on the bill of lading, air waybill, export shipping instructions, or other loading document.
Authorized agent. An individual or legal entity physically located in or otherwise under the jurisdiction of the United States that has obtained power of attorney or written authorization from a USPPI or FPPI to act on its behalf, and for purposes of this part, to complete and file the EEI.
Automated Broker Interface (ABI). A CBP system through which an importer or licensed customs broker can electronically file entry and entry summary data on goods imported into the United States.
Automated Export System (AES). The system, including AESDirect, for collecting EEI information (or any successor document) from persons exporting goods from the United States, Puerto Rico, or the U.S. Virgin Islands; between Puerto Rico and the United States; and to the U.S. Virgin Islands from the United States or Puerto Rico.
Automated Export System Trade Interface Requirements (AESTIR). The document that describes the operational requirements of the AES. The AESTIR presents record formats and other reference information used in the AES.
Automated Foreign Trade Zone Reporting Program (AFTZRP). The electronic reporting program used to transmit statistical data on goods admitted into a FTZ directly to the Census Bureau.
Bill of lading (BL). A document that establishes the terms of a contract between a shipper and a transportation company under which freight is to be moved between specified points for a specified charge. Usually prepared by the authorized agent on forms issued by the carrier, it serves as a document of title, a contract of carriage, and a receipt for goods.
Bond. An instrument used by CBP as security to ensure the payment of duties, taxes and fees and/or compliance with certain requirements such as the submission of manifest information.
Bonded warehouse. An approved private warehouse used for the storage of goods until duties or taxes are paid and the goods are properly released by CBP. Bonds must be posted by the warehouse proprietor and by the importer to indemnify the government if the goods are released improperly.
Booking. A reservation made with a carrier for a shipment of goods on a specific voyage, flight, truck or train.
Bureau of Industry and Security (BIS). This bureau within the U.S. Department of Commerce is concerned with the advancement of U.S. national security, foreign policy, and economic interests. The BIS is responsible for regulating the export of sensitive goods and technologies; enforcing export control, antiboycott, and public safety laws; cooperating with and assisting other countries on export control and strategic trade issues; and assisting U.S. industry to comply with international arms control agreements.
Buyer. The principal in the export transaction that purchases the commodities for delivery to the ultimate consignee. The buyer and ultimate consignee may be the same.
Cargo. Goods being transported.
Carnet. An international customs document that allows the carnet holder to import into the United States or export to foreign countries certain goods on a temporary basis without the payment of duties.
Carrier. An individual or legal entity in the business of transporting passengers or goods. Airlines, trucking companies, railroad companies, shipping lines, pipeline companies, and slot charterers are all examples of carriers.
Civil penalty. A monetary penalty imposed on a USPPI, authorized agent, FPPI, carrier, or other party to the transaction for violating the FTR, including failing to file export information, filing false or misleading information, filing information late, and/or using the AES to further any illegal activity, and/or violating any other regulations of this part.
Commerce Control List (CCL). A list of items found in Supplement No. 1 to Part 774 of the EAR. Supplement No. 2 to Part 774 of the EAR contains the General Te
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© 2005
Mandatory Use of Automated Export System Takes Effect July 2
The Census Bureau has issued a final rule requiring export information to be filed through the Automated Export System or AESDirect for all shipments where a shipper’s export declaration is required. The rule is effective as of July 2 but Census states that it will not implement its provisions until 120 days after June 2 (approximately Oct. 2) in order to allow affected entities sufficient time to come into compliance.
Highlights of Final Rule. According to Census, the final rule amends the Foreign Trade Statistics Regulations in their entirety by:
• renaming the FTSR as the Foreign Trade Regulations to more accurately reflect the scope of the revised regulations implementing full mandatory AES filing, such as the inclusion of State Department requirements and the advance filing requirement implemented by U.S. Customs and Border Protection;
• specifying that in “routed” export transactions the U.S. principal party in interest can compile and transmit export information on behalf of the foreign PPI when agreed upon by the FPPI, this permitting the USPPI to act as an agent of the FPPI upon its written authorization;
• removing the Option 4 post-departure filing approval procedures and strengthening the certification and approval requirements for post-departure filing of electronic export information by providing that (1) authorized agents may no longer apply for post-departure filing status on behalf of individual USPPIs (i.e., only USPPIs may apply); (2) USPPIs must demonstrate the ability to meet AES pre-departure filing requirements by filing EEI through the AES before being approved for post-departure filing, (3) USPPIs must meet a minimum number of shipments requirement before being authorized to file post-departure, and (4) partnership government agencies will determine whether or not a USPPI poses a significant threat to U.S. national security before granting the applicant post-departure filing status;
• specifying the time and place of filing requirements for presenting proof of filing citations, post-departure filing citations and/or exemption legends;
• specifying how to file EEI when AES, AESDirect or the participant’s AES is unavailable for filing;
• specifying the procedure for reporting the value of goods to the AES when inland freight and insurance charges are not known at the time of exportation;
• adding a routed export transaction indicator and a vehicle identification qualifier to, and removing the date of arrival and the waiver of prior notice indicator from, the list of data elements required to be reported through the AES;
• revising the language that describes the proper manner for reporting costs of repairs and/or alterations to goods and the reporting of the value of replacement parts exported; and
• creating a new subpart H to cover FTR penalty provisions, including (1) the increase in penalties imposed for violations from $100 to $1,000 per each day of delinquency, to a maximum from $1,100 to $10,000 per violation; (2) situations when the filer knowingly fails to file or files false and/or misleading information and other violations of the FTR where a civil penalty shall not exceed $10,000 per violation and a criminal penalty shall not exceed $10,000 or imprisonment for not more than five years, or both, per violation; and (3) enforcement by the Bureau of Industry and Security’s Office of Export Enforcement, CBP and U.S. Immigration and Customs Enforcement.
Clarifications From Proposed Rule. In response to comments received on its February 2005 proposed rule and its own internal review, Census has provided the following information about the final rule.
• Only the internal transaction number, which confirms that the shipment information has been accepted in the AES, is acceptable as the proof of filing citation. The external transaction number will no longer be accepted as a proof of filing.
• For shipments of goods not on the U.S. Munitions List, the filing citation or exemption legend should be provided to the exporting carrier no later than (1) for vessel cargo, 24 hours prior to loading cargo on the vessel at the U.S. port where the cargo is laden; (2) for air cargo, no later than two hours prior to the scheduled departure time of the aircraft; (3) for truck cargo, no later than one hour prior to the arrival of the truck at the U.S. border to go foreign; (4) for rail cargo, no later than two hours prior to the time the cargo arrives at the U.S. border to go foreign; (5) for mail and cargo shipped by other methods (except pipeline exports), no later than two hours prior to exportation; (6) for pipeline exports, within four days following the end of each calendar month; and (7) for post-departure filing by approved parties, no later than ten calendar days from the date of export.
• The current $2,500 exemption level for reporting will not be removed or reduced, as doing so would increase the number of shipments reported each month by approximately four million and neither Census nor CBP has the resources to process this additional workload.
• A new provision has been added to specify how to submit voluntary self-disclosures of a violation or suspected violation of the FTR.
• Upon request, the agent of an FPPI must provide the USPPI with a copy of the power of attorney or written authorization giving it the authority to file EEI on behalf of the FPPI before the USPPI provides the required information necessary to complete the EEI filing. The USPPI is not required to provide the agent of the FPPI with a power of attorney or written authorization.
• In response to concerns about providing an employer identification number or social security number to an FPPI’s agent or placing the EIN or SSN on the proof of filing citation, Census is working with CBP to develop a system that allows the reporting of registration numbers instead and will address this issue in a future rulemaking.
• A new provision has been added to provide clarification on who will be the USPPI when goods are imported for consumption and re-exported without being changed or enhanced.
• The requirements for retaining export information have been clarified and the requirement to retain paper certification notices has been eliminated.
• An entry number is required for goods withdrawn from a foreign trade zone and exported.
• The requirements for filing EEI, including for goods shipped to and from Puerto Rico, have not changed. However, EEI must be filed for goods previously admitted to customs warehouses or FTZs moving under CBP bond between Puerto Rico and the U.S. and to the U.S. Virgin Islands from the U.S. or Puerto Rico.
• Neither Census nor CBP requires EEI or a paper SED for goods shipped from U.S. territories, including Guam Island, American Samoa, Wake Island, Midway Island and the Northern Mariana Islands, to foreign countries or areas and goods shipped between the U.S. and these territories.
• Appendices have been added to the regulations to provide references to filing codes, FTR exemptions and exclusions, and citations and legends and to provide a “crosswalk” between the FTR and the FTSR.
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New Foreign Trade Regulations Tighten Enforcement, Increase Penalties
Census Rule Makes Significant Revisions to Automated Export System
The Census Bureau published in the June 2 Federal Register its long-awaited final rule relating to the new Foreign Trade Regulations. This rule represents a substantial overhaul of Census' export regulations and includes provisions that mandate the use of the Automated Export System, significantly increase penalties and allow for greater enforcement by the departments of Commerce and Homeland Security. While the effective date of the FTR is July 2, the rule will not be formally implemented until Sept. 30 in order to give the export community time to bring their processes and activities in line with the new FTR requirements.
The final rule was issued after Census and the DHS resolved a three-year dispute over the sharing of confidential export data with foreign governments and the Option 4 program, which allows export data to be filed up to 10 days after vessel departure. Census had strongly opposed the DHS's push to share confidential export information with foreign governments for antiterrorism purposes, while the DHS sought to put an end to Option 4 because it believed this process creates an unacceptable loophole for illegal exports. In the end, the two agencies agreed to disagree on the confidentiality issue, and the final rule therefore retains the proposed rule's prohibition on sharing the data contained in AES submissions with foreign governments. With respect to Option 4, the existing moratorium on new users will continue and only currently approved filers may use this procedure.
Among the other key provisions of the FTR are the following.
· replaces the term SED (Shipper's Export Declaration) in the FTR with Electronic Export Information
· requires all export data to be filed electronically through the AES-paper SEDs will no longer be accepted
· describes the process for AES filing by U.S. principal parties in interest or their agents
· describes the data elements required for AES filing and when EEI must be transmitted via the AES
· specifies that only the internal transaction number will serve as proof of AES filing-the external transaction number will no longer be acceptable as proof of filing
· significantly increases civil penalties to $1,000 to $10,000 per violation and criminal penalties to a maximum of $10,000 per violation and/or 10 years' imprisonment
· creates new provisions for the filing of voluntary self-disclosures-Census will share the information contained in such disclosures with other exporting agencies, and the weight afforded to such disclosures as a mitigating factor in penalty cases is entirely within Census' discretion
· designates the Bureau of Industry and Security's Office of Export Enforcement and the DHS's U.S. Customs and Border Protection and U.S. Immigration and Customs Enforcement as the offices responsible for enforcement of the FTR
Exporters Advised to Review Compliance Status Ahead of FTR Implementation
As announced in late 2006, Census has begun auditing exporters who are not meeting their AES obligations; i.e., those who are not complying with their Option 4 filing requirements, have a high number of late AES filings or unresolved fatal errors, or fail to achieve a 95 percent compliance rate in the AES compliance reports issued monthly to AES filers. Penalties for violations have not generally been enforced by Census, but that will soon change with the implementation of the FTR. Further, because of the greater sharing of information among the U.S. government agencies responsible for the enforcement of export laws and regulations, exporters may find themselves in a position of having to file multiple, simultaneous voluntary disclosures with various agencies.
In light of the increased FTR enforcement initiatives of Census, CBP, OEE and ICE, the increased penalties under the new FTR and the sharing of information among export agencies, prudent exporters will move quickly to evaluate and improve their export compliance status. This is particularly vital for those exporters who rely on freight forwarders or other agents to submit their AES records, since AES compliance reports and fatal error reports are issued to the AES record filers and not necessarily to the exporters who ultimately have liability for the accuracy of those records. Reliance on freight forwarders is not a valid excuse for noncompliance with the FTR, as the exporter remains principally liable for its agent's mistakes.
Minimum key steps for compliance with the FTR and other U.S. exporting requirements include conducting internal export compliance assessments, evaluating the effectiveness of current internal controls and procedures, documenting internal control processes, assessing the activities of freight forwarders and agents responsible for AES filings, and providing targeted training opportunities for company personnel and overseas partners.
The attorneys and professionals of Sandler, Travis & Rosenberg, P.A., and Sandler & Travis Trade Advisory Services Inc. have demonstrated experience guiding companies around the globe through the maze of U.S. export requirements and designing effective internal export compliance programs. For further information about the new requirements in the FTR and how your company can achieve its export compliance goals, please contact:
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Sandler, Travis & Rosenberg, P.A., is a customs and international trade law firm concentrating in assisting clients with the global movement of goods, ideas and personnel and the setting of global trade policy. Our affiliated consulting company, Sandler & Travis Trade Advisory Services Inc., is a leading provider of trade-related management and consulting services to government and industry. For more information about ST&R and STTAS, please visit our Web site. |
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Customs Update: Checklist to Avoid Export Penalties
Updated June 2, 2008 1:14:53 PM
Susan Kohn Ross / The Journal of Commerce Online
In a recent speech, Assistant Secretary of Commerce for Export Enforcement Darryl Jackson addressed the mitigation of administrative penalties, an issue on exporters' minds in light of the radical increases in penalties for export control violations under the recently enacted IEEPA Enforcement Act. Prior to its passage, the maximum export control violation civil penalty was $50,000 per violation. Under the new law, the amount increased to $250,000, or twice the value of the violative transaction, whichever is greater. The open question was how the Bureau of Industry and Security would decide to implement these higher penalty amounts. Now we know.
Per Jackson's comments, if the exporter is able to demonstrate an "effective compliance program," BIS is now giving "great weight" in mitigation -- equal to a 25-percent reduction -- in administrative penalty cases. Thankfully confirming again that one size does not fit all, Jackson identified nine indispensable components that will be a feature of all "effective" export compliance programs so as to meet the standard warranting great weight in mitigation. These elements must be in the design of the compliance program and must actually be implemented. Of course, the burden is on the exporter to demonstrate the effectiveness of its compliance program, or put another way, if the program was so effective, how do you explain the violation occurring?
1. Meaningful Risk Analysis
The first step is the performance of a "meaningful risk analysis," which would consider such factors as the types of goods, the proposed end users and end uses, the parties and, of course, the likelihood of diversion. It cannot be a one-time thing and must be periodically reviewed and updated.
2. Formal Written Compliance Program
The written compliance program must be tailored to the outcome of the risk analysis. Formal written Standard Operating Procedures are the fundamental basic of any viable compliance program and should be developed and implemented by all relevant staff, and be made available to everyone these SOPs affect.
3. Oversight by Senior Officials
To be meaningful, oversight of export control must be tasked to at least one senior official, but if possible a small team is a better idea. The senior officials involved in oversight should, of course, include the empowered official(s) of the company as well as those holding manager and officer titles with decision making authority over the export group for oversight to have any meaning.
4. Employee Training
For written SOPs to have any validity, employees must be given training and even encouraged to seek outside training and benchmarking. Employees must know what is expected of them as part of their training process. The training program must also be part of the institutional knowledge of the company and must be both meaningful/well-directed, and also properly documented.
5. Customer/Transaction Screening
Does your company screen its customers? What about forwarders and other service providers? If so, how often? It is not enough to screen yearly or on some other regular cycle. For a compliance program to be effective, it must include screening procedures for all export transactions and customers. Screening against the various lists generated by all the agencies, including screening of domestic transactions, must be an automatic part of every transaction and, depending on the lapse of time between order and fulfillment, screening may need to occur two or more times during the process, but must include every transaction and every customer and relevant service provider, such as consolidators.
6. Recordkeeping Requirements
No compliance program is worth anything without proper record keeping. There are record keeping requirements in the Export Administration Regulations. There are record keeping requirements in Sarbannes-Oxley. There are record keeping requirements in any meaningful compliance program. How do you document training? What are the steps for problem resolution? What records is a given employee expected to create and maintain? How do you document screening is taking place? All of these questions and many more can only be answered if proper record-keeping is in place. If a problem arises, it will be the quality of the company's record-keeping program that will make or break whether it is considered a viable record-keeping program.
7. System for Reporting Violations
No matter how hard we try, we are all human and so mistakes will happen. When they do, what is the company's policy for reporting those errors? To whom within the company is the mistake reported? How is it escalated within the company? How quickly is it investigated? How quickly is corrective action taken? When is it reported to the proper export control agency through a voluntary disclosure? If the mistake is sufficiently serious, when and how is it reported to the board? What steps are taken at that level to correct it? Is there retaliation against the initial maker of the mistake or anyone who reports the error? Voluntary disclosures generally warrant 50-percent mitigation simply due to the filing of the disclosure itself. That may not always be the case, however, and the ability to establish the problem was quickly discovered, investigated, corrected and reported is the only sure way to get that level of mitigation. If this is not the company's norm, how does one explain to the shareholders, public or private, why the company is suffering such violations and lack of mitigation simply because it cannot properly document its efforts?
8. Periodic Reviews and Audits
Any compliance program of real value includes the performance of periodic internal audits. There is no other way to insure the compliance program properly anticipates the risk areas and monitors for them. Past transactions must be reviewed to identify and minimize potential problem areas. Only once those are identified can the program be updated and stay timely and effective.
9. Remedial Actions
What steps are taken when violations are discovered? Was the misstep a simple mistake? A failure to follow existing SOPs? Was it done intentionally? Was it done at the direction of a higher-up? The empowered official?
There should be varying steps of employee discipline in the company's human resources and export control procedures which reflect both the seriousness of the mistake and the level of intent or ignorance associated with it. Whatever those varying levels of discipline, non-action is not acceptable either for the export-control agencies or from a perspective of good corporate governance.
These nine steps were addressed by Assistant Secretary Jackson in the context of BIS export enforcement. However, they apply equally to import compliance programs. All the agencies, import and export, recognize that mistakes will happen. What makes the difference is how the company responds when those mistakes come to light. Does it attempt to sweep everything under the rug, or is bold and affirmative action taken in a timely manner to clean-up the mess? While materiality is a factor in evaluating risk for Sarbanes-Oxley purposes, materiality plays only a small role when the federal agencies look at compliance.
As we hear more and more stories about night vision and other critical goods ending up in the wrong hands and putting our troops at ever greater risk, the fact is the Department of Justice is pursuing export violations in the criminal context with an ever-greater vengeance. When was the last time you thoroughly reviewed your compliance program? If an export one, do you have a truly meaningful program so that you might enjoy the full 75-percent mitigation the filing of a voluntary disclosure coupled with a strong compliance program will get you, based on Jackson's comments, or will your program fall flat on its face? Keep in mind, even the sentencing guidelines used with criminal cases look to the quality of the company's SOPs in deciding how severely the corporation should be punished, and again, no distinction is made between publicly-held or privately-owned companies.
Susan Kohn Ross is International Trade Counsel at Mitchell Silberberg and Knupp LLP in Los Angeles. She is also the co-founder of http://www.tradelawyersblog.com/ and co-creator of CTPAT Made Easy, Inc.(http://www.ctpatmadeeasy.com/), an Internet-based program simplifying the application process for the Customs-Trade Partnership Against Terrorism. She can be reached at 310-312-3206 or skr@msk.com.
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Washington Moving Import Safety Inspections Overseas
Updated June 3, 2008 9:04:25 AM
Peter T. Leach / The Journal of Commerce Online
NEW YORK -- The procedures for certifying the safety and security of imports entering the United States will eventually be pushed overseas under an evolving system of international standards that Washington is trying to establish first for imports of food and drugs. Secretary of Health and Human Services Michael Leavitt told the 87th annual conference of the American Association of Exporters and Importers on Monday that the new strategy is being implemented as a result of the findings of the federal task force he chairs charged with setting up new methods to enforce the safety of food and drug imports. Leavitt was appointed chairman of the task force by President Bush following problems last year with imports from China of contaminated wheat gluten in pet food, lead paint in toys and other products.
The goal of the task force was to set up a system that would ensure product safety. “I told the president we couldn’t inspect all imports,” Leavitt said. “We want to roll the borders back and ensure the safety of products before they get here,” Leavitt said. “We’re beginning to tell the world that if you want access to our markets, you have to meet our standards.” He said the U.S. hopes to put the certification of food and drug product safety and security in the hands of trusted third-party inspectors. He said that the Food and Drug Administration simply does not have enough inspectors to check all imports coming from 850,000 different suppliers around the world.
He said any inspection system must not slow down trade, which is essential to the U.S. economy. “The key to speed is trust; the key to trust is transparency, and the key to transparency is standards,” he said. When asked if the new system will eventually cover all imports, Leavitt said, “We developed the plan with the idea that it will begin to permeate all areas of imports."
Leavitt said that a system of international standards backed by trusted inspectors to certify them will preserve the speed of imports. He warned that inspecting all imports will cost the U.S. its leadership position in international trade. “We need to develop a system that fosters speed, trust and development to make sure we remain a leader in the global economy,” Leavitt said.
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C-TPAT to Include Exports?
Updated June 3, 2008 10:39:25 AM
Peter T. Leach / The Journal of Commerce Online
NEW YORK -- The United States and the governments of some of its major trading partners are slowly working toward developing mutual recognition of their trade security procedures. To facilitate mutual recognition, Customs and Border Protection is trying to apply its Customs-Trade Partnership Against Terrorism (C-TPAT) program to exporters as well as importers, where its major focus has been to date. Bradd Skinner, director of the C-TPAT industry partnership program, told the opening session of the 87th annual conference of the American Association of Exporters and Importers that Customs plans to ask its C-TPAT members for their input on applying the program to export procedures as well as to imports. Skinner said a pilot program is being developed that will focus on export security but that it will not replace other export security programs. He said one goal of the program would be to help the U.S. develop mutual recognition of security arrangements between its C-TPAT program and the European Union's Authorized Economic Operators program, which applies to both imports and exports.Mutual recognition with the EU program would make it easier for C-TPAT members to export to the EU, and for AEO members to export to the U.S. But Walter Boerman, vice president for Royal Philips Electronics, said the EU's AEO program is still very much in the process of implementation. From his description, AEO has an even more complicated set of requirements than C-TPAT. It has different procedures for every different function in the supply chain, he said. "It requires a lot of paperwork. It's not easy, and (EU) customs is behaving like accountants." Skinner said U.S. Customs is working on developing mutual recognition with several major U.S. trade partners. It has an agreement in place with New Zealand and agreements pending with Canada, and Jordan. It is also developing pacts with Japan, Singapore, Australia and Mexico.
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Peru Signs Free Trade Deals with Canada and Singapore
LIMA, Peru — Peru has signed free trade deals with Canada and Singapore as part of its push for such trade pacts - despite opposition from other Andean nations. President Alan Garcia said at a ceremony at the presidential palace Thursday that he wants Peru to be Latin America's gateway for Asian trade. Peru also wants trade agreements with other countries, including China and European nations, Garcia said. Chile is the only other Latin American country with a free trade deal with China. Peru's pursuit of its own trade accords has irritated some of its partners in the Andean Community regional trade group. Leftist Bolivia and Ecuador are more wary of free trade deals with developed nations. Last week, Peru petitioned the Andean Community to allow each member country to make its own intellectual property laws. Peru needs tighter patent and trademark standards to comply with a free trade deal that was approved by U.S. Congress late last year. Ecuador and Bolivia voted against Peru's request.
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Ten Reasons to Use Global Sourcing
By Gail Dutton
June 3, 2008
“Made in America.” The imprint means innovation, high quality, safety and reliability. So why should companies even consider exchanging that stamp for “Assembled in USA” and components manufactured in other nations? Not so long ago, the main reason was to gain lower prices for labor-intensive goods. That’s still a good reason, but there are several other circumstances in which “Made in America” isn’t the best choice. Here are ten, culled from the experience of Mark Thompson, global commodity leader at Pioneer Hi-Bred International, an international leader in plant genetics.
Material is available only from global sources
Swiss pharmaceutical giant Roche experienced this a few years ago to produce the flu medication Tamiflu, which at that time, was the only medication effective against the deadly H5N1 strain of avian flu. A key ingredient of Tamiflu, shikimic acid, is extracted from wild star anise, which is only available from four provinces in China. Star anise from other countries provides lower yields and inferior purity, according to Roche spokesman Darien Wilson.
For a historical example, consider diamonds. Once found only in India, nearly 50 percent of the diamonds mined today come from Africa, although significant deposits are being mined in Brazil, Canada, Australia and Russia. The U.S. has no reliable source of industrial or consumer-grade diamonds. (Colorado’s Lake Kelsey diamond mine opened in the 1990s with sporadic operations, and Arkansas boasts a public diamond field—Crater of Diamonds State Park near Murfreesboro, Arkansas—that has yielded some multi-caret stones.)
Sometimes the issue isn’t materials, but expertise and geography that can’t be found in the right combination in the U.S. Ireland, for example, has become a primary location for call centers, especially for European operations. The country is attracting a young, multi-lingual population of native speakers that can serve all of Europe and much of America during normal business hours before handing off calls to their North American counterparts.
Call centers are tapping into linguistic expertise, while technology companies are accessing high level scientific knowledge. With the economic collapse of the Soviet Union and the Warsaw Pact nations in the early 1990s, many Eastern European scientists who had been assigned to government-funded, generally defense-related projects, found themselves out of work or woefully under paid. Western companies were able to thus hire some of the brightest scientific minds for their commercial applications at lower salaries than comparable U.S. scientists would command, if they were willing to work commercially, and to use the time difference to their advantage.
This “follow-the-sun” working strategy lets teams in different time zones provide round-the-clock service. Some firms, including Xerox, split some project teams among time zones, ensuring that a particular technical challenge is resolved faster because someone is always working on it.
Technology is available only from global sources
It’s hard to believe, but there actually are some things the U.S. doesn’t make. “Except for a firm’s core, strategic technologies, access to materials and process technology is gained through the supply chain,” according to Richard Weissman, assistant professor at Endicott College in Beverly, Massachusetts. It’s also true, though, that bright ideas originating offshore may be adapted to improve products, services and efficiency, developing broader appeal or additional applications.
Maglev trains are a good example. The U.S. abandoned maglev transportation research in the 1960s. Germany and Japan carried on. So when the U.S. Transportation Administration began considering high-speed maglev trains, the technology had to come from Germany, Japan or Korea, which began research somewhat later.
German firm Transrapid pioneered the technology, opening an exhibition line in Hamburg in 1971 and repeatedly winning world maglev speed records. It designed and built the only currently operating commercial maglev transportation system in existence, in Shanghai, China. So, when Lockheed Martin became involved in maglev transportation in 2000, it teamed with Transrapid International, the U.S. subsidiary of the German firm. Under their agreement, Transrapid provides the technology and Lockheed Martin oversees the projects, ensuring they meet U.S. specifications and codes. Marketing is being conducted jointly.
Likewise, in the 1970s, Gummi Bears candy was only made by Haribo in Bonn. It became a global hit. Later, Trolli and a few other German manufacturers acquired the gummi technology and began making other shapes including, in the U.S., gummi worms. Notably, Thompson says, “it was the last new candy product category.” Since those early days, the technology has been exported to the U.S. and Mexico, he says.
For Oregon-based Leupold & Stevens, need for high quality combined with cost pressures was behind the decision to find Asian sources for the optical glass it uses in his rifle scopes and binoculars. The glass is mainly found in Asia, with a few very high end manufacturers in the U.S. and Germany. Sourcing in Asia allowed the company to have the desired level of quality at a price its customers can afford.
Lower total cost of goods
Even with the price of the goods, transportation, taxes and import duties, some goods can be acquired cheaper abroad, as Leupold & Stevens found with optical glass. This is one of the major reasons companies first consider offshore sourcing. Generally, any labor intensive item can be produced abroad and delivered to the U.S. for less than the cost of making it here and delivering it domestically.
Early in his career, Thompson found this was true with toys and birthday cake novelty items. It’s still true today with a wide range of goods, including stone tiles from India and garments from southeast Asia and Central America and computer components from Korea.
“You really have to be careful in determining total costs,” though, Thompson emphasizes. It’s more than just the cost of the goods plus transportation. Total costs include direct and indirect costs like insurance, carrying excess inventory, which Thompson says is needed because of the increased shipping time, as well as quality and communications with suppliers.
Additional factors may also come into play, though, that obviates any advantage in cost. For example, one electronics manufacturer a few years ago found that air pollution in Shanghai registered 800 ppb of hydrogen sulfide. Inside its supplier’s factory, the level nearly doubled to 1500 ppb, versus 7 ppb in the U.S. Such high levels of hydrogen sulfide corrodes electronics, substantially shortening the lifespan of computers and other electronics coming from that area.
The total costs of goods may also include direct and indirect costs throughout the items life. Germany, for examples, requires cradle-to-grave attention, with plans for recycling at the end of the item’s life. So, if components aren’t recyclable, a lower upfront cost may result in higher end of life costs. Also consider the risks to intellectual property, a concept that often isn’t fully understood even by high level execs. To guard against that, Leupold & Stevens, Coca-Cola and other firms keep their most valuable intellectual property at home.
To meet quality requirements
Sometimes quality matters, and sometimes “good enough” is just fine. It’s important to know the difference. A slipped stitch on a $6 shirt doesn’t really matter. Corroded circuit boards or inferior optics, however, make a big difference.
NASA knew when it sent astronauts into space that the quality of the still photos they took truly mattered, not only for science but to capture the imaginations of people throughout the world and thus garner support for continuing the space program. For those missions, the Polaroid camera that was fine for backyard barbeques wouldn’t do. Neither would the Nikons or Leicas used by professional photographers. NASA needed the best of the best. It needed Swedish-made Hasselblad, the Stradivarius of cameras. Perfection, of course, isn’t cheap. The digital, SLR H3DII model, released September 2007, retails for just under $34,000.
The tradition of quality that surrounds Hasselblad extends to other industries, too, and other countries. The printing industry typically sources its presses from companies like Germany’s Koenig & Bauer AG. For centuries, the finest analog watches, like those from Phillipe Patek, were handmade in Switzerland.
It’s important to note, though, that the definition of the term “quality” may vary by country and by region, as Mickey North Rizza, Boston-based analyst at AMR Research, points out. So, when discussing quality issues with suppliers, it may be better to discuss specifications and the reasons for such exacting specifications “as well as the definition of any confusing words, as it is better to error on the side of clarity,” she says. Also look at the supplier’s track record to ensure that company really does understand your product, specifications and overall business goals.
To establish additional sources of supply
From childhood, we’ve been admonished, “Don’t put all your eggs in one basket.” That’s why we make contingency plans, and that’s why working with multiple suppliers is a good thing.
When Thompson was a buyer in the food industry in the 1990s, a California drought severely hurt the garlic industry. He and other American buyers turned to China and to obtain the supplies they needed. That was a good stop-gap strategy, but since then, China has been charged with dumping garlic onto the U.S. market. The U.S. Department of Commerce is investigating.
Pistachio growers did this in reverse in the 1970s. At the time, Iran was the sole source of pistachios, Thompson says. American growers planted their own trees and have since become a dominant player in that market—a smart move in light of the Iranian Revolution and our subsequent embargo against Iran.
Shoe and athletic apparel giant Nike, is another example. It contracts with more than 700 factories in 52 nations. Having such a broad supplier base ensure that supply chain disruptions in one factory or region can be absorbed by suppliers in other regions, and thus minimize the impact to Nike.
There are indirect benefits, too. These contracts employ some 800,000 workers throughout the world, decreasing the influence of any one supplier or region while increasing the base of skilled workers and making it possible for plants suppliers to work together to develop their own best practices and therefore continue to improve product quality, factory productivity and workers’ quality of life.
Anticipation of actual material shortages
Right now, the American energy industry doesn’t have the production capacity it needs to meet the energy requirements of this country. Although America has vast resources of oil and coal, much of it remains untapped in regions that are declared off limits to extraction or that are in difficult to access formations, like oil sands. Wind energy, one alternative, too often meets a NIMBY mentality, as evidenced by last autumn’s debacle off Cape Code. The result is a perennial shortage that forces us to import oil from Canada and the OPEC nations, and to buy coal from Asia.
Although that particular shortage is imposed by politics and technological hurdles, other shortages may be sparked by labor unrest, bad weather, warfare, disease, industrialization of other countries and other issues, which may cause delays in the supply chain or put regions temporarily out of the market.
For example, when ‘mad cow disease’ (bovine spongiform encephalopathy) threatened the Canadian been industry in 2003, grocery store meat sections augmented their selections with Australian beef. And, when U.S. citrus crops are damaged by periodic freezes, buyers can augment their supplies with produce from Mexico or India and, during the shoulder seasons, from Australia and Brazil.
Sometimes, though, a shortage is global, making good relations with multiple suppliers even more important. Right now, there’s a global shortage of steel and, according to Tom Johnstone, president and CEO of Stockholm-based SKF, it will likely continue into 2008. For the world’s largest bearings manufacturer, the shortage leads to steadily increasing costs and “negative effects on production, service to the market and operating margins,” Johnstone said in the third quarter report.
Texas general contractor Brasfield & Gorrie planned for steel shortages, buying 4,200 tons of concrete reinforcing steel in advance, to help minimize delays while building a $169 million Galveston condo complex. That’s the same strategy companies used during the steel shortage of 2004 and during the 2005 shortage of tires for construction equipment. Sometimes that’s all you can do, but it’s easier if you have multiple suppliers.
Support in global markets for domestic products
The imprint “Made in America” isn’t as important as it once was, as other nations develop increasingly sophisticated, high quality products. And, the backlash against globalization encourages consumers and manufacturers to buy locally. An American-made product that incorporates components from the local country increases its local acceptance and support. Or, as Thompson says, “Buying from other nations helps you sell your own products there.” In some cases, it may be required, he adds. “It’s also a way to create awareness and to reduce costs,” Rizza adds.
The globally-sourced, Made in America business model is particularly true in the aviation industry, Thompson says, which uses it as a sales point. Boeing Corporation’s 787 Dreamliner, for example, is being constructed in Everett, Washington, but includes components from 43 of the world’s top aviation suppliers and electronically inks more than 130 supplier sites around the world. Major orders have been placed by airlines throughout the world.
NASA took the same approach in developing the International Space Station. Dominated by the U.S., it’s built from modules developed in many countries. The Canada Arm, for example, has been a source of Canadian pride for nearly three decades and appears prominently in many photos of the station. Last October (2007), NASA was preparing to launch an Italian component called “Harmony” to link the U.S-made Destiny lab with the European Space Agency’s Columbus module and Japan’s Kibo module. International cooperation, in this instance, shares the glory as well as the financial costs of exploring space.
Support in global markets for domestic products
The imprint “Made in America” isn’t as important as it once was, as other nations develop increasingly sophisticated, high quality products. And, the backlash against globalization encourages consumers and manufacturers to buy locally. An American-made product that incorporates components from the local country increases its local acceptance and support. Or, as Thompson says, “Buying from other nations helps you sell your own products there.” In some cases, it may be required, he adds. “It’s also a way to create awareness and to reduce costs,” Rizza adds.
The globally-sourced, Made in America business model is particularly true in the aviation industry, Thompson says, which uses it as a sales point. Boeing Corporation’s 787 Dreamliner, for example, is being constructed in Everett, Washington, but includes components from 43 of the world’s top aviation suppliers and electronically inks more than 130 supplier sites around the world. Major orders have been placed by airlines throughout the world.
NASA took the same approach in developing the International Space Station. Dominated by the U.S., it’s built from modules developed in many countries. The Canada Arm, for example, has been a source of Canadian pride for nearly three decades and appears prominently in many photos of the station. Last October (2007), NASA was preparing to launch an Italian component called “Harmony” to link the U.S-made Destiny lab with the European Space Agency’s Columbus module and Japan’s Kibo module. International cooperation, in this instance, shares the glory as well as the financial costs of exploring space.
Support to other organizational global operations
“Setting up factories helps you get local buy in and support, too,” Thompson says. Arranging joint ventures and research partnerships also can help swing buying decisions in your direction.
Boeing is a case in point. That company has a 60-year relationship with India and has become “the mainstay of the country’s domestic and intercontinental commercial fleets,” according to Boeing’s news releases. Air India bought its first Boeing jetliner in 1960 and within two years because the world’s first all-jet airline. It continued adding Boeing jets to its fleet, and so did other Indian airlines. The market was strong enough that by 2003, Boeing established a subsidiary in India to “strengthen its local presence” and to find “new ways to pursue growth and productivity initiatives.” Those ways include projects with India’s leading companies and research organizations.
Even before it established a subsidiary, Boeing began working closely with India’s leading software development companies on information technology projects and engineering data analysis projects. It since has partnered with the Indian Institute of Science to conduct research on aerospace materials, structures and manufacturing technologies, which are then integrated into Boeing’s aircraft. Some 2,000 Indian researchers are actively involved. Boeing’s R&D division also is collaborating with India’s national Aerospace Laboratory and has contracted with Hindustan Aeronautics Ltd. to manufacture some components and assemblies and to digitize engineering drawings.
Additionally, Boeing plans to invest up to $75 million for training facilities, mainly for Indian pilots and, working an Indian partner, another $100 million to build a maintenance, repair and overhaul facility in central India for Boeing planes.
Boeing is there because the market is strong the company can benefit from Indian expertise. A case can be made that India would have purchased Boeing planes anyway, so perhaps its coincidental that in 2006, Air India ordered 68 Boeing commercial jets—the largest commercial airline order in India’s history, worth $11 billion. Between now and 2026, Boeing projects that India will need 856 new commercial jets at a price tag of about $72 billion. Boeing spokespersons won’t draw any linkages between the company’s investment in India and sales of planes. Draw your own conclusions.
Global sources can be more reliable
This isn’t a given, but “it’s always a possibility,” Thompson says. Reliability has two aspects—that of the product and that of the supplier.
“I was buying candles from a supplier in China, and the order always arrived on time and in the proper quantities,” Thompson says. “This really is about finding a good supplier with a good reputation and then working with them to develop a deep understanding of your needs and their constraints and, oftentimes, a personal relationship.
The relationship can be at least as important as the actual business deal, particularly in countries in which the rule of law is still evolving, and suppliers will take care to get to know the potential buyers and their values. Without strong courts to enforce decisions, the deal is enforced by the relationship. “You have to travel and meet with them, and lay out your expectations,” he emphasizes. With that in mind, don’t expect to confine your conversations to the phone and Internet.
Sometimes the product itself is more reliable. Take the coatings industry as an example. Right now, red lead paint is the standard for coating steel to prevent corrosion. There are some challenges, though. Lead-based paint isn’t accepted in all locations because of environmental concerns. Additionally, steel that needs to be coated while in service—bridges, for example—can’t necessarily be cleaned sufficiently to allow the paint to adhere, and the paint also can’t always penetrate the crevices, joints and overlap points inherent in construction.
To address those problems, the Swedish firm Introteknik AB developed a coating system called Isotrol that penetrates the existing paint, rust and grime to protect the steel. Independent tests indicate the coating protects for 15 to 20 years in highly corrosive environments, which is far longer than competing products, according to the just-released Frost & Sullivan report, “Advances in Corrosion Protection Technologies.”
Joint ventures
Joint ventures may help firms access local expertise and talent, advance a product or take advantage of trade agreements. They’re a mainstay in the pharmaceutical and biotech industries, which rely on joint ventures to get innovative products to market. In those industries, typically the biotech firm develops a drug into or through the clinical trials stage and then partners with a larger pharmaceutical company to bring the drug to market. In recent news, German pharmaceutical giant Boehringer Ingelheim and U.S. biotech firm Vitae Pharmaceuticals, Inc., launched a collaboration to develop and commercialize a compound to treat diabetes and other metabolic diseases.
The benefit to Vitae Pharmaceuticals is the upfront and near-term payments of $35.6 million, in the form of cash, research funding and an equity investment, plus the possibility of up to $300 million in future payments as predetermined milestones are met, with royalties also coming from future sales as Boehringer Ingelheim leads the development and commercialization of the compound. Vitae Pharmaceuticals maintains the right to develop the research for other indications. In exchange, Boehringer Ingelheim gets access to an innovative compound without the intensive, early stage development work.
Collaborations like the Boehringer Ingelheim/Vitae Pharmaceuticals agreement make business sense because they exploit the skills of both companies to do something neither could do easily alone.
When joint ventures are formed mainly to access local markets, however, they may not be such good deals. As companies become increasingly globalized and source from many nations, international joint ventures can actually muddle operations. Research from Harvard University and the University of Michigan indicates the value of working alone has a better financial outcome than collaborating when companies have global production or sourcing operations or when they want to leverage a global network of affiliates.
In those scenarios, the interests of the local partner—getting more business from the company—may conflict with those of the multinational firm. Oftentimes, the expertise companies seek through joint ventures can be accessed through other vehicles that allow the firms to retain ownership. So, before forming a join venture, look carefully at what each partner offers as well as at the potential pitfalls before proceeding. wt
Sidebar: The Sweet Life
Mark Thompson is the global commodity leader for Pioneer Hi-Bred International, the world’s leader in advanced plant genetics. His background, though, is in candy.
“Practically all candy comes from outside the U.S.,” Thompson says. “Look at the fine print on the candy bag or box. It usually says ‘distributed by’ rather than ‘made by,’” he says.
That change occurred shortly after Thompson entered the candy business in the late 1980s. “U.S. subsidies to sugar farmers drove the price up,” he says, so that it was nearly double world prices. Candy companies balked, but Congress didn’t budge. Consequently, most U.S. candy companies closed their U.S. factories and moved offshore. As purchasing manager for the aptly named Foreign Candy Company, he purchased candy mainly from Mexico, which he says is still a major supplier for the U.S. candy market.
But eventually, Thompson decided that man could not live by candy alone. He needed some spice in his life. What he found was the world of garlic, vanilla, cinnamon, which he sourced for Tone’s Spices, searching out the combination of quality and price that has made Tone’s Durkee, Spice Islands and French’s brands household names. Many of these spices grow only in well-defined regions, but plant geneticists have been working for decades to extend their growing conditions. Thompson is working with them now, at the world leader in advanced plant genetics, Hi-Bred International, Inc., which conducts research in 25 countries and production facilities throughout the world. Ironically, he says, “Now I don’t do a lot of global sourcing.”
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Korea to Resume Imports of U.S. Beef
Despite pubic protests that prompted it to delay the move twice, the Korean government has given the go-ahead to lift the country’s ban on imports of U.S. beef. As a result, a two-stage process under which Korea will fully reopen its market to all U.S. beef and beef products is expected to begin during the week of June 2. However, three Korean political parties have filed a lawsuit seeking to keep the ban in place. The issue has also stalled efforts to secure legislative approval of a free trade agreement with the U.S., which will have to be resubmitted to the new National Assembly that began its four-year term May 30.
World Trade/Interactive
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APEC Trade Ministers Discuss FTAs, Corporate Social Responsibility
Trade ministers from the member countries of the Asia-Pacific Economic Cooperation forum gathered in Peru recently for their annual meeting. Among the topics of discussion were the development of the Free Trade Area of the Asia-Pacific and how to promote corporate social responsibility in the region.
FTAAP. The ministers reiterated the importance of further analyzing the long-term prospect of the Free Trade Area of the Asia-Pacific and instructed officials to continue their intensive work program on this issue. One of the possibilities for creating the FTAAP is by merging the dozens of regional and bilateral free trade agreements (RTAs/FTAs) already in effect, and the trade ministers welcomed a recent report evaluating the convergences and divergences among these agreements. U.S. Trade Representative Susan Schwab said last year that work toward the FTAAP and similar agreements could accelerate if the Doha Round of multilateral negotiations “disappears from the scene.”
Corporate Social Responsibility. Trade ministers discussed the role that APEC can play in developing corporate social responsibility in the region, which appears to be a new topic for the group. They noted that CSR has been developing at different speeds and in different directions within all APEC economies over recent years; that each approach reflects local factors, distinct business cultures and economic structures; and that CSR is most effective when it is led by the private sector and takes these different approaches and development levels into account. While many countries, companies and international organizations have developed effective CSR practices and guidelines that could serve as useful models, the ministers agreed that APEC (especially through the APEC Business Advisory Council) could play a promoting and facilitating role in CSR awareness and best practices in both the public and private sectors. They therefore encouraged officials to work closely with ABAC to develop an APEC CSR agenda for consideration by APEC leaders this year.
Model Trade Agreement Measures. APEC is in the process of developing model measures for RTA/FTA chapters in order to promote high-quality agreements than can further increase trade and investment liberalization in the region. Trade ministers have now endorsed model measures for chapters on competition policy, the environment and temporary entry of business persons. They also called on officials to accelerate efforts to complete the work on all remaining model measures by this November.
Investment. Trade ministers welcomed continued work on a study of bilateral investment agreements and the core investment-related elements of existing FTAs in the region, which is being undertaken with a view to developing core principles for investment agreements. They also endorsed the Investment Facilitation Action Plan for 2008-2010, which they said “constitutes a significant achievement for APEC this year.” Officials will now continue their work on IFAP by developing a work program on implementation of the actions agreed in that plan.
World Trade/Interactive
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WTO Review Highlights Continued Challenges for Businesses in China
The World Trade Organization recently completed a trade policy review of China. The review found that while China’s efforts to liberalize trade and investment are moving forward, the country continues to face a number of challenges that will affect those doing business there. Highlights of the report’s findings include the following.
Economic Environment. China is continuing to benefit from its trade and investment reforms. Per capita gross domestic product rose from $1,490 in 2004 to $2,017 in 2006 and the number of people living on less than $1 a day has decreased to about 10 percent of the population. In 2006, China’s total trade in goods alone accounted for about 65 percent of its GDP and 13 percent of global trade. These figures “demonstrate clearly the value of integrating more liberal trade and foreign investment policies into broader macroeconomic and structural reforms in order to promote economic development.”
On the negative side, the review notes (1) the continuing imbalance in the sources of economic growth, which has been driven much more by exports and investment than by consumption; (2) the inefficient allocation of most investment due to factors such as incentives and other forms of assistance accorded to manufacturing; and (3) the exacerbation of environmental problems and income inequality. The government has taken a number of policy initiatives to address these problems, including trade policy measures such as taxes and reduced value-added tax rebates on exports, but their effectiveness is questionable.
Trade and Investment Policy. The overall aim of China’s trade policy continues to be accelerating the opening of its economy to the outside world in order to introduce foreign technology and know-how, develop foreign trade and promote “sound economic development.” China aims to further strengthen the multilateral trading system but has also been intensifying its pursuit of bilateral and regional free trade agreements.
In addition, although some aspects of its trade policy remain opaque, China has continued to adopt measures to increase the transparency of its trade and trade-related policies, practices and measures. It has also introduced or amended various rules and regulations to further liberalize foreign direct investment and establish a more rules-based and predictable business environment for foreign investors.
Trade Policies and Practices. The review outlines a wide range of Chinese trade policies and practices that affect those doing business there, including the following.
• Tariffs remain one of China’s main trade policy instruments. The overall average applied most-favored-nation tariff was 9.7 percent in 2007 (unchanged from 2005), including 15.3 percent for agricultural products and 8.8 percent for non-farm goods.
• Some non-tariff barriers have been reduced; e.g., the number of lines subject to automatic import licensing has declined and measures have been adopted to increase the alignment of national standards with international norms.
• Other barriers remain: the sanitary and phytosanitary regime remains complex, government procurement from foreign companies is substantially limited, and an already complicated export regime has become considerably more restrictive and covers a large and growing number of products.
• China has continued to use policy tools to channel resources into certain activities in order to promote investment in high technology, encourage innovation and protect the environment (e.g., by reducing energy consumption). These tools include tax incentives, non-tax subsidies, price controls and various forms of “guidance,” including sector-specific industrial policies.
• State-owned enterprises continue to play a dominant role in the economy, accounting for some 35 percent of GDP, and enjoy monopoly positions in certain sectors. A main challenge to SOEs is raising their productivity through further reforms; private firms operating in China, especially foreign-invested enterprises, are generally more productive than SOEs.
• Having concentrated much of its past reform efforts on manufacturing, which tends to be capital-intensive, the government’s attention is now turning to services, which tend to be more labor-intensive. If they are sufficiently competitive, services have the potential in the long run to generate new jobs for surplus labor currently located in rural areas.
• China’s energy sector continues to be characterized by a high level of state ownership, regulation and limited competition. The government regards energy as a strategic commodity and has therefore adopted a gradual approach to reforming the sector. As a result, consumers remain insulated from global markets, while trade restrictions and regulatory barriers protect domestic producers from international competition. The result has been artificially low prices and higher energy use domestically, which is helping drive up demand and prices globally and contributing to environmental problems.
• While the government’s intention is to open the services sector further to private and foreign participation as a means of boosting growth and providing alternative employment to agriculture, the pace of liberalization has been slower than that for manufacturing, and as a result most services sectors are still subject to a high degree of state control and lack of competition.
Outlook. With its vast human resources, high rate of investment in physical and human capital, strong growth in labor productivity and increasingly market-oriented economy open to international trade and foreign investment, China has the potential to sustain its rapid growth in the foreseeable future, albeit at a somewhat slower rate as its economy matures and its labor force starts to shrink. In order to realize this potential, however, China needs to continue to address a number of important social and economic challenges. These include widening income disparities among regions and between urban and rural areas, facilitating the movement of surplus labor from agriculture into other activities, increasing research and development expenditures and improving the protection of intellectual property, increasing government spending on social services (thus raising consumption and reducing reliance on exports for growth), dismantling impediments to the efficient allocation of land, energy, water and other natural resources, and further reforming the tax system.
China Identifies Problems, Goals. In the report it submitted as part of the WTO review, China identified a number of problems confronting the further development of its foreign trade.
• a high percentage of its exports continue to be of an energy-intensive, high-emission and resource-intensive nature
• exports are still concentrated on a few markets and further efforts to diversify are needed
• trade protectionism is rising among some WTO members
• China has been subject to the largest number of antidumping actions in the world for 13 consecutive years
• technical standards and sanitary and phytosanitary measures have become major obstacles to China’s exports, causing $75.8 billion in direct losses and $143.7 billion in lost trade opportunities in 2006
The government also outlined its economic and trade priorities for the next few years, which include the following.
• changing the underlying mechanism for economic growth by (a) moving toward an approach that coordinates consumption, foreign investment and exports; (b) shifting away from a reliance on manufacturing and toward a combination of agriculture, manufacturing and services; and (c) reducing the consumption of material resources and focusing instead on scientific and technological progress, labor quality improvement and innovation in management
• further enhancing the quality and safety of foods, drugs and other consumer goods
• reforming the resource tax system to improve the system of compensation for the use of resources and the compensation mechanism for damage to the environment
• expanding pilot programs on VAT reform and possibly expanding those programs nationwide
World Trade/Interactive
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