2020 Global Trade: It’s a Whole New World
From tariffs and trade wars to new trade agreements and updated INCOTERMS, 2020 is shaping up to be an interesting year for global shippers.
Managing Trade Compliance in a Volatile Environment
Tariffs and socio-economic conditions create volatility for businesses involved in global commerce. These issues can disrupt business cycles and create financial risk.
Businesses operating globally are subject to specific regulatory policies enforced in every country involved in the end-to-end supply chain. Naturally, the potential for fines and penalties requires extensive research and close governance of ongoing trade compliance programs to remain abreast of each sovereign nation’s trade regulations and agreements.
The compliance target is ever moving. To mitigate the risk of noncompliance, companies must scrutinize every detail of their trade process to identify gaps that increase exposure to financial risk.
International shippers can’t afford to gamble on compliance, as penalties are costly. U.S. Customs and Border Protection (CBP) scrutinizes imports using the Harmonized Tariff Schedule (HTS) to classify raw material or finished goods based on material makeup, product name, and/or intended use.
This close examination creates added risk and exposure for importers and exporters in an era of uncertainty for trade agreements and emerging security threats.
The Impact of Noncompliance
During the past two years, trade tensions have been disruptive to U.S. businesses impacted by product- and origin-specific tariffs. Added layers of administrative enforcement create additional risk.
Free-trade agreements negotiated with various countries provide U.S. businesses the ability to easily sell products to those countries with lower import duties, reducing barriers to U.S. exports.
The United States—Mexico—CanadaAgreement (USMCA) recently replaced the North American Free Trade Agreement (NAFTA). The USMCA includes new policies on cars, labor, environmental standards, intellectual property, and some digital trade. It also gives U.S. manufacturers more protection.
Meanwhile, the United States just entered a “phase one” deal with China, agreeing to “halve 15% duties on $120 billion of imports and delay others in return for Chinese promises to make structural reforms and purchase an additional $200 billion in American goods and services over the next two years,” reports the American Journal of Transportation. Phase two will likely take place after the presidential election.
The passage of the Trade Facilitation and Trade Enforcement Act (TFTEA) necessitates awareness of evolving terms in trade agreements. The measure gives CBP a mandate to increase trade enforcement by focusing on trademark violations, anti-dumping, countervailing duty, social compliance, and established general trade compliance practices.
The e-commerce-driven explosion of small-package shipments across the U.S. border compels CBP to address new security threats emerging in this channel and ensure all revenue due to the U.S. government is collected.
As a result, CBP investigators are questioning HTS numbers, particularly for targeted items and imported products that reflect an HTS classification change possibly spurred by the assessment of a higher or recently adjusted duty.
Compliance is a journey, not a static program that sits on a shelf. It has to be an ongoing process of assessment and evaluation. As a matter of best practice, corporate executives need to focus their attention on the three top issues of trade compliance.
1. Know the regulations and tariffs that CBP enforces on goods imported into the United States and how to stay aligned with ever-changing HTS requirements. This involves using an import management process that is designed and constantly maintained as a matter of corporate control.
2. Have a plan if your organization loses the benefits free-trade agreements offer. Executives need contingency strategies to overcome the loss or change to agreements like USMCA or adjustment to parameters for participants in the Generalized System of Preferences, which grants duty-free treatment of goods of designated beneficiary countries.
3. Take on the mindset of proactive compliance, including record keeping, supervision and control, and classification processes. Informed compliance is more than a best practice. It is the law. For decentralized organizations, compliance is difficult to manage without documented processes and ongoing training.
Many importers and exporters recognize that it is a best practice to seek independent evaluation of their compliance platform. Independent Verification and Validation (IV&V) requires a knowledgeable partner that helps identify high-risk areas, uncovering gaps and inconsistencies that could lead to fines or other punitive damages. Your IV&V partners must also introduce a compliance platform plan to close the gaps.
—By Rick Brumett
Vice President, Client Solutions
Incoterms Update Guides Global Trade
A consistent set of business terms helps international trade flow smoothly. The Incoterms, published by the International Chamber of Commerce (ICC), is a set of 11 conditions that importers and exporters use voluntarily to manage responsibility for shipments.
In January 2020, the ICC released the 2020 Incoterms, the first update since the 2010 set. The 2020 terms don’t contain significant changes. In fact, companies can continue to use the 2010 terms if all parties agree, or the parties can opt to spell out terms in the sales contract and not refer to Incoterms at all. Still, the terms are a convenient way to ensure all parties in the transaction understand their responsibilities.
The Incoterms spell out the responsibility only for the movement of goods, not their title or ownership. “Incoterms describe when the responsibility for risk and cost moves from the seller to the buyer, that’s all,” says Tom Cook, an international business consultant.
Uncertainty is The Word For 2020
Current global trade policies create a level of uncertainty that makes it difficult for importers to project costs and volumes.
“The ongoing tariff situation and trade uncertainty are concerns, despite having the U.S.-China phase one deal in place,” says Jonathan Gold, vice president of supply chain for the National Retail Federation. “The trade deal is a small step forward, but we still have tariffs on $370 billion worth of trade with China, which can change any time the United States decides China isn’t living up to its commitment under the agreement.”
Also on the global trade radar is the European Union (EU). Certain products, food, and beverages from the EU could be slapped with a 100% tariff as the United States fights against Airbus subsidies that represent an unfair marketplace advantage over Boeing. There’s also talk of a 25% duty on autos imported from the EU.
“It’s difficult to shift sourcing strategies around the EU,” Gold says. “You can’t get French wine or Italian olive oil from anywhere else.”
Brexit also looms as an unknown. The United States and the United Kingdom will have to negotiate new trade deals as the country leaves the EU.
Over on the trans-Pacific, ocean rates have climbed as trade surged during the past several years, but tariffs are changing that situation. For example, the International Housewares Shippers Association is negotiating ocean carrier rates for 2020 with 10 carriers. In 2019, the contracts were focused on making sure shippers would get their loads on vessels. This year, rates are expected to be flat or possibly decrease due to lower volumes on the contract year that runs May 1 through April 30.
“We want to make sure we’re committing enough volume so that if space does get tight, carriers will continue to load cargo,” says Jeff Bergmann, executive director, International Housewares Shippers Association. “If they don’t, you have to go to the spot market where rates are high.”
Lower volumes moving through West Coast ports could be a blessing in disguise, allowing terminals and port truckers to address issues that cause congestion and slowdowns.
Domestic carrier rates may be soft as well, with spot rates at or below contract rates. “This is a great opportunity for the ports to work through congestion and efficiency issues,” Gold says. “Turn times at some terminals are longer than they need to be.”
Also, the impact of the International Marine Organization’s 2020 low-sulfur fuel requirements for ocean vessels could impact rates and sailing availability in the coming months as the carrier community adapts to the new regulations.
Logistics Execs Worried Despite U.S.-China Trade Deal
Even after a signed trade deal that de-escalates months of back-and-forth trade retaliation between the United States and China, logistics executives say that a U.S.-China trade war is the top threat to global growth.
Agility and Transport Intelligence recently surveyed logistics professionals on the global economy and the leading threats to growth in 2020. Twenty-eight percent of respondents see a U.S.-China trade war as the biggest threat to global growth in 2020. U.S.-Iranian tensions were next, followed by a slowdown in the Chinese economy.
Three of the leading threats involve China, which highlights its growing importance to the global economy and its ability to affect the fortunes of other countries.
The USMCA: Finally Ratified! What to Expect
Before the United States-Mexico-Canada Agreement (USMCA) was ratified on Dec. 19, 2019, the U.S. International Trade Commission had submitted aneconomic analysisof President Trump’s signature trade agreement meant to replace NAFTA.
The analysis report was carried out by the independent and bipartisan International Trade Centre (ITC), which assessed the USMCA’s impact on the U.S. economy as a whole as well as on individual sectors of the economy. That assessment included the deal’s predicted impact on gross domestic production, imports, exports, employment, production, and more.
What were the report’s big-picture conclusions? Positive.
The USMCA will be slightly positive overall for the U.S. economy and employment, the report noted. The ITC’s model estimates that the USMCA will raise U.S. real GDP by $68.2 billion and create 176,000 U.S. jobs.
While significant in absolute terms, this is only a 0.35% and 0.12% increase, respectively, compared to the status quo. Trade overall with Canada and Mexico would increase by more though, with exports projected to grow by 5.9% and 6%, respectively, and imports by 4.8% and 3.8%, respectively.
Most of the growth resulting from improvements, however, will not be caused by a reduction of tariffs, since most tariffs are already zero under NAFTA. The U.S. economy will mostly reap the benefits of provisions on digital trade and changes to the rules of origin for auto.
Since NAFTA was created at the dawn of the internet, it does not contain provisions designed to tackle the digital world we now live in. The USMCA would establish and clarify rules on digital trade, removing the current uncertainty on the issue and ensuring that data flows openly among the three nations.
The new provisions on the auto rules of origin would also increase U.S. production of auto parts and the number of people in the United States employed in this sector.
Which USMCA rules are projected to have a relatively large economic impact?
The report highlighted the significant impact digital and automotive trade rules will have on the economy.
Digital trade and e-commerce. The USMCA would be the first U.S. free-trade agreement that includes a chapter specifically on digital trade. Digital trade provisions would affect not only traditional digital companies but also benefit firms across sectors including manufacturing and agriculture.
The report also highlighted international data transfer provisions that reduce policy uncertainty as the most important components of the digital trade chapter. The USMCA includes provisions that would both prohibit “discriminatory treatment of cross-border data transfers” and forced data localization.
In all three member countries, the transport industry, the financial services sector, and the construction industry would experience the greatest reductions in trade costs stemming from the cross-border data transfer provisions in the USMCA, the report noted.
The biggest winner of the new data transfer provisions would be the Canadian banking sector, which would benefit from a cost reduction of 4.5%.
Meanwhile, the cost reduction effect would be smallest in the agriculture sector at 0.56% across all three economies. Interestingly, the report acknowledged that cost reduction estimates across the board would likely be lower if they took into account measures on data localization and data transfer already committed to by Canada and Mexico under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
In addition to provisions ensuring the free flow of data, U.S. firms in the business-to-consumer (B2C) e-commerce sector, such as Amazon and eBay, would also benefit from higher de minimis thresholds (DMT) in Canada and Mexico. Canada wouldincreaseits DMT for customs to C$150, up from C$20, while Mexico agreed to increase customs DMT from $117, up from $50.
Shipments whose value falls below the DMT are exempt from customs duties and taxes, and undergo faster clearance and customs checkpoint processing. Thus, higher DMT thresholds would lower costs and expedite delivery processes for U.S. firms shipping to Canada and Mexico. The ITC report estimates that U.S. e-commerce exports to Canada and Mexico would increase by $332 million and $91 million respectively.
Gains from higher DMT on customs duties would be partially offset by relatively low DMT for taxes—U.S. shipments to Mexico and Canada would still be subject to taxes if they pass a threshold of $50 or C$40, respectively.
—By William Alan Reinsch
Senior Advisor and Scholl Chair in
Scholl Chair in International Business
Program Manager and Research Associate
Scholl Chair in International Business
Coming to Terms With Incoterms
The Incoterms represent a spectrum of responsibility and costs. On one end, Ex Works means the seller is responsible only for packaging. The buyer bears other expenses—loading, delivery to the port, export duties and taxes, security clearances, terminal charges, import duties and taxes, and delivery charges.
At the other end of the spectrum, Delivered Duty Paid means the seller is responsible for all costs.
One noticeable change for 2020 is the renaming of Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU). This change reflects the fact that the buyer or seller may want to have goods delivered someplace other than a terminal.
DPU is often utilized for consolidated containers used by multiple consignees. It’s the only term in which the seller is responsible for unloading the cargo.
The Free Carrier (FCA) term was updated to allow parties in the contract to agree the buyer could issue a bill of lading with an on-board notation to the seller.
The change overcomes the problem when the seller has to load the cargo on a transport hired by the buyer that’s not the final international carrier. If the transaction uses a letter of credit as the payment method, the bank will often require the seller to present a bill of lading with the on-board notation. However, international carriers would not display the notation on a bill of lading because they didn’t receive the goods directly.
Now, the forwarder or transportation company can issue a bill of lading or carrier receipt that helps in getting paid under letters of credit.
The Cost Insurance & Freight and Carriage Insurance Paid To (CIP) terms are the only ones that require sellers to provide insurance. Now, under the CIP term, the seller has to provide a marine insurance policy of at least 110% of the cargo’s value as part of their transaction responsibilities.
Appointing a point person to manage the process for the company is a recommended best practice.
EXW: Ex Works
FCA: Free Carrier
FAS: Free Alongside Ship*
FOB: Free On Board*
CFR: Cost & Freight*
CIF: Cost Insurance & Freight*
CPT: Carriage Paid To
CIP: Carriage Insurance Paid To
DAP: Delivered at Place
DPU: Delivered at Place Unloaded
DDP: Delivered Duty Paid