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1. My name is George Thompson.  I am a partner in the law firm Neville Peterson.  We have offices in Washington, DC and New York, NY.  My law firm specializes in import and export law in the United States.  I have been practicing law in this area for 28 years, since I graduated from Cornell Law School in 1981.  I have also worked in the U.S. government on import issues, and I teach several graduate level courses at George Mason University in Virginia on import and export law.

2. What I would like to discuss with you today are the most important laws that are enforced by U.S. Customs and Border Protection agency, which is a branch of the United States government.  As in China, the customs authorities in America are responsible for collecting duties and taxes on imports, making certain that merchandise presented for importation is legally permissible to come into the country, and for determining whether the documentation presented with an import is correct.

3. Now as exporters, you may take the view that American import laws are a concern only to the importer of merchandise.  After all, you may reason, the importer is the party that has legal responsibility for paying the duties and making certain that the merchandise can enter through customs.   The importer is responsible for meeting all legal formalities.  In international sales contracts, unless the exporter has sold the goods DDP – or delivered duty paid – the exporter is not responsible for customs formalities at all.

4. However, I believe that taking that view would be short sighted if you were to believe that the exporter has no interest in the customs process and, from a legal standpoint, it is actually incorrect in a number of different ways.

5. There are two reasons why a Chinese exporter should be aware of U.S. import requirements and should provide its purchasers with assistance in meeting those requirements.  The first reason is customer satisfaction.  If you can provide your buyers with merchandise that meets all U.S. Customs requirements, you will help them to avoid importation costs and delays and even possible rejection of the merchandise from importation.  Helping your customers avoid these problems will make them pleased with you.

6          The second reason is that many U.S. legal requirements are, in fact, the responsibility of the foreign exporter to comply with, for example, properly marking the merchandise with the country of origin, and complying with cargo security requirements.  There are quite a few of these.  Depending on the terms of your sales contracts, you may be required to ship merchandise that complies with U.S. Customs requirements, and in fact, you may be considered to be in breach of your contract if you do not ship compliant merchandise.

7. Therefore, learning about U.S. Customs requirements will at a minimum provide you with a competitive advantage over other exporting companies that lack such knowledge and will help you avoid legal complications with U.s. Customs and with your importer.

8. Now first, I would like to discuss the importation process in the United States.  This process involves what is called the entry of merchandise.

9. Entry must occur at an official U.S. Customs port.  There are 325 ports of entry located in the United States.  These include seaports located that are on the coasts, ports on rivers and lakes, airports, and ports in internal cities where merchandise is sent after it first arrives in the U.S.  The port of entry is not necessarily the same port where the merchandise first arrived.  The importer may decide to file the official entry papers at a different port, such as one closer to its business location.

10. What do we mean by the term entry?  “Entry” refers to two simultaneous activities.  One is the physical act of moving goods into the country. The other is the legal process of filing the documentation required to import the goods and to pay the duties.  The act of entering merchandise thus includes presenting paper or electronic documents to U.S. Customs as well as tendering of duties.  The documents must have sufficient information to allow U.S. Customs to determine whether or not to release the goods to the importer.  The documents also must include information regarding the tariff classification, value, rate of duty, and country of origin of the merchandise.

11. The most common form of entry is called a consumption entry, and so this is the procedure we will discuss first.  A consumption entry allows goods to be released into United States commerce, with no further control by U.S. Customs authorities. 

12. Under a consumption entry, the importer must file the entry documents with U.S. Customs within 15 days after the physical arrival of merchandise arrives in a U.S. port of entry, but this period may be extended by U.S. Customs upon the importer’s request.  In most cases, the entry documentation is actually filed before the goods ever physically arrive in the port, and is filed by electronic transmission.

13. The entry documentation must include (1) a Customs entry form 3461, (2) evidence of the importer’s right to make entry, for example, proof that the importer owns the merchandise or is the consignee of the merchandise, such as bill of lading, or carrier’s delivery to the person making entry, (3) a commercial invoice, (4) a packing list, and (5) any documentation required by other U.S. government agencies.  The commercial invoice and packing list are prepared by the exporter of the merchandise.  These are considered to be regulatory documents, as well as commercial documents.

14. The only persons with the right to make entry are the owner or purchaser of goods, someone with a financial interest in the goods, or an appointed customs broker licensed by U.S. Customs to conduct customs business on behalf of others.

15. The importer must have obtained a surety bond, to guarantee that the customs duties will be paid.  The surety will be responsible for payment of duties, in the event that the importer is unable or unwilling to pay the duties when the bill is issued by U.S. Customs.

16. Within 10 days after the date of entry, the importer must file what is called an entry summary (which is on Customs entry form 7501) with estimated duties attached.  The entry summary includes documentation concerning the nature of the merchandise, the classification and the value.  Thus, under the U.S. entry system, submission of the full entry documentation and payment of duties follows clearance of the goods by U.S. Customs, so the importer can have physical possession of the goods before it pays the duties.

17. U.S. Customs also has the right to physically inspect the merchandise, even if all the entry documentation is in order.  Reasons for inspection can include confirmation that the entry documentation is accurate, for example, that it accurately describes the goods being presented, ensuring that there is no contraband being smuggled with the merchandise, and making certain that U.S. security restrictions are met.  In fact, however, the vast majority of imported merchandise does not undergo physical inspection by U.S. Customs.

18. As a result of the entry process, merchandise will be released from Customs custody into U.S. commerce.  In certain circumstances, and these are very rare, U.S. Customs can order redelivery of the merchandise, if it later discovers that it should not have allowed release of the goods in the first place.  Customs can order redelivery up to 30 days after release for most types of products and up to 180 days after release for textile products. 

19. Next I’d like to discuss Customs custody.  This is a legal term that means that Customs has not yet released goods from its physical possession and that legal movement into the U.S. beyond control of Customs is not yet permitted  Merchandise must remain in Customs custody until it has been released by U.S. Customs.  In most cases, U.S. Customs will authorize immediate entry of merchandise, meaning that all legal prerequisites have been met and the goods will be released immediately to the custody of the importer.

20. If U.S. Customs does not authorize release, the goods must remain in Customs custody, meaning that they cannot legally enter the United States.  

21. Reasons for keeping merchandise in Customs custody may include, for example, the importer’s failure to file the entry documents, the need for more information to determine whether the merchandise is admissible into the United States, and a decision by U.S. Customs that the merchandise is not admissible, meaning it is not allowed any further into U.S. territory.  Each U.S. port of entry has a special, high-security area for where goods in Customs custody are kept.  These areas are for placement and storage of arriving cargo until it has been released.  When U.S. Customs holds onto goods in this manner, it is referred to as “detention”.  So goods that remain in Customs custody and cannot be released into U.S. commerce are considered detained – subject to detention.

22. If U.S. Customs refuses to release the goods, there are a few options for the importer to pursue.  It may try to address the problem identified by U.S. Customs, for example, missing paperwork or improper country of origin labeling of the merchandise.  The importer can file an administrative protest against the refusal to release the goods, presenting arguments to Customs why the decision to detain the merchandise is legally incorrect.  In some cases, the importer may be permitted to ship the goods from the U.S. to a third country.  If it cannot fix the problem or find another market to ship the goods, the importer may abandon the goods, meaning that they become the property of U.S. Customs and can be sold or destroyed.

23. U.S. Customs also may seize the merchandise in certain circumstances, for example, when counterfeit goods are presented for importation, meaning that the goods will neither be authorized for entry nor released to the importer.

24. Seizure can occur when the merchandise is prohibited.  I mentioned counterfeit goods; it can also include illegal drugs or other products that are contrary to U.S. law.  There are a number of circumstances in which products can be seized.  Once goods have been seized, the importer generally must file a case in Federal court to get them released by U.S. Customs.

25. Next, I will discuss what happens after the goods have been released by U.S. Customs.  Even though the importer has made estimated duty deposits, this is not necessarily the final determination of its duty liability, and this is a very important point to keep in mind

26. U.S. Customs has up to one year to take the step called “liquidation” of the entry.  Liquidation is the final determination of duty liability.  U.S. Customs can increase or decrease the duties, if it finds that there was an error in the initial duty deposit amount.  In most cases, the entry liquidates with no change in the duties.  If U.S. Customs does not act within a year, the entry automatically liquidates at the entry deposit amount.

27. It is very common for the importer to disagree with decisions of U.S. Customs.  In that case, it can file what is called an administrative protest challenging those decisions.  The protest is filed with the same agency -- U.S. Customs – that has made the determination that is being challenged.  It can only be filed after the entry liquidates, and it must be filed within 180 days of the liquidation date. Now very often, when importers file protests of Customs decisions, they will look to the foreign exporter to provide them with documentation or other assistance in support of the protest.  If that ever occurs with one of your customers, you want to be very certain that you provide them with the necessary information, because the information you provide will be essential to overturning an adverse decision by U.S. Customs through the protest process.

28. You may ask whether U.S. Customs will be fair in reviewing its own decisions.  My answer is that U.S. Customs uses the protest process to correct its own factual and legal errors, so the process is fair.  However, if U.S. Customs has taken a legal position and does not change its mind after a protest and the importer still disagrees with the decision, the importer can appeal the decision to the U.S. Court of International Trade.  That court is a federal court with special expertise in import matters.

29. So you can see that the U.S. system has many procedural safeguards to protect the rights of importers.  Although this is a benefit, the drawback is that it takes a great deal of time in most cases to adjudicate disputes with U.S. Customs.  So we have procedural protections on the one hand, but a fairly lengthy process on the other hand, which is designed to permit both sides to present their case.

30. There are several types of entries other than consumption entries.  These entries permit the importer to either avoid or defer payment of duties.  They all involve some degree of continued oversight of the merchandise by U.S. Customs. 

31. A Transportation and Exportation entry is used when the merchandise arrives in a U.S. port, but is going to be sent to another country.  For example, a container that arrives in Los Angeles for subsequent shipment to Mexico or Canada would generally be covered by Transportation and Exportation entry.  This type of entry does not require the importer to pay Customs duties.  The importer obtains a surety bond to guarantee that the goods are exported.  Assuming that exportation takes place, there is no further Customs liability.

32. A Warehouse entry is used when goods are placed in a Customs bonded warehouse.  A bonded warehouse is a secured structure where merchandise can be stored without payment of Customs duties.  Therefore, bonded warehouses provide opportunities for duty deferral: no duties are owed until the goods are removed from the warehouse and entered for consumption.  If goods are exported to another country, no duty is owed at all.  This is why bonded warehouses are often used as transshipment centers in the U.S.

33. A Foreign-Trade Zone is another area where merchandise may be placed free of duty.  They offer the same features as bonded warehouses, but have the following advantage.  Imported parts and materials can be brought into a foreign-trade zone and manufactured into another product there. If the finished product is subsequently entered into the U.S., the duty rate that applies is the lower of the duty rate on the parts and materials or on the finished product.  Therefore, foreign-trade zones offer U.S. manufacturers the opportunity to reduce their overall duty liability.  Many United States manufacturers have established Foreign-Trade Zone operations, such as automobile producers and pharmaceutical producers.

34. A temporary importation bond permits temporary importation of merchandise for a period of one year, which can be extended up to three years.  At the end of that time, the merchandise must either be exported or destroyed.  Temporary importation bonds are often used for goods that travel to the U.S. for trade shows or sporting events or for other display purposes where they will be here for a short while and subsequently taken out of the country.

35. Finally, a Carnet is a special type of entry issued by the International Chamber of Commerce and recognized by U.S. Customs that authorizes temporary entry of merchandise, on condition that the merchandise is either exported or destroyed after one year.

36. In early 2009, U.S. Customs adopted a new additional type of entry, used for security screening purposes only, for merchandise carried by vessels.  This is called the Ten Plus Two entry, because it requires the importer to provide ten pieces of information and it requires the shipping line to provide two pieces of information.  Without that information, the merchandise will be denied entry into the United States.

37. Specifically, the Ten Plus Two entry requires the vessel carrier to provide a stow plan with information about the vessel and the cargo, and to provide daily cargo status reports after the vessel has sailed for the U.S.

38. The importer must report the names and addresses of the manufacturer, seller, buyer, ship to party, container stuffing station, and consolidator, the importer’s and consignee’s identification numbers, the country of origin and the tariff classification number.  All of this information must be reported to U.S. Customs no later than 24 hours before the cargo is loaded on a vessel.  This strict time deadline requires the assistance of the exporter in making the information available as early as possible in the sale process, because if the exporter does not provide that information, the vessel will not allow the merchandise to be loaded.

39. Next, I would like to discuss the way in which U.S. Customs treats merchandise that is abandoned by the importer.  This is an important topic for Chinese exporters.  Let me explain why.

40. If the Chinese exporter sells on an FOB Chinese port basis, it means that the U.S. buyer owns the goods at that point and is responsible for paying ocean freight costs.  The U.S. buyer also is going to act as the importer for U.S. Customs purposes, with responsibility for paying Customs duties.

41. It sometimes happens that the buyer is unable to pay the duties or for some reason decides that it does not want the merchandise, for example if the importer has declared bankruptcy.  In most cases when that happens, this means that the Chinese exporter has not been paid for the merchandise.  Because the goods are in the U.S., and are in U.S. Customs custody, the exporter cannot get the goods returned very easily.

42. Merchandise that cannot be entered into the U.S. and remains in Customs custody is called general order merchandise.  That merchandise may be exported from the U.S. by the consignee.  If it is not exported within 6 months, it is subject to sale. 

43. Similarly, merchandise that is unclaimed or abandoned before entry is subject to sale after 6 months.

44. U.S. Customs will conduct an auction sale of general order, unclaimed, and abandoned merchandise after the 6 month period expires.  The Chinese exporter will have the ability to participate in the sale and purchase the goods.  In almost all cases, the auction price is much lower than the original sale price.

45. Therefore, the sale process gives the Chinese exporter the ability to purchase and resell the merchandise, if doing so makes business sense.  This process does not require the exporter to give up any legal claims it has against the buyer for breach of contract, or any claims in bankruptcy proceedings, for the unpaid balance of the original sale price. 

46. Now that we have covered the different types of entry procedures, I would like to turn our attention to some of the most important substantive issues that arise in imports.

47. First, tariff classification is used to categorize different goods to determine the applicable duty rate. The United States, like China, is a signatory to the Harmonized Tariff Schedule.  You may already know that the Harmonized Tariff Schedule consists of 96 chapters, covering the full range of products, from live animals all the way through to processed industrial goods.  Each chapter of the Harmonized Tariff Schedule is divided into headings and subheadings.  The chapters, headings and subheadings are identical for all countries that have adopted this tariff system.

48. However, different countries have divided the subheadings into different tariff items.  The United States tends to have quite a few tariff items, unlike China, which tends to stop distinguishing goods at the subheading level.

49. The Harmonized Tariff Schedule has a number of different rules and guidelines that importers and exporters can use to reduce duty rates.  For example, one rule says that incomplete or unassembled items are classified as if they were complete or assembled, as long as they have the “essential character” of the finished product. 

50. Let’s say that a U.S. company wants to buy a product from you.  By determining whether the duty rate on the finished product is higher or lower than the duty rate on parts, the importer and exporter can structure their transaction to get the most advantageous duty rate.

51. If the duty rate on the finished product is higher than that for parts, they could set the product as a collection of parts, rather than as a finished product. On the other hand, if the duty rate on parts is higher, they could set the product in its finished form.

52. U.S. Customs also provides advance rulings of how it will classify an imported article.  This permits the buyer to know the exact rate of duty that will apply, so it can determine the total cost of its purchase.  I have prepared many advance ruling requests, and I can tell you from experience that advance rulings provide very helpful guidance regarding the way in which an imported product will be treated.

53. Customs valuation also is an important area.  Customs valuation identifies the value of the imported merchandise against which the duty rate will be assessed.  For example, if the duty rate is 5 percent, the determination of the value answers the question, 5 percent of what.

54. Although the determination of Customs value (like all Customs planning) is a regulatory matter enforced by the government of the country where the goods are imported, it has a direct bearing on the contract planning between the buyer and seller for three reasons. 

55. First, in the vast majority of transactions, the Customs value is based on the sale price of the merchandise.  This is called the transaction value.  Therefore, the contractual choices made by the buyer and seller generally will determine the Customs value element of the duty calculation equation. 

56   Second, the party with responsibility for paying the duties – generally the buyer, except in a Delivered Duty Paid contract – should take its prospective duty liability into account in determining whether to enter into a contract in the first place.  Customs duties are as much a part of a transaction’s cost as the price paid to the seller.  Identifying the amount of duties should be part of the buyer’s contract planning process. 

 

 

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