One of the many important questions being asked at the start of 2012 is when should international traders expect to take advantage of the new free trade agreements (FTAs) with Korea, Panama, and Colombia? Once President Obama issues the authorizing Executive Orders, Customs and Border Protection (CBP) will still need to publish proposed regulations. Based on the number of FTAs already enacted under U.S. law, it appears the general format and content of those regulations are fairly well set. However, the formalities must nonetheless be followed. It remains to be seen how quickly CBP will publish those regulations, whether the comment period will be more than thirty (30) days, and just how quickly thereafter the final regulations will become effective. The only thing certain is that it will be at least a few more weeks before the new FTAs are implemented under U.S. law.
In the meantime, there are a number of ways international traders may prepare for that inevitable implementation. From public reports, it is well known that one of the most fruitful ways CBP raises revenue is by auditing trade preference program claims, since many importers are not able to support them. Having proper documentation in hand before making the claim, therefore, is key. To that end, the first thing to do is read the agreement to determine its requirements as they apply to you, along with the rules of origin relevant to your goods. Relying on what your supplier tells you is not enough, nor can you simply tell your buyers that the goods you are selling are compliant. You must have supporting documents. You must be able to document compliance. While Korean customs officials have said publicly that Korea intends to certify its companies, it is not clear what will be certified or what certification will mean, and similar certification assurances have not been forthcoming regarding companies in Panama or Colombia. The best thing for you to do is document your compliance irrespective of any “certifications.”
Next, consider how you are interacting with your suppliers. If you rely on purchase orders, what needs to be added to your standard terms and conditions? If your orders are placed via emails or phone calls, what documentation should you be routinely requesting from your suppliers? Just how far into the supply chain will your suppliers be willing to let you go?
If you are an exporter, what can you expect your buyers to demand? What documentation are you currently gathering from your suppliers? What may need to change regarding your method of product acquisition or production? What more will be demanded of you? Remember, just because you purchased something in the U.S. does not mean it qualifies as U.S.-made, even under these FTAs.
Most products will likely be eligible based on tariff shift, the rule of origin that requires an analysis of all the components, input, raw materials, and consumables in a given shipped product to make sure the necessary change in classification has occurred. These classification changes are driven by the Harmonized Tariff Schedules and not Commerce’s EECNs or State’s ITAR classifications. In some cases, value added will need to be considered. Will you be able to get the value breakdowns you need from your vendors? Are you willing to provide such sensitive information to your buyers? It’s time to start having conversations with your business partners on these and related topics. Can you obtain the origin certifications you need from your suppliers and others? Do you have the records necessary to support any origin certifications you issue to your buyers? Can you put together a costed bill of materials that accurately discloses the origin and cost of each component, input, raw material, consumable, and anything else that went into making the product you are buying or selling, including labor and general overhead? If you do not qualify based on tariff shift, can you still qualify based on the de minimis rule or some other exemption? Are you confident that you will be able to support your own origin certifications should you get audited in the future? Do you have the proper record-keeping program in place? If you have these important conversations now, enlist the help of your trade professional team, and adjust your way of doing business accordingly, you will be ready to take full advantage of the free trade agreement of interest to you as soon as it takes effect. If you are making claims under other FTAs, these recommendations also apply.
Remember, in the U.S., if you are the importer and fail to support your FTA claims, significant fines can follow. Many foreign countries seem to be following suit. In some countries, the penalty for making unsupported claims is incarceration. Besides the significant fines and/or jail time, there are the inevitable and often more onerous challenges dealing with your customers and trade partners down the road. Reason enough to use this time wisely.