On November 16 of last year, the U.S. House of Representatives issued a Joint Majority Staff Report on the Transportation Security Administration (TSA). The report is titled, A Decade Later: A Call for TSA Reform. In my opinion it was a scathing commentary on TSA, and it illuminates several critical flaws that need immediate attention. Among other things, a few of the key findings were:
TSA lacks administrative competency and is made inefficient by its massive bureaucracy;
TSA's leadership structure is flawed;
TSA is failing to carry out agency operations;
TSA is failing to develop and deploy effective technology.
One of the most shocking and paralyzing facts in the report indicates that the TSA is now larger than the Departments of Labor, Energy, Education, Housing and Urban Development, and State combined. Absolutely incredible! They employ more than 65,000 people. The report went onto say that TSA's primary mission of transportation security has been neglected because of the constant focus on managing its enormous and unwieldy bureaucracy. In the last 10 years the TSA has spent a staggering $57 billion dollars to "secure the transportation network." That makes the paltry sum of $4 billion spent on U.S. Customs & Border Protection's (CBP's) Automated Commercial Environment (ACE) system seem like a real bargain.
As TSA was being stood up, their leadership made a power play for imposing control over maritime and land border cargo. The TSA claimed that they owned those modalities for inbound and outbound cargo. I know because I was in some of those meetings as we were in the midst of designing the Customs-Trade Partnership Against Terrorism (C-TPAT) Program with CBP. Thankfully, under the guidance of then Commissioner Robert Bonner and with wide support from the trade community, CBP successfully fended off their aggressive tactics.
The TSA was successful, however, in getting control over air cargo including international consignments. And so as not to blemish their perfect record, and just as you would expect, they have failed miserably in this realm as well. Last October the TSA finally admitted that they would not be able to meet a December 2011 deadline for 100% screening of all inbound air cargo on commercial aircraft. They cited the unique challenges of the industry and offered no estimate of when they might be able to meet this standard.
In my humble opinion, no one knows cargo better than CBP. They have more than 200 years of experience in examining and handling it, and by most accounts they do a darned good job. Perhaps the TSA should consider hiring CBP to consult with them on how to effectively and efficiently run the air cargo operations.
In recent years I've been quoted a number of times as saying: "Of the 40-plus federal agencies that regulate international trade, CBP should be given the equivalent of the Malcolm Baldrige Award for being accessible and for logically deploying new programs efficiently and effectively." This notion is especially true when you compare CBP to agencies like the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA) and certainly the TSA.
Needless to say, without espousing or imposing my political views on the readership, it bothers me immensely as a professional and, more importantly, as a tax-paying citizen to witness this kind of inept management and reckless waste. The federal government has repeatedly demonstrated that they are not good at running or effectually managing processes or operations. The U.S. Postal Service and Social Security Administration serve as prime examples. Now, here comes TSA to trump them all, and they have accomplished this feat in only 10 short years.
The key question at the end of the day, of course, is what's being done to correct this situation? Given their abysmal record, it sounds like a good house cleaning is in order. Will it happen? Based on my experiences in Washington, I'd say that it's not likely; after all it is the government where non-appointees are virtually guaranteed a lifetime of work. So the problems will perpetuate themselves and the agency will be the subject of another searing report in a few years and perhaps under a new Administration. As a result of the House of Representatives' report, a total of 11 recommendations were made, but frankly speaking, they fall far short of addressing the real issues at TSA with the substantive hard-hitting mandates that the agency needs to truly address some of the issues outlined in the narrative.
In part 2 of this series of articles, I discussed an imaginary situation where the seller has difficulties with the buyer over FOB transactions and the use of containers. These differences are caused by the use of archaic terms that do not fit well with modern shipping practices. The conversation between the seller and their adviser revealed the anomalies and explained some of the possible corrective measures.
The seller, at the end of that conversation, raised the issue of CFR, CIF, CPT and CIP and container traffic, and sought more information. Here we pick up where we left off in the last article.
Adviser: You were asking about CFR, CIF, CPT and CIP and container traffic?
Seller: Yes, which is more appropriate?
Adviser: The CFR and CIF terms are an extension of FOB. CFR requires the seller to enter into a contract of carriage and prepay the freight costs, and CIF requires the additional provision of insurance from the seller to the buyer. However, the important issue to remember is that the risk transfer under FOB, CFR and CIF are the same once the goods have been placed on board, regardless of who pays for the freight and the procurement of insurance.
As FOB is not suitable for container traffic, CFR and CIF are also not suitable for container traffic. In container traffic, the Incoterms® 2010 Rules recommend the usage of FCA (discussed before) in place FOB, CPT in place of CFR, and CIP in place CIF. It is important to note that the risk transfer point in FCA, CPT and CIP is the same, and this is essentially when the goods are handed over to a third party.
Seller: So exactly where does the risk transfer take place for CPT and CIP in container traffic?
Adviser: Under CPT and CIP, the risk transfers from seller to buyer when the goods are placed at the disposal of the buyer or their agent. What this usually means in practice is when the freight forwarder engaged by the buyer takes possession of the goods. The place where this takes place may vary from transaction to transaction and will depend on whether the forwarder is collecting the goods from you or you are delivering to them. And if there is no forwarder involved and you are delivering the container directly to the wharf, it will be at the cargo terminal at the wharf.
Seller: Ok, what about insurance then?
Adviser: The seller has to provide evidence of insurance to the buyer, most commonly by the provision of an insurance certificate, under CIF and CIP. A few words of warning about insurance. As the risk transfers at the beginning of the journey in the export country, the buyer carries the bulk of the transport risk. It therefore makes sense that the buyer should be particularly concerned about the insurance clauses to ensure they are adequate to their perceived risk needs.
We do have standard insurance clauses, commonly referred to as the Institute Cargo Clauses. These clauses have three levels of insurance for maritime traffic, and we need to specify which of these clauses forms part of the contract. Clauses A offer the highest form of insurance (these are called "All Risk" insurance, but they are not really all risk, rather the greatest risk cover). Clauses B offer intermediate cover and Clauses C the minimum cover. Be careful because Clauses C do not cover vessel loading and unloading risks.
Seller: Sorry, but again, why have CPT or CIP instead of CFR and CIF? It seems the seller carries less risk under CPT and CIP.
Adviser: You may look at it that way, but let's imagine that you have delivered the goods at the cargo terminal at the wharf. This is a customs controlled area and we can look at this as limbo land. The goods have not yet left the country physically, but in reality their international journey has started as these are now destined to be loaded onto the vessel for export. So, the risk should transfer at that point because the cargo terminal operator acts as the agent of the shipping line. I hope this clarifies it.
Seller: Ok, thanks, but what about Figure 1; you said that there were surprising patterns.
Figure 1: Incoterms® 2010 Rules Usage by Exporters to ASEAN
Adviser: Figure 1, which shows the distribution of Incoterms usage among exporters of manufactured goods to the Association of Southeast Asian Nations (ASEAN), indicates a mismatch between the mode of transport and the choice of Incoterms. This is based on the commonly accepted fact that maritime trade accounts for more than 80% of all trade and the majority of goods are sent containerised around the world.
In Figure 1, I pointed out that these were usage rates for Australian manufactured goods to ASEAN (Burma, Brunei, Cambodia, Indonesia, Laos, Philippines, Malaysia, Singapore, Thailand and Vietnam). There is no evidence to suggest that world container usage rates are different to those found in the Australian research. If we look at the usage rates of FOB (15%), CFR (14%), and CIF (28%), these total to 57% of transactions. These terms are not recommended for use in container traffic movements, yet these continue to be used. There is a problem.
Seller: What can be done to remedy the incorrect choice of Incoterms?
Adviser: The answer to this question has to be education. Rules changes, processes change, practices change and people also need to change the way they do things in response to the changed environment in which they work. It will not be easy to do. Some of the barriers will be historical"”the "we have always done it this way" approach. Others will be cultural"”"I cannot challenge my manager as they are more important than me in the hierarchy of the organisation." Yet changes need to be made, otherwise there will continue to be a higher risk element than need be.
Seller: Thanks for this. It seems to make sense, but as you say, not easy to do. One final question: if traders wanted to develop their own terms, could they do so?
Adviser: Yes, but it is a bit like re-inventing the wheel. The 11 Incoterms® 2010 Rules pretty much cover every major shipment configuration. If you did want to develop your own terms you would need to make sure you comprehensively cover the issues identified in the Incoterms 2010. There may be a disadvantage in doing so, though, as the Incoterms have a long history and enjoy the benefit of court cases and precedent, something your own rules are unlikely to have.
I hope these conversations have provided some practical examples. In as much as the information given here is believed to be correct at the time of publishing, before taking any course of action, readers are advised to seek appropriate specialist advice on their particular circumstances.
The order came late... or never arrived... or your partner wants to constantly renegotiate... or the client is never satisfied. Conflict occasionally arises in business. But when cultures differ:
How do you know when you're dealing with a cultural issue rather than a business issue?
How do you bridge the cultural divide in order to focus on solving the issues?
Not on the Same Cultural Page
Business cultures vary widely around the world. What is acceptable in one location could be scorned in another. A Japanese businessperson who is uncomfortable may break out in giggle, while their American counterpart may clear his throat, cough, perspire or talk faster. It is important to separate cultural issues from business issues. Cultural issues normally challenge your assumptions and expectations about your counterpart's responses and other actions. Often it comes in the form of a perceived overreaction or "under" reaction to what you said or did.
Taking Care of Business
Here are some common conflict styles and how you can approach your counterpart for better results:
Emotional Outbursts"”This style is particularly common in the Middle East, but you can sometimes find it in Africa, Latin America and Mediterranean countries. Let's assume that you didn't do anything to actually deserve the outburst. By throwing an emotional tantrum, the person is trying to get you to give concessions. It is built on the assumption that they need to be on top of a win-lose relationship with you. The trick to rendering this technique ineffective is to remain extremely calm and wait for the person's tantrum to cease. Then pick up the conversation from where it left off before the outburst and ignoring the outburst altogether.
Silence"”Silence is a well-used tool in Eastern Asia. When someone is upset, they literally stop speaking. Sometimes this silence is over the phone, but it can also include unresponsiveness to emails and other communication channels. The assumption here is that the other side will break the silence first by offering concessions to make up for the negative feelings. Again, assuming that the silence is undeserved, do not be the one to break the silence if you were the last one to communicate. By waiting in silence, you are communicating that this technique does not work on you.
Frequent Renegotiations"”Many Western cultures rely on a written legal contract to define a business relationship. In the rest of the world, relationships are the foundation of business dealings. In these relationship-based business cultures, you can expect your clients, suppliers and partners to ask to renegotiate your arrangement. These renegotiations are a reflection of a changing business environment in-country and also a desire to keep the business relationship current and functional. You can expect this in places like China, India, Russia, Africa, and Indonesia.
If you would like to learn more about intercultural business communications, please visit my blog.
We took a few training sessions with you some time ago. Since our sessions with you, the people in Customer Service raised a question about certificates of origin. I was wondering if you could help us.
Most of our goods come from Asia, and we do not further manufacture or assemble any of the goods. Upon receipt at our distribution center, we complete an inspection, audit our import documentation, and notify our customs broker when there are any overages, under-reporting or damaged goods received. The customs broker sends us the corrected paper work.
We have customers in Latin America; our imported goods are shipped to Latin America. Our customers in Latin America ask us to provide them with a certificate of origin (COO) regarding the goods we are selling. Depending on where the customer is located, they might ask for a NAFTA Certificate of Origin or CAFTA Certificate of Origin.
The question is: Are we obligated to provide the customer with a certificate of origin covering the goods we're selling?
Thank you,
Perplexed on Origination
Dear Perplexed,
You are not obligated to provide a NAFTA or CAFTA COO. These two types of COOs are voluntarily issued when the goods originate according to the rules of these two free trade agreements.
However, Latin American countries' customs authorities (as well as many other countries) often require a country of origin designation within the documentation that you prepare and submit to your customer so they may clear goods into their country. There are different approaches that will satisfy this requirement. It is best to confirm the best option for your customer and verify which of these options will ensure smooth customs clearance.
Here are three options:
Identify the country of origin with a statement on each line item on the commercial invoice,
Issue a supplemental letter to the buyer with the country of origin for each item being shipped.
In addition to the documentation identifying the country of origin, it is important to mark the product and the boxes with the correct country of origin.
In Part 1 of this series of articles, I discussed an imaginary situation where the seller and the buyer have differences in processing an EXW transaction. These differences were caused by the freight forwarder's preferences that mutated EXW into something closer to FCA. The seller, unaware of the added risks incurred, was following the request of the freight forwarder, but with some reservations.
The conversation between the seller and their adviser revealed the anomalies and explained some of the possible corrective measures. The seller, at the end of that conversation, raised the issue of FOB and container traffic, and questioned why this may be problematic. Here we pick up where we left off in the last article.
Adviser: You were asking why FOB should not be used with container traffic.
Seller: Yes, a lot of buyers seem to want to buy on this term, and the fact that the goods are shipped in containers does not seem to bother them at all. So what is the problem?
Adviser: The problem is not one, but many. Firstly, we need to understand that the term FOB had been around for a long time before maritime container transport was invented. The term FOB has been questionable for nearly the past 50 years. The main issue has been the risk transfer point between the seller and the buyer in the FOB contract. In fact, in a rather famous court case of 1954, the judge expressed his concerns about the means by which risk would be transferred with the following words:
Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of the derrick across a notional perpendicular projecting from the ship's rail (Devlin J in Pyrene Co Ltd v. Scindia Navigation Co Ltd [1954] 2QB402 at 419).
The Incoterms themselves appear to have been somewhat unclear over the years. The Incoterms 1990 stated:
It should be noted that FOB, CFR and CIF all retain the traditional practice to deliver the goods on board the vessel. While, traditionally, the point of delivery of the goods according to the contract of sale coincided with the point for handing over the goods for carriage, contemporary transportation techniques create a considerable problem of 'synchronisation' between the contract of carriage and the contract of sale. Nowadays goods are usually delivered by the seller to the carrier before the goods are taken on board or sometimes even before the ship has arrived in the seaport. In such cases, merchants are advised to use such 'F-' or 'C-' terms that do not attach the handing over of the goods for carriage to shipment on board, namely FCA, CPT or CIP instead of FOB, CFR and CIF.
The Incoterms 2000 stated in part:
The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the named port of shipment.
The Incoterms 2000 also stated:
This term can be used only for sea or inland waterways transport. If the parties do not intend to deliver the goods across the ship's rail [such as is the case for containerised traffic] the FCA term should be used.
The introduction to the Incoterms 2000 highlights the uneasy fit with containerisation:
The delivery point under FOB, which is the same under CFR and CIF, has been left unchanged in Incoterms 2000 in spite of a considerable debate. Although the notion under FOB to deliver the goods 'across the ship's rail' nowadays may seem inappropriate in many cases, it is nevertheless understood by merchants and applied in a manner which takes account the goods and the available loading facilities [emphasis added]. It was felt that a change of the FOB-point would create unnecessary confusion, particularly with respect to sale of commodities carried by sea typically under charter parties.
With all due respect to that statement, it is exactly why this is not well understood that problems arise. The Incoterms® 2010 Rules make it quite clear that the term FOB is not the preferred choice for container traffic because in practice the container is invariably part of a multimodal movement. In fact, a recent study on container movements conducted by the Port of Melbourne, Australia, reveals that 54% of export containers are 'staged.' This means that these containers are not delivered directly from the exporter's premises to the wharf, rather they go through third parties (such as container packing warehouses, freight forwarders, containers parks, etc).
Prudent risk management practices would have the risk transfer when the journey commences or when the seller loses control of the goods by handing them over to a third party. Indeed this is the case in FCA, CPT and CIP that are the multimodal answer to FOB, CFR and CIF. But let's stick to FOB"¦ particularly as there has been a change in the risk transfer point. Under Incoterms 2010, the risk transfer point under FOB is once the goods have been placed on the vessel. In the absence of a court case, at the time of writing, this is understood to mean that the whole consignment has to be loaded on board, but this does not mean stowed and lashed.
Seller: Look, that is very nice, but my buyer is comfortable with FOB, after all they have been doing this for years.
Adviser: If I had $5 for every time I heard "we have been doing this for years" I would have retired a rich man long before I sat down to this conversation with you. Some say history is everything"”yes it is, but to learn from, for otherwise there is no progress. There is also another counterargument to the, "I have been doing for years" claim. That is, "If you stand in one place long enough, eventually a bus will come along and run you over."
Times change, processes change, and we need to respond to those. The buyer wants to minimise their risk and so does the seller. It is a matter of negotiation. I am going to put it to you that the seller is best placed to transfer the risk to the buyer when they (the seller) lose physical control of the goods. This is because they cannot control the risk without possession of the goods"”under these circumstances someone else has the goods, and that someone else should carry the risk.
In FOB transactions, the seller would be responsible for 10 or more uploads and offloads from the time the goods leave the export premises until they are loaded on to the vessel, as shown in Table 1. Do you really want to be responsible for this?
Export warehouse to Container Packing Station (CPS)
2
On/Off
CPS to Forwarder
2
On/Off
Forwarder to ContainerPark
2
On/Off
ContainerPark to Wharf
2
On/Off
Wharf to Ship
2
On/Off
Total number of cargo movements for which the risk is retained by the seller if FOB is used.
10
(or more depending on how may times the container is moved at the wharf, post acceptance).
Table 1: 10+ product movements prior to loading"”how will the seller mitigate risks?
Seller: Well, when you put it like that, I don't really want to retain all these risks, but the buyer wants me to deliver on board.
Adviser: I am going to suggest to you that you can negotiate with the buyer to take the goods to the wharf, but not load them on the vessel. You can do this by using FCA, XXX Port, Incoterms® 2010 Rules. If you do this, you retain the risks until the cargo terminal operator has the goods made available to them, but terminal movements and loading on the vessel are at the risk and cost of the buyer. You need to explain to them that times have changed and so should contract delivery clauses. By the way, you still have no obligation to contract for carriage under these circumstances.
Seller: OK, I get it now. I guess that I can try to change what I have done in the past and convince the buyer to do the same.
Adviser: Yes, that's the spirit.
Seller: You said something about other terms before: CFR, CIF, CPT and CIP and risk transfer. I am not sure that you explained that completely though.
Adviser: You are right, I did not, but that is another session again.
It has been said that the United States is the most diverse country imaginable. Our exports reflect this diversity with an astoundingly broad range of products and services. Our exports cover the scope from apples, airplanes and antibiotics to zinc, zippers and zinfandel wine. How in the world does the U.S. government deal with facilitating and regulating such a vast array of exports? This is accomplished by multiple agencies, each with a designated degree of autonomy, overlap and responsibility. There are 20 agencies charged with export accountability for products and services pertaining to their area of expertise and jurisdiction.
Some people believe that the United States is the only country with multiple agencies involved in the export process. This is simply a myth. Canada, China, England, Germany and many other countries have multiple agencies that are charged with regulating their respective country's exports.
Another myth that seems to prevail worldwide is that exporting is a right. Exporting from most countries, including the U.S., is a privilege, not a right and therefore laws, regulations and processes are followed accordingly.
Let me use Japan as an example to illustrate the fact that most countries have multiple agencies involved in the export process. The bulk of products and service exports from Japan are managed by the Ministry of Economy, Trade and Industry (METI) and is analogous to our U.S. Department of Commerce. METI covers exports in 16 categories of products and service areas including: military weapons, nuclear supplies, chemical weapons, biological weapons, missiles, advanced technical materials, fabrication materials, electronics, electric calculators (high speed), telecommunication equipment, sensors, voyaging equipment, ocean industry products, propelling facilities, military goods, and machinery goods. However, the Japanese Ministry of Agriculture, Forestry and Fisheries covers agriculture products, wood and lumber, and fish. The Japanese Ministry of Health, Labor and Welfare covers products that fall under pharmaceutical issues and pharmaceutical law.
You can find a list of the 20 different U.S. federal agencies in the Export Programs Guide. This publication is the single most comprehensive guide to federal programs that assist U.S. exporters. In this publication, you will be able to ascertain detailed descriptions of more than 100 programs offered by 20 different U.S. federal agencies. These include:
Export counseling programs,
Information on trade promotion events,
Export financing programs,
Sources of industry- and country-specific information and assistance, and
Information on export controls and licenses.
For your ready reference and ease of use, you will find entries that provide a brief description, a contact name and telephone number, and a website and e-mail address. Additional valuable information to be found in the Export Programs Guide are listings of regionally-focused programs such as the China Business Information Center, the Middle East and North Africa Business Information Center, and the India Business Center, each of which provides exporters with a single point of access for information on regional trade events, business counseling, and market research specific to that important region. Two appendices to the book include a list of all 107 U.S. Export Assistance Centers located throughout the country and contact information for the 20 federal member agencies of the Trade Promotion Coordinating Committee (TPCC).
If after checking the Export Programs Guide you are still having trouble finding what agency to contact or how to locate a particular program regarding an export transaction, then you could always contact the Trade Information Center. You can reach the Trade Information Center at 800-USA-TRAD (E) (800-872-8723).
There are a several reasons justifying the existence of multiple export agencies and why they are necessary. First, no one agency could possibly have staff knowledgeable about all the various types of products and services we export. SME's (government speak for "subject matter experts") are essential to technically and competently handle their respective agencies regarding export issues and topics. Second, if only one agency was charged with regulating all exports there would be the risk that a sole agency would potentially have too much power over such a broad area of importance. Third, having multiple agencies means that there is a specific agency in any given industry or discipline that the export community has to communicate with that understands the nomenclature of the industry.
For example, the FDA (Food and Drug Administration) is best positioned to deal with medical, drug and food products. The NRC (Nuclear Regulatory Commission) is best positioned to regulate nuclear, atomic and radioactive materials and technology. The DOA (Department of Agriculture) is best positioned to deal with export matters for beef, fruit and similar farm products.
There are, of course, some negative aspects of having to deal with multiple export agencies. These include such issues as complexity created by inherent confusion in having to deal with regulations of multiple agencies, duplication of some programs, additional employees, and "turf orientation" common when more than one government organization is involved in any given process.
In spite of these negatives, the 20 U.S. government agencies involved in the export process do a pretty good job based on the growth and history of exports of the United States. The more you, the exporter, know about and positively use these relevant agencies then the smoother and more productive the results should be for your company and our economy as a whole.
Editor's Note: It wasn't that long ago when some economists, including former Federal Reserve Chairman Alan Greenspan, were claiming that the days of the U.S. dollar as the primary reserve currency of the world were numbered and would be replaced with the euro. That seems much less likely now. In fact, a new Fed policy announced last week makes U.S. dollars available to European central banks to prop up their own banking sectors. STRATFOR Global Intelligence has published a very good analysis of the situation.
This report is republished with permission of STRATFOR.
The U.S. Federal Reserve on Wednesday adjusted its "dollar liquidity swap arrangements" with Europe's central banks, as well as with Japan and Canada. This means that for now, European banks will not require a massive bailout that Europe is ill-equipped to provide. It also demonstrates the true nature of the U.S.-dominated global financial order.
The Fed's action effectively gives these central banks access to a massive pool of new U.S. dollars that they can borrow at low costs. Central banks will then provide funding to their banking sectors. The loans must be repaid to the Fed within three months and are structured so that the risks are borne by the foreign central banks, not the Fed. Similar arrangements have been used since the days following the 9/11 attacks and were deployed in the early stages of the U.S. subprime crisis, but Wednesday's deal offers the best terms yet to borrowers. And loans like this are regularly refinanced as they expire.
The move generates relief amid rapid deterioration in the European financial markets as banks' holdings of distressed sovereign bonds decline in value. European banks cannot withstand serious declines in the value of their assets compounded by unwieldy amounts of leverage"”borrowing money to purchase these bonds and other assets. In some cases even two-percent fluctuations in asset values could lead these banks into bankruptcy. In this environment, banks stop lending to each other, fearful that the borrower will go bankrupt and therefore be unable to pay back the loans.
Europe's intertwined banking and sovereign debt crises create a complex and unwieldy situation. The banks need governments to service what are basically unserviceable debt burdens or the banks will become insolvent. Governments, meanwhile, need banks to refinance their countries' growing debts or they will default. And on top of this sits a relatively constrained European Central Bank (ECB) that does not have the wide latitude for action its counterparts in other economies have. There is a strong argument to be made that limitations on the ECB will ease as the crisis continues"”they already have to a significant degree"”but the stress in Europe's banking sector has reached a critical stage.
The proposed solutions are, for the most part, not clearly conceived"”and all are improbable as long-term fixes. Sovereign wealth funds based in nations whose per capita incomes are a fifth of Europe's balked at providing funds. Investors who had already shunned European bond markets despite full sovereign guarantees could not be lured back with complex schemes involving only partial guarantees. The overall sense of futility has been growing.
Even though the Fed is merely providing liquidity, as opposed to long-term structural support, its action will do much to abate Europe's crisis. Nominally designed to support markets with short-term dollar loans, the funds provided by the currency swaps will find their way through numerous channels into the broader European financial markets. Thus, in addition to helping banks, the funds could relieve pressure on Europe's sovereign debt markets. For example, banks can purchase government bonds"”even those, such as Greek bonds, that are very poorly rated"”and use them as collateral to secure this unlimited funding. But even though the risk of a fundamental breakup in the banking sector or currency union will abate somewhat, none of the underlying problems that have created the crisis will have been solved.
In fact it is STRATFOR's standing forecast that nothing will solve the underlying problems that have created Europe's crisis. The European Union is an inherently desynchronized entity, and packing disparate economies like Germany and Greece into a free trade zone, let alone a currency union, is naturally problematic. Peripheral European countries cannot forever absorb unchecked German exports with no recourse to the traditional methods they have used to protect themselves"”such as trade barriers, controls on capital flows and independent monetary policies.
Still, forceful backing from the United States is a significant geopolitical event in that it reinforces the established global financial and monetary order. The United States provided this type of liquidity to Europe in the past, in order to counter the effects of the U.S. subprime crisis. Now, as countries watch Europe's crisis grow to threaten the eurozone's very existence, the United States is ultimately the only economy large enough and with enough political credibility to prop up the global system. This was a given for most of the postwar era, but was seemingly forgotten over the past decade as proponents of the euro touted the currency as a counterbalance to the dollar. But the facade of the euro's stability has begun eroding, and dollar primacy has begun reasserting itself.
This report is republished with permission of STRATFOR.
International trade is both important and problematic.
Important, because we live in a globally interconnected economy where we depend on one another for commercial activity. At times this dependence is dangerous, as the problems created in one country may affect others. A good example of this is the global financial crisis and the continuing fall-out that has spread far beyond the USA, affecting markets in the EU, among others.
Problematic, because international trade is not easy. As one of my former staff members used to say when trying to explain the complexity of export transactions to others in the organisation: when you export, you just don't whistle for a taxi. How true this is.
The purpose of this article is not to explore the various challenges and benefits of international trade transactions, as this would probably fill up a series of volumes. Rather, this article revisits the continuing problem of one aspect of international trade transactions that continues to create potential problems; that is, the incorrect application of Incoterms® 2010 rules, based on the mode of transport and commercial practices.
Recent research in Australia has shown the following distribution of Incoterms usage among exporters of manufactured goods to the Association of Southeast Asian Nations (ASEAN), as shown in Figure 1. It should be noted that this research was conducted just prior to the introduction of the Incoterms 2010, and the terms have been adjusted accordingly to reflect current usage.
Figure 1: Incoterms® 2010 Rules Usage by Exporters to ASEAN
There are some interesting data patterns that can be observed from Figure 1. The term EXW, that is transport neutral as far as the seller is concerned, is used in 18% of occasions. On further enquiry, it was discovered that the term is not actually being used as intended, and that indeed there are considerable variations.
Let me provide an example. A seller in Australia has contracted with a buyer in Japan for the supply of certain goods on an EXW basis. This means the seller is neither responsible for carriage, nor border clearance. The buyer in Japan has contracted a freight forwarder to pick up the goods at the seller's warehouse. The forwarder has advised the seller that they will need forwarding instructions from them and that they (the seller) will be shown as the shipper on the transport document. Furthermore, the seller discovers that the freight forwarder has been clearing the consignments for export, declaring the seller as the exporter.
"So what?" some may well ask. So what is that these practices are not correct. The seller has become alarmed about this, worrying about their risk exposure and asks what they can do. The simple answer to this is to revisit the Incoterms 2010 and apply them correctly, and that is what we are going to do now.
Imagine the conversation between the seller and their adviser on this issue. It may go something like this:
Adviser: Why did you provide the forwarding instructions to the freight forwarder?
Seller: Because they asked for them.
Adviser: Are you responsible for the contract of carriage?
Seller: No, the buyer is.
Adviser: Did you appoint the freight forwarder?
Seller: No, the buyer did.
Adviser: So, if you did not engage the freight forwarder and you are not a party to the contract of carriage, why would you complete the forwarding instructions that usually state that you are authorising the forwarder to do things on your behalf?
Seller: I am not sure. They asked us to do it, and they were quite emphatic that it was our responsibility.
Adviser: Well, the short answer to this problem is that you have no obligation to contract for carriage or make any arrangements for carriage and, in fact, you are not the exporter.
Seller: But the forwarder has told us that we need to be shown as the shipper on the transport document.
Adviser: The forwarder has not been engaged by you, and therefore, there is no contractual link between you and them. They ask what they like, but that does not mean they are going to get it. Who is paying them to perform the arrangement for clearance and carriage?
Seller: The buyer.
Adviser: And, therefore you are not responsible for these charges, correct?
Seller: No, we have nothing to do with these.
Adviser: And you should have nothing to do with these processes. By the way do you get a copy of the export declaration made to customs?
Seller: No. Why, does it matter?
Adviser: Well, I would be concerned. You have no idea what the freight forwarder is declaring to customs, yet they are using your organisation's name in doing so. This is risky; far too risky for me. I would not be happy about it. If I am not exporting, my organisation should not be named anywhere.
Seller: So, what should I do?
Adviser: Here is a suggestion. Do not complete forwarding instructions. Do not have yourself shown as the shipper. Instead let the freight forwarder be shown as the shipper, as after all they are acting on behalf of the buyer under instructions. And one more thing, as you are selling EXW, at least under Australian legislation, you are not the exporter. Certainly that is how the taxation department looks at it, so do not have the freight forwarder list you as the seller on the customs export declaration. Again, they can list themselves as being the agent of the buyer.
Seller: But will this not make it more complicated or messy?
Adviser: No, not really, but it may create problems for the buyer from a tax perspective. But I am not a tax expert, so you would need further advice. There is another option to overcome the issue of export clearance and potential buyer taxation liability at the local level. Sell FCA and make the delivery point your nominated works.
Seller: But this means that I have to do the export clearance and provide a transport document to the buyer.
Adviser: No, it does not mean all of that. Yes, you do have to provide export cleared goods to the buyer's agent (the freight forwarder). It means that the risk in transit will transfer from you to the buyer at the nominated premises. It does not mean that you have to provide a transport document, unless you agree to do so. If you do not want to enter into a contract of carriage, then you do not have to. Does this make sense to you now, do you understand where you stand on an EXW transaction and that you can use FCA instead to overcome some of the difficulties that EXW may present?
Seller: Yes, I get it now. Thanks a lot. This was helpful, but I have one more question. May I ask?
Adviser: Sure, go ahead.
Seller: We are sending goods in containers by sea, as you know, so why not use FOB?
Adviser: Oh dear, this requires another session....
Seven billion is a number that businesses may want to think about. That is the number that the world's population attained on October 31, 2011, according to the United Nations Population Division. Compare that to the Census Bureau estimate of 312 million residents in the United States. It means that 22-times more people live outside the United States than in this country.
That is good news for U.S. companies that already export as well as for those that want to enter the export arena for the first time. As we approach the year end and reflect on future business opportunities, there is no better time than right now to pursue exporting as part of your business strategy and action plans. Adam Smith's wisdom regarding "comparative advantage" back in the 1700's still rings true for us today and will serve those who make the effort to pursue global markets. In research, products and services, the U.S. is recognized for its technology, quality, delivery and, thanks to foreign exchange rates, pricing advantages. Other advantages include trade agreements and government-backed relationships, just to name a few.
Despite these advantages, it is still a very competitive world out there. For U.S. exporters, there is good news again: enter the International Trade Administration, popularly known as the ITA.
If you visit their website you will notice that the ITA is there to help you in many ways. First and foremost, the ITA strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements. ITA works to improve the global business environment and helps U.S. organizations compete at home and abroad. The ITA supports the National Export Initiative to support and sustain economic growth and support American jobs.
In order to do this, the ITA is organized into four distinct but complementary business units:
U.S. and Foreign Commercial Service"”Promotes U.S. exports, particularly by small and medium-sized enterprises, and provides commercial diplomacy support for U.S. business interests around the world.
Manufacturing and Services"”Strengthens U.S. competitiveness abroad by helping shape industry-specific trade policy.
Market Access and Compliance"”Assists U.S. companies and helps create trade opportunities through the removal of market access barriers.
Import Administration"”Enforces U.S. trade laws and agreements to prevent unfairly traded imports and to safeguard the competitive strength of U.S. businesses.
Another useful tool to help you increase your export markets and penetrate new markets is the Export Programs Guide, which is available as a free download from their website. The ITA first published this book in the early 1990's, and it was a great help to me back then when I needed all the help I could get. Even today with 43-plus years of export experience, I find this a valuable reference resource. I continue to recommend this 89-page, easy-to-reference book to my clients as a worthwhile resource, especially to those looking for additional markets and new to exports.
This government publication contains detailed descriptions of more than 100 programs offered by 20 different federal agencies. It is the most comprehensive guide to federal programs designed to assist U.S. exporters. The guide provides information on sources of trade leads; market research programs; special market access and technical assistance programs; export finance, insurance, and non-agricultural grant programs; and agricultural export and finance programs.
In summary, one of the ways to increase your company's bottom line is to engage in successful exporting. Fortunately the global market continues to expand with support and assistance available to you from the ITA.
The common perception is that nothing gets accomplished in gridlocked Washington, D.C. Not so when it the subject is international trade. It has been a remarkably productive couple of weeks for trade legislation. The activity has even attracted the attention of the mainstream news media. In case you missed the news let me recap for you.
The highlight of events was the passage of three free trade agreements. On October 12, Congress passed, and on October 21, the president signed trade agreements with South Korea, Colombia and Panama. The three agreements are similar to the structure of the other contemporary free trade agreements such as the DR-CAFTA agreements. While similar to their predecessors, each agreement incorporates a few of its own unique qualities. The details of the implementing legislation can be found at the U.S. Government Printing Office: South Korea, Panama and Columbia.
The full text of each agreement can be found at the U.S. Trade Representative's website: South Korea, Panama and Colombia.
Each of the agreements permits implementation on or after January 1, 2012. Full implementation details are pending.
While the three trade agreements garnered the most attention there was a fourth piece of legislation passed. That legislation and the FTAs incorporated some details that are noteworthy for the trade:
Associated with the Trade Adjustment Assistance Act was a provision that reinstated the Generalized System of Preferences (GSP) program retroactive to January 1, 2011. Under the terms of the legislation any entries presented since January 1 that have been properly coded with the GSP indicator of "A" automatically began receiving duty refunds beginning November 5, 2011. Importers that did not claim the duty preference program will need to file post entry amendments in order to obtain the refund.
MPF Increased
Also associated with the Trade Adjustment Assistance Act was an increase in the merchandise processing fee (MFP) charged on imported shipments from 0.21% to 0.3464%. The minimum of $25 and maximum of $485 remain unchanged. The U.S.-Korea FTA extends the application of the MPF through the year 2021.
ATPA Reinstated
Incorporated into the U.S.-Colombian FTA was a renewal of the Andean Trade Preference Act (ATPA) retroactive to February, 2011, when the agreement lapsed. U.S. Customs and Border Protection has published details for obtaining refunds for eligible entries made during the lapse period.
Have you heard the latest news out of Washington? Earlier this month, Congress passed and President Obama signed legislation for three new free trade agreements: the U.S.-Columbia Free Trade Agreement, the U.S.-Korea Free Trade Agreement, and the U.S.-Panama Free Trade Agreement.
These agreements originally negotiated under the George W. Bush Administration have finally reached fruition after negotiations stalled over some unresolved issues. In particular, the Obama Administration was able to secure greater access to the Korean automotive marketplace, increased labor rights and worker protections in Columbia, and increased tax transparency and labor rights in Panama.
The Obama Administration believes that these newly formed trade agreements will help increase American exports of goods and services to consumers within Columbia, Korea and Panama thereby supporting several thousand jobs here at home.
U.S.-Colombia Free Trade Agreement
Currently, the nation of Colombia has the third largest economy within Central and South America. In 2010, the total value of U.S. exports to Columbia was $12 billion. The U.S.-Colombia Free Trade Agreement will eliminate barriers to trade by allowing approximately 87% of all U.S. exports of consumer and industrial goods and services to Colombia to become duty free immediately with most other tariffs being eliminated over the next 10-15 years depending upon the industry.
Some of the key industrial sectors effected by this agreement are agriculture and construction equipment, aircraft and associated parts, automotive parts, fertilizers and other agrochemicals, information technology equipment, medical and scientific equipment, and wood.
In addition, under the agreement, Columbia will immediately eliminate tariffs on wheat, barley, soybeans, soybean meal and flour, high quality beef, bacon, most fruit and fruit products, wheat, peanuts, cotton, and many other processed products. The agreement will also provide duty free access for specified volumes of standard grade beef cuts, chicken leg quarters, animal feed, corn, rice, soybean oil, and dairy products through the use of tariff rate quotas.
U.S.-Korea Free Trade Agreement
The U.S. International Trade Commission is estimating that the U.S.-Korea Free Trade Agreement alone will increase the U.S. Gross Domestic Product by $10 to $12 billion annually. Implementation of this agreement will be the most significant agreement since the North American Free Trade Agreement.
Under the U.S.-Korea Free Trade Agreement, barriers to trade are eliminated by allowing approximately 95% of all bilateral trade in consumer and industrial goods and services to become duty free within three years from the effective date of this agreement while most other tariffs will be eliminated over the next 10 years.
U.S.-Panama Free Trade Agreement
Panama is one of the fastest growing economies within Latin America, growing at a rate of 6.2% in 2010, according to the White House. The U.S.-Panama Free Trade Agreement will eliminate barriers to trade by allowing approximately 87% of all U.S. exports of consumer and industrial goods and services to Panama to become duty free immediately with most other tariffs being eliminated over the next 10"“15 years, depending upon the industry.
Some of the key industrial sectors affected by this agreement are agriculture and construction equipment, aircraft and associated parts, fertilizers and other agrochemicals, information technology equipment, and medical and scientific equipment.
In addition, under the agreement, Panama will immediately eliminate tariffs on high-quality beef, frozen turkeys, sorghum, soybeans, soybean meal, crude soybean and corn oil, most fruit and fruit products, wheat, peanuts, cotton, and many other processed products. The agreement will also provide duty free access for specified volumes of standard grade beef cuts, chicken leg quarters, pork, corn, rice, and dairy products through the use of tariff rate quotas.
As you are conducting your international trade transactions, keep these new trade agreements in mind. Stay tuned for further details on these agreements.
Amazing! There is actually an import regulation based in common sense!
"Get out of town!" says you.
"Truth!" say I.
The government does not waste hard-earned tax dollars or the resources of importers attempting to collect or refund revenues of less than $20.
What is this about? CBP regulation 19 CFR §159.6 states:
Difference between liquidated duties and estimated duties.
(a) Difference under $20 in original liquidation. When there is a net difference of less than $20 between the total amount of duties, fees, taxes, and interest assessed in the liquidation of any entry (other than an informal, mail, or baggage entry) and the total amount of estimated duties, fees, and taxes deposited, including any supplemental deposit, the difference shall be disregarded and the entry endorsed "as entered."...
As always, the devil is in the details.
Too frequently this so called "$20 Rule" is misinterpreted as implying that importers need not make corrections to entries when less than $20 in revenue is involved. I've heard this misinterpretation from importers, customs brokers, and local CBP representative alike. I've also heard interpretations that maintain the importer need not make amendments for value discrepancies of plus or minus $20. Unfortunately, neither of these interpretations is what the regulation really says.
If you read the regulation carefully and closely you will note it speaks merely to CBP's obligations to collect or refund revenue.
Lest you think me overly hard-nosed, let us consider the following scenario:
An importer's broker makes a typographical error on a NAFTA entry from Canada. Instead of declaring $1 million in value the broker drops a decimal point and only declares $100 thousand. NAFTA, of course, exempts the entry from duties as well as user fees. As a result the error results in no loss of revenue to the government. No harm no foul, right? Wrong! The importer under-declared the value of the shipment by 90%! The entry summary process is not just about revenue, it is also a statistical data report. Importers have an obligation to report that data accurately, regardless of the revenue. In this example the importer should amend the entry and report the proper value.
There are a variety of similar discrepancies that can surface in an entry that result in minor or no revenue issues including those related to:
HTS codes,
HTS reporting quantity,
Country of origin,
Country of export, and
Manufacturer ID codes.
Each of these is an important data element that should be accurate.
Really? You mean to tell me that if I declare 10,000 units, and I actually receive only 9,999 I need to make a post entry amendment? For one unit???
Well...maybe, maybe not. The CBP policy for pursuing enforcement action is to first identify an error, second to demonstrate harm to the United States, and third to meet a materiality standard. Clearly CBP would be hard-pressed to make such a case for one unit of 10,000.
Within a Focused Assessment (FA), however, that same error may have been one of many quantity reporting errors that demonstrate a pattern of material and systemic weaknesses within the importer's internal controls. The FA guidelines instruct the audit teams to hold importers to a 99% accuracy standard based on a weighted average. (See FA document 3F page 6) Quantity can be interpreted to be HTS related as described within this document. If CBP can demonstrate a pattern of errors, an importer may fail their audit.
As a trade compliance manager you have an obligation to ensure that you have implemented systemic controls to avoid making entry declaration errors. While you might choose to establish a policy that does not report such statistically insignificant errors, you certainly should have a system in place that tracks and evaluates them. Better yet, why not simply report the minor non-revenue issue within a Post Summary Correction (PSC) or quarterly Post Entry Amendment (PEA) report? (See: Oops, I Made a Mistake!) Both processes allow for reporting non-revenue issues of less than $20.
Ultimately what you report and when you report it is up to the policies of your individual company and the advice you might receive from your broker or attorney.
The regulations attempt to inject a modicum of reason into the importing revenue collection process. But don't be mistaken. CBP regulations and policy hold importers to a high standard of accuracy. While $20 in revenue may not be an issue between CBP and the trade, the rest of the data within an entry is.
No one could have predicted exactly how September 11, 2001, would impact our lives and our profession. On that fateful morning I was in the air on my way to visit Target's Indianapolis Distribution Center and oblivious to the new world we would encounter upon landing. What was clear is that the dastardly attacks on the World Trade Center, the Pentagon and that open field in Pennsylvania were going to change the way the security game was played.
We knew that our profession would be called upon to leverage our expertise and become "deputized" to the cause of securing our nation's commerce and her economy. From that perspective we have stepped up to the challenges we face in the modern era and have gone a long way in establishing our credibility in board rooms and in the eyes of government officials around the world.
Much has changed in the past 10 years, but not all for the better. The vision of a partnership between private sector security professionals and the government is alive and well in programs such as the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Overseas Security Advisory Council (OSAC). The ability to share strategies, intelligence and resources has never been greater.
The danger of this level of interest in corporate security programs by government entities has a serious downside, however. As an example, in the past few weeks Union Pacific railroad was required by U.S. authorities to spend an additional $50 million on its security program. Union Pacific was found to have unwittingly been the vehicle for drug smugglers on the U.S. Mexican border. There may be cause for the company to re-think its security strategy as a result of these incidents, but being forced to spend $50 million on a security program that includes funding a "fusion center" with U.S. Customs and Border Protection (CBP) sounds a bit more like extortion.
While the end result may be a more secure company and a more secure border, there is a profound difference between volunteering to do our part in the spirit of partnership and being required to do so through the use of regulatory authority. The ends do not necessarily justify the means.
In yet another instance of overreach, CBP has once again targeted Gibson guitars for its alleged lack of oversight of its import supply chain. This company has been importing wood from around the world for decades. Then along came the Lacey Act in 2008 that required importers of woods to report details on the species and genus of the tree in an effort to protect endangered trees around the world.
The Act did not stop there, however. The law also requires CBP to enforce the laws of the exporting country as well. The result is that the CEO of a well respected American company has the potential of serving time in jail over the violation of an obscure Indian law that prohibits the export of sawn wood. The U.S. Government has interpreted Indian law to say the wood Gibson imported was falsely declared as veneers because some assembly is still done in the U.S rather than India. Fortunately the solution to this issue was clearly outlined by the federal investigator. Unfortunately his recommendation was for Gibson to outsource their operations and avoid complying with U.S. import laws.
In a time where we should be encouraging companies to create jobs in this country, we have laws and the people who enforce those laws encouraging companies to limit their global supply chains because U.S. law is too complex. While the Gibson issue may not be directly related to the security profession, the bureaucratic inflexibility found in the Lacey Act is a lesson for us all. The strength of the post September 11 security regime is based on true partnership and flexibility. We must be vigilant to ensure it does not fall victim to an overzealous federal government.
Our company received a very high value letter of credit from our customer in Dubai. Our sales and contract team were very involved in negotiating the bid, developing the contract and reviewing the letter of credit with the customer. All parties (our team of engineers, sales, contracts and legal and the customer) agreed that the payment under the letter of credit would be in two parts. We agreed that 80% would be paid upon shipment of the goods from the USA with submission of the documentation required under the letter of credit by the bank. The remaining 20% will be paid upon successful installation at the buyer's facility in Dubai. The buyer's inspection agent is to issue an inspection certificate for us to present to the bank with our draft for this balance.
Here's the problem. The sales and engineering team negotiated with the buyer to have one part ship directly from Italy to Dubai. The buyer said that was just fine, since it would save money for everyone on the project. The problem comes from the next decision that was made: They did not amend the letter of credit! Instead, it was a "handshake" amendment; the buyer said this would be just fine.
It gets worse. We issued documentation for the value of the order as stated within the letter of credit (this included the value of the item from Italy), and we stated in the documentation that the country of origin of all the merchandise was the USA. We provided all the documentation to our freight forwarder in the USA who submitted the documents to the bank for reimbursement.
The shipment from Italy is being held by customs in Dubai; it is critical to the installation of our product at the plant in Dubai and obtaining the balance of payment under the letter of credit. Help"”ideas are needed!
Yours,
Stressed and in need of advice!
Dear Stressed (and in need of advice),
What next?
Here are a few suggestions that I hope will help you with your situation:
Work closely with your freight forwarder, their agent in Dubai and the buyer's customs broker, and the buyer regarding the documentation. There are many steps that they may recommend. Immediately advise all parties of the:
country of origin for all products on each shipment, and
value of the goods shipped from Italy and the USA.
Instruct your USA-based freight forwarder to amend the Electronic Export Information (EEI) made for your USA shipment to reduce the value of the transaction; subtract the value of the shipment that was transported directly from Italy to Dubai.
Develop a letter of credit amendment process within your organization to avoid "handshake" amendments to future letters of credit.
Initiate a letter of credit training program for your entire team to avoid similar situations in the future that cause increased costs for changes and corrections after a shipment has occurred, plus disrupt the installation of the product at the customer's facility.
Establish an internal letter of credit review team and process once the order has been received and input into your ERP system, especially for high value transactions. Changes in production, product origin, delivery times and documentation can be caught to avoid export compliance and letter of credit payment issues.
You and your team have resources at your finger tips to avoid problems with shipping and commercial documents in the future! They include:
The nature of the customs entry process is that it lends itself to inaccuracies. Collecting the data for a customs entry is not unlike the game of telephone where the message gets distorted as it passes from one person to the next. Consider the typical import program.
The importer places an order with a buying agent that places an order with a trading company that places an order with a factory that produces the product and its version of commercial paperwork. The paperwork is passed back to the vendor and the freight forwarder. The vendor generates its version of the commercial invoice and submits it to the forwarder who sends a copy to the importer and the importer's customs broker. Meanwhile the vendor issued a price increase to the buying agent who sent a message to the import buyer who failed to update the company's purchasing system. The factory had excess materials so, as a favor, they shipped more product than ordered knowing that the buyer had a habit of charging back for quality discrepancies. Receiving didn't catch the overage and received the goods as ordered. The broker wasn't sure of the classification and tried to call the importer for an update but received no response. Need I continue?
Does this sound anything like the reality of your import supply chain? No wonder there are errors within your customs entries! Despite your repeated attempts to coordinate and control customs entry data, humans ultimately get involved and errors occur. Importers, I am assuming you are monitoring the data accuracy of your customs entries. You are exercising reasonable care in this area, aren't you? If you are doing your jobs you are also discovering these errors.
"To err is human, to forgive divine," so said the great poet Alexander Pope. Despite their self image we know that Customs and Boarder Protection (CBP) is not a divine entity. CBP is an earthly agency of the U.S. Federal Government that has its rules regarding errors and omissions within a customs entry. Despite their terrestrial abode CBP rules do permit a certain amount of latitude, which could be interpreted, I suppose, as forgiveness.
When an importer discovers an inaccuracy on an entry an importer is obliged to report that inaccuracy to CBP. Remember the declaration that appears on the bottom of the entry summary CBP form 7501 that states:
I also declare that the statements in the documents herein filed fully disclose to the best of my knowledge and belief the true prices, values, quantities, rebates, drawbacks, fees, commissions, and royalties and are true and correct, and that all goods or services provided to the seller of the merchandise either free or at reduced cost are fully disclosed. I will immediately furnish to the appropriate CBP officer any information showing a different statement of facts.
The site includes an example of a Post Entry Summary form along with a list of frequently asked questions. Briefly summarized, the PEA process is the method by which importers and their brokers can amend unliquidated entries. A PEA must be submitted as either an individual amendment letter (also known as a single PEA) upon discovery of an error or on a quarterly tracking report. The type of PEA, single or quarterly, will depend on the type of error corrected.
Single PEAs
All single PEAs must be filed at least 20 working days prior to the scheduled liquidation date of the entry summary. Single PEAs submitted after the 20th day will be rejected and returned to the filer as an "untimely submission." (Liquidation normally occurs at 10 months or 314 days.) Only one entry summary may be submitted with each PEA coversheet.
The single PEA process cannot be used for informal entry summaries nor can it be used to delete or cancel an entry.
Quarterly Tracking Report
Quarterly reporting can only be submitted for non-revenue PEAs or PEAs with a bill or refund resulting in under $20 and a value below $10,000. The quarterly tracking report must be submitted on a spreadsheet. It should contain the same data elements that are on the post summary adjustment coversheet, with an additional element indicating in which quarter the error was discovered. The report must be submitted 15 calendar days from the last day of the quarter.
Could filing a PEA trigger a CBP penalty or audit?
Filing of the occasional PEA should not trigger an audit. Routine and frequent PEA filings, however, might demonstrate a pattern of serious internal control weaknesses within the importer's program and, yes, these might trigger an enforcement action from CBP. Nevertheless importers have an obligation to ensure accuracy within their entries.
As troublesome as entry errors can be, compliant importers view them as opportunities to improve the controls within an import program. They learn to track and analyze the types and causes of errors. They realize that repetitive errors are a weakness in their control systems that require a fix. These could be as simple as personnel training issues or more complex such as computer system upgrades. Compliant importers also learn to audit 7501 entry summary data prior to submission to CBP thereby minimizing usage of the PEA process.
According to the Federal Register notice released on June 24, 2011, entry summaries filed using the ACE system must be corrected using the new PSC process. Effective September 22, 2011, PEA will no longer be accepted for entry summaries filed via ACE. The Federal Register notice also extends the PEA process another three years until June 24, 2014. With this new functionality CBP has made it simpler for importers and their broker's to make corrections when there is an error.
Perhaps there is a smidgen of divinity in CBP after all.
In my five-part series of articles about doing business in South Africa, I discussed the value proposition for the country, highlighted several international companies already conducting business in a variety of sectors, and talked about the challenges every company will face in South Africa. In this final article, I offer some suggestions to companies looking to expand into that market.
Recommendations
In South Africa, many traditional, established companies have not adopted their products nor their distribution networks to the needs of low-income people. Instead, complex products and distribution methods designed for more affluent consumers have been pushed into the market. It is time to reevaluate the international business model and adapt products to meet the needs of specific market segments.
Segmenting markets is the key to reaching black South Africans of all economic levels. This suggests that the attitudes and outlooks of consumers are more important than their incomes in determining their shopping behavior. To tap the bottom-of-the-pyramid market, it is important to launch affordable products that can be distributed via multiple small and medium enterprises and mom-and-pop stores.
Many of the mom-and-pop stores will need to be educated and trained to support products and provide services after sales. New pricing models must also be developed to cater to the bottom of the pyramid market. Lower prices are not the answer to the challenges faced, since many segments of the market in South Africa tend to be brand conscious and are willing to pay a price premium if trust is developed.
Final Words
South Africa has a relatively stable economy, abundant natural and labor resources, and well-developed financial markets. Growth in the coming years will be driven by increased investment as well as an expansion of trade and domestic consumer markets. However, international investors cannot ignore the fact that they will face daunting problems due to corruption, social problems, weak political systems in the sub-Saharan region, and social tensions. Additionally global players must be mindful of the marketing, operational and logistical challenges in South Africa and develop proactive strategies to deal with these challenges.
Editor's Note: It's been 10 years since al Quida launched its terrorist attack on the United States, and I'm sure you've read numerous articles"”some good, some bad"”looking back at the past decade on the country's war on terrorism. Here is one analysis that I think does a very good job of describing what has gone right and what has gone wrong with this war during the past decade.
This report is republished with permission of STRATFOR.
By George Friedman
It has been 10 years since 9/11, and all of us who write about such things for a living are writing about it. That causes me to be wary. I prefer being the lonely voice, but the fact is that 9/11 was a defining moment in American history. On Sept. 12, 2001, few would have anticipated the course the resulting war would take"”but then, few knew what to think. The nation was in shock. In retrospect, many speak with great wisdom about what should have been thought about 9/11 at the time and what should have been done in its aftermath. I am always interested in looking at what people actually said and did at the time.
The country was in shock, and shock was a reasonable response. The country was afraid, and fear was a reasonable response. Ten years later, we are all much wiser and sure that our wisdom was there from the beginning. But the truth is that, in retrospect, we know we would have done things superbly had we the authority. Few of us are being honest with ourselves. We were all shocked and frightened. Our wisdom came much later, when it had little impact. Yes, if we knew then what we know now we would have all bought Google stock. But we didn't know things then that we know now, so it is all rather pointless to lecture those who had decisions to make in the midst of chaos.
Some wars are carefully planned, but even those wars rarely take place as expected. Think of the Germans in World War I, having planned the invasion of France for decades and with meticulous care. Nothing went as planned for either side, and the war did not take a course that was anticipated by anyone. Wars occur at unpredictable times, take unpredictable courses and have unexpected consequences. Who expected the American Civil War to take the course it did? We have been second-guessing Lincoln and Davis, Grant and Lee and all the rest for more than a century.
This particular war"”the one that began on 9/11 and swept into Afghanistan, Iraq and other countries"”is hard to second-guess because there are those who do not think it is a war. Some people, including President George W. Bush, seem to regard it as a criminal conspiracy. When Bush started talking about bringing al Qaeda to justice, he was talking about bringing them before the bar of justice. Imagine trying to arrest British sailors for burning Washington. War is not about bringing people to justice. It is about destroying their ability to wage war. The contemporary confusion between warfare and criminality creates profound confusion about the rules under which you operate. There are the rules of war as set forth in the Geneva Conventions, and there are criminal actions. The former are designed to facilitate the defense of national interests and involve killing people because of the uniform they wear. The latter is about punishing people for prior action. I have never sorted through what it was that the Bush administration thought it was doing.
This entire matter is made more complex by the fact that al Qaeda doesn't wear a uniform. Under the Geneva Conventions, there is no protection for those who do not openly carry weapons or wear uniforms or at least armbands. They are regarded as violating the rules of war. If they are not protected by the rules of war then they must fall under criminal law by default. But criminal law is not really focused on preventing acts so much as it is on punishing them. And as satisfying as it is to capture someone who did something, the real point of the U.S. response to 9/11 was to prevent anyone else from doing something "” killing and capturing people who have not done anything yet but who might.
Coming to Grips
The problem is that international law has simply failed to address the question of how a nation-state deals with forces that wage war through terrorism but are not part of any nation-state. Neither criminal law nor the laws of war apply. One of the real travesties of 9/11 was the manner in which the international legal community"”the United Nations and its legal structures, the professors of international law who discuss such matters and the American legal community"”could not come to grips with the tensions underlying the resulting war. There was an unpleasant and fairly smug view that the United States had violated both the rules of war and domestic legal processes, but very little attempt was made to craft a rule of warfare designed to cope with a group like al Qaeda"”organized, covert, effective"”that attacked a nation-state.
As U.S. President Barack Obama has discovered, the failure of the international legal community to rapidly evolve new rules of war placed him at odds with his erstwhile supporters. The ease with which the international legal community found U.S. decision makers' attempts to craft a lawful and effective path "illegal and immoral" (an oft-repeated cliche of critics of post-9/11 policy) created an insoluble dilemma for the United States. The mission of the U.S. government was to prevent further attacks on the homeland. The Geneva Conventions, for the most part, didn't apply. Criminal law is not about prevention. The inability of the law to deal with reality generated an image of American lawlessness.
Of course, one of the most extraordinary facts of the war that begin on 9/11 was that there have been no more successful major attacks on the United States. Had I been asked on Sept. 11, 2001, about the likelihood of that (in fact, I was asked), my answer would have been that it was part of a series of attacks, and not just the first. This assumption came from a knowledge of al Qaeda's stated strategic intent, the fact that the 9/11 team had operated with highly effective covert techniques based on technical simplicity and organizational effectiveness, and that its command structure seemed to operate with effective command and control. Put simply, the 9/11 team was good and was prepared to go to its certain death to complete the mission. Anyone not frightened by this was out of touch with reality.
Yet there have been no further attacks. This is not, I think, because they did not intend to carry out such attacks. It is because the United States forced the al Qaeda leadership to flee Afghanistan during the early days of the U.S. war, disrupting command and control. It is also because U.S. covert operations on a global scale attacked and disrupted al Qaeda's strength on the ground and penetrated its communications. A significant number of attacks on the United States were planned and prosecuted. They were all disrupted before they could be launched, save for the attempted and failed bombing in Times Square, the famed shoe bomber and, my favorite, the crotch bomber. Al Qaeda has not been capable of mounting effective attacks against the United States (though it has conducted successful attacks in Spain and Britain) because the United States surged its substantial covert capabilities against it.
Obviously, as in all wars, what is now called "collateral damage" occurred (in a more civilized time it would have been called "innocent civilians killed, wounded and detained"). How could it have been otherwise? Just as aircraft dropping bombs don't easily discriminate against targets and artillery sometimes kills innocent people, covert operations can harm the unintended. That is the nature and horror of war. The choice for the United States was to accept the danger of another al Qaeda attack"”an event that I am certain was intended and would have happened without a forceful U.S. response"”or accept innocent casualties elsewhere. The foundation of a polity is that it protects its own at the cost of others. This doctrine might be troubling, but few of us in World War II felt that protecting Americans by bombing German and Japanese cities was a bad idea. If this troubles us, the history of warfare should trouble us. And if the history of warfare troubles us, we should bear in mind that we are all its heirs and beneficiaries, particularly in the United States.
The first mission of the war that followed 9/11 was to prevent any further attacks. That mission was accomplished. That is a fact often forgotten.
Of course, there are those who believe that 9/11 was a conspiracy carried out by the CIA in order to justify interference in our liberty. But an organization as capable as they believe the CIA is would not need a justification to abridge liberty. That was a lot of work to justify something, and the truly powerful don't need to justify anything. Nor do they need to leave people who are revealing the truth alive. It is striking that the "doubters" believe 9/11 was created in order to crush American freedoms but that the conspirators are so incompetent they cannot shut down those who have discovered the conspiracy and are telling the world about it. Personally, if I were interested in global domination triggered by a covert act like 9/11, I would silence those revealing my secret. But then I'm not that good at it, and the doubters all have reasons why they are blogging the truth and are not dead or languishing in a concentration camp.
I take this detour for four reasons. First, doubters should not be ignored but answered. Second, unless they are answered, they will be able to say the CIA (or whomever they think did it) needed one attack to achieve its goals. Third, the issue the doubters raise is not the structural integrity of a building but the underlying intent of the CIA in carrying out the attack. The why is everything to them, and it is important to point out that it is their explanation of motive that makes no sense. Finally, I am engaging the doubters here because I enjoy receiving an abundance of emails containing fascinating accusations and the occasional threat.
Considering the Failures
But to return to the main theme, it is important here to consider not only the successes but also the failures of the war, and here Iraq comes to mind. There is a case to be made that the Iraq campaign was not irrational, but even more interesting, I think, is the fact that no war is without its disastrous misjudgments, even successful wars. In my mind, the U.S. invasion of the Philippines in 1944 was a major mistake. It did little to contribute to the fall of Japan, cost far more than the 4,000 American lives lost in Iraq, and it could have actually delayed the end of the war. It was opposed by senior commanders and was essentially something Gen. Douglas MacArthur insisted on for political reasons. The Battle of the Somme in World War I cost 600,000 British and French casualties, with 60,000 in one day. Their total gain during the battle was perhaps six miles. And in the American Civil War, the federal drive into Virginia turned into a disaster.
Every successful war is built around a series of defeats and miscalculations. The perfect war is built around deeply flawed and unnecessary campaigns. My own personal selections are not as important as the principle that all successful wars contain massive mistakes. If we simply write off Iraq as one of these, that in itself does not change the fact that the American homeland was not attacked again. Did Iraq contribute to that? This is a question that warrants a long discussion. But conceding that it had no effect simply makes the post-9/11 war normal and, in that normality, tragic.
What has not been normal has been the length of the war. Heavy fighting continues in Afghanistan, Iraq is not quite done and new theaters for covert operations are constantly opening and closing. It is the first U.S. campaign"”Afghanistan"”that actually poses the most vexing problem, one that is simple to express: When is the war over? That, of course, depends on the goal. What is the United States trying to achieve there?
The initial goal of the invasion was to dislodge al Qaeda, overthrow the government that had supported it and defeat the Taliban. The first two goals were accomplished quickly. The third goal has not been accomplished to this day, nor is it likely that the United States will ever accomplish it. Other powers have tried to subdue Afghanistan, but few have succeeded. The Taliban are optimized for the battlefield they fight on, have superior intelligence and have penetrated and are able to subvert government institutions, including the Afghan military. They have the implicit support of elements in a neighboring major nation "” Pakistan "” that are well beyond American means to intimidate. The United States has no port from which to supply its forces except the one controlled by Pakistan and only complex and difficult supply routes through other countries.
On the other hand, the Taliban cannot defeat the United States, which can stay in Afghanistan indefinitely. But the major U.S. mission in Afghanistan is concluded. Al Qaeda has not used Afghanistan as a primary base since 2002. Al Qaeda in Pakistan, according to the United States, has been crippled. The Taliban, products of Afghanistan for the most part, have no international ambitions. Al Qaeda has relocated to other countries like Yemen and Somalia.
Given this, continued combat in Afghanistan cannot be linked to al Qaeda. It could be said that the reason to go to war in Afghanistan was to prevent al Qaeda's return. But the fact is that it doesn't need Afghanistan, and if it did return to Afghanistan, it would be no more dangerous to the United States than it currently is with its bases elsewhere.
In wars, and especially in counterinsurgencies, the mission tends to creep upward. In Afghanistan, the goal is now the transformation of Afghan society into one that is democratic, no longer corrupt by American standards and able to defend itself against the Taliban. This goal does not seem attainable given the relative forces and interests in the country.
Therefore, this war will go on until the United States decides to end it or there is a political evolution in Kabul in which the government orders us out. The point is that the goal has become disengaged from the original intent and is unattainable. Unlike other wars, counterinsurgencies rarely end in victory. They usually end when the foreign forces decide to leave.
There is talk of a long war against radical Islam. It had better not be. The Islamic world is more than a billion people and radical Islam is embedded in many places. The idea that the United States has the power to wage an interminable war in the Islamic world is fantasy. This is not a matter of ideology or willpower or any other measures. It is a matter of available forces, competing international interests and American interests.
Ultimately, there are three lessons of the last decade that I think are important. The first is the tremendous success the United States has had in achieving its primary goal"”blocking attacks on the homeland. The second is that campaigns of dubious worth are inevitable in war, and particularly in one as ambiguous as this war has been. Finally, all wars end, and the idea of an interminable war dominating American foreign policy and pushing all other considerations to the side is not what is going to happen. The United States must have a sense of proportion, of what can be done, what is worth doing and what is too dangerous to do. An unlimited strategic commitment is the definitive opposite of strategy.
The United States has done as well as can be expected. Over the coming years there will be other terrorist attacks. As it wages war in response, the United States will be condemned for violating international laws that are insensate to reality. At this point, for all its mistakes and errors"”common to all wars"”the United States has achieved its primary mission. There have been no more concerted terrorist attacks against the United States. Now it is time to resume history.
This report is republished with permission of STRATFOR.
I found an article online that you wrote regarding the value on a commercial invoice titled Repaired Goods: Import and Re-Export. I am a Transportation Coordinator for my current employer, and there has always been a question in my mind that I'm not sure how to answer.
Many times we ship items to customers free of charge as an incentive for a bulk order or just as samples for them to try out. I've always thought that their actual value must be listed on the Commercial Invoice whether we charge the customer or not. Usually when I do that, however, I always make a notation on the Commercial Invoice stating there was no charge to the customer. The value was for customs use only.
Is that the correct approach to a shipment of this nature? Thanks in advance for your assistance.
All the best, Storm Clouds in Minnesota
Dear Storm Clouds in Minnesota:
You are on the right track. There is guidance available in the Foreign Trade Regulations regarding value to be reported to Census via AESDirect; this will supplement your understanding of valuation. There are also letters posted to their website (see #163, "Proper Reporting of Exports of Merchandise Previously Imported for Repairs or Alterations, and Replacement Parts"), and they have a newsletter that can also be helpful. These resources are like an umbrella in rainstorms!
The buyer may want you to state a lower value to reduce their obligation for duty payment, but that is incorrect from the perspective of the U.S. government's regulations as well as the regulations of the buyer's country.
If the products being shipped are indeed samples, then have the packaging and the packing marked with an indication that the goods are for testing and sample purposes, not intended for resale.
If the sample has been compromised in any way to ensure that the product will not be resold in the market of the customer, then the value is nominal or zero. One example is a t-shirt that has been slit up the front or back, so it cannot be worn.
Thanks for your question! All the best (& stay out of the rain)!
Following is an excerpt from an email exchange I had with a reader of this column.
Dear John:
I read your recent article. Once again it was clever, witty and succinct. I appreciate your knack of delivering dry information in a concise, easy-to-read format.
I wonder if you could do me a favor and point me towards a simple central source for learning how to import from abroad to the U.S. for resale. I'm looking for a step-by-step, easy to understand source akin to "Importing for Dummies."
Thanks!
Douglas U.M. Bower, esq.
I knew it! First they oil you up with praise and then they want free consulting. Such is my life! I responded nevertheless.
Dear D.U.M.B.e.:
Thanks for the email and the effusive, well-deserved praise. I am pretty wonderful, aren't I? (This is only one of the reasons I am self-employed.)
There are a couple of resources that come to mind that introduce importing to the uninitiated. Consider the following:
Customs and Border Protection (CBP) has issued a free publication entitled Importing Into the United States. As you might imagine, this 211 page book is ego- or should I say Customs-centric focusing on the regulations and mechanics of the U.S. customs entry process. It does, however, break down the basics of the regulations.
CBP also has an area on its website entitled "Tips for New Importers and Exporters." This site helps put some of the regulatory requirements into perspective.
I've written an introductory book that is available on the IBT website. How to Become an Importer is a 75-page pamphlet that speaks to the broader importer issues of contracting terms, payment methods, logistics, as well as the customs entry process. I wrote the book with a former boss in mind. He was no dummy but was simply unaware of, and therefore underestimated, the complexities and elegance of the importing process.
Each section of the book lays out critical steps in importing and challenges the reader to think about the direction they will take with their import program. I've also written a much longer tome (411 pages) that delves more deeply into the U.S. importing process. This book is also available at the IBT website.
A quick search of Amazon.com uncovered an actual book entitled Import/Export for Dummies. I've not read the book, so I cannot offer a recommendation. A brief review of its table of contents shows it to be comprehensive with a focus on the purchasing and marketing sides of importing and exporting. At 360 pages it may be more than the simple source you are seeking.
Consider this as well. New importers face the challenge of understanding the myriad of regulations imposed on imported products from other government agencies. CBP is merely the "beat cop" assigned to enforce the regulations for about 40 other agencies. CBP summarizes its other agency responsibilities at its website. Do your research on those agency websites as well.
Best of luck to you!
John
Dear John:
So what you are saying is there is no single source?
Doug
OK, Doug, you busted me. You asked a simple question, and I gave the consultant's shotgun response of options.
Here is the concise answer: No, there is not a single source of simple step-by-step instructions for importing into the United States.
Now for the long answer. And there shouldn't be! Importing is not for dummies. It is far too complex to be boiled down into a step-by-step list. There are several reasons for this.
Each Supply Chain Is Unique
Each import supply chain is different requiring different solutions and business processes. I suppose those steps could be simplified and put into a generic checklist of sorts, but such a list would be a broad outline that would be almost meaningless. It would read something like this:
Find a vendor and select a product
Place a purchase order
Pay the vendor
Ship the product
Clear U.S. Customs
Take delivery
Each one of those simple steps involves a universe of complex details, options and decisions. The sources I mentioned in my first message to you give an insight into those complex details. As we delve into the details we would find that importers have their own methodologies that work for them.
Importing Is Not Linear
Consider also that importing is not a wholly linear process that lends itself to a step-by-step process. Like any business activity there is an order to things, and there is cause and effect. Because of the number of players involved in any import transaction several activities occur concurrently. I am an extremely linear (rigid?) thinker, yet I tend to look at importing as more like juggling.
Try this exercise. Attempt to flow-chart your import program in one simple line. It is highly unlikely you will be able to do so. It is more likely your page will resemble an electrical diagram than it does a supply chain flow.
It Takes Brain Power
Customs law requires importers to be informed of the regulations and to exercise a hyper due-diligence standard known as reasonable care in complying with them. There is no step-by-step instruction manual or third party service provider that can take on that responsibility for you.
We are dealing with U.S. Government regulation. When has that ever been simple? Any "how to" book by its nature will have to gloss over some of the details. At some point importers must dive into the source documents.
Get Reading!
I don't mean to beat you up. As a newcomer to the trade I realize you came to me for advice. You somehow seem to have developed the perception that importing can be simplified into a step-by-step checklist. I am trying to challenge that impression.
I stand by my original response and advise you to explore the sites and publications I first recommended. These are introductory and are the first ball you may wish to throw in the air as you learn to juggle the various disciplines of commercial importing.
Learning the regulations and the commercial competencies to be a successful importer is truly not for dummies. It also is not rocket science. With a little research and reading any smart person can learn how to do it.
Since the end of apartheid and its first democratic elections in 1994, South Africa has liberalized the economy, enacted economic reforms to attract foreign direct investment (FDI), and performed consistently well on various surveys of competitiveness and the business environment. South Africa's value proposition that I discussed in a previous article may motivate the international marketer to rush in to take advantage of the market opportunities. However, international businesses should recognize that doing business in South Africa is not without challenges.
In 2010, the World Economic Forum's annual Global Competitiveness Report polled executives on the issues facing international businesses doing business in South Africa. The top five responses were inefficient bureaucracy, poorly educated work force, crime and theft, restrictive labor regulations, and corruption.
In Part 4 of my series on South Africa, I will discuss the key challenges businesses face in that country including the prevalence of non-tariff barriers, competition for holding companies, ineffective enforcement of intellectual property rights regulations (IPRP), piracy and counterfeiting, logistical nightmares, and the fragmented infrastructure.
Non-Tariff Barriers
While the Southern African Development Community (SADC) has moved towards liberalizing trade to make the flow of goods between countries easier and economically more rewarding, non-tariff barriers continue to be a concern.
Case in point: South Africa has a complex import process. The South African Revenue Service (SARS) defines approximately 90,000 product tariff codes that are strictly enforced on all imports. New-to-market U.S. exporters are actively encouraged to engage the services of a reputable freight forwarding/customs clearance agent well versed in the South African convention.
Other non-tariff barriers to trade often cited include port congestion, technical standards, customs valuation above invoice prices, theft of goods, import permits, antidumping measures, IPRP crimes, an inefficient bureaucracy, and excessive regulation. I would recommend reading my article, Beware of Non-Tariff Barriers in Global Markets, to understand the business implications.
Competition in Retail Sector
Due to South Africa's history of apartheid and allied international sanctions, retailing is dominated by several large South African holding companies, which account for by far the majority of the leading retailing brands in South Africa. The holding companies operate in various categories ranging from grocery to clothing and footwear and from furniture to furnishings. Not only do these companies offer a number of brands within a certain area of retail, but they also ensure that they capture a core target market, whether lower-, middle- or upper-income consumers.
Fragmented Retailing
In South Africa, informal "Spaza" shops originating primarily in black homes are an especially prevalent type of retail operation. These businesses typically operate in a section of an occupied home or in another structure on premises used for residential purposes. Many Spaza shops are operated as family endeavors, selling food, beverages, and various consumer goods.
In addition there are micro retailers operating from residences called Tuck shops. These Tuck shops are found around taxi stands and public transit stations. Both Spaza and Tuck shops play key roles in poor communities. They facilitate trade by breaking bulk, stocking inventory, and providing convenience of location.
Other words commonly used to describe the informal retail structure include "sheeban." These are all located in black townships outside of Johannesburg. Hawkers"“individuals without permanent structure"”are also common features of retail trade. To succeed in this market, international marketers must develop strategies to embrace the fragmented retailing structure by finding ways of selling products to these retail operations.
Logistical Challenges
South Africa has great roads and expressways, but public transport is either non-existent, unsafe or unreliable. South Africa has everything that the rich need, but the poor lack basic amenities from public transportation to schools. Since the majority of poor live in the rural area, about 50% of them live more than 30 minutes from the nearest clinic and post office.
In addition, there is insufficient space for trucks in the port and a shortage of equipment to load trucks. Truck queues can cause delays of between three and six hours, translating into a cost of $46 per hour per truck. Trucks often wait in queues of up to five kilometers long.
Intellectual Property Right Protection
South Africa's value proposition coupled with the high penetration of western media, technology and lifestyles also present a lucrative market for counterfeit goods. Gray marketing and parallel importation also pose challenges, since there is no direct legal protection for local distribution against parallel imports. The major gateway for inbound counterfeit goods is Johannesburg International Airport.
In recent years, the South African government has introduced measures to enhance enforcement of the 1997 Counterfeit Goods Act, but the enforcement has been very lax. Despite efforts to improve IPRP enforcement, monetary losses from counterfeiting and piracy remain high. I would recommend reading my article, Counterfeit Products: Why Should You Care?, to understand the implications for marketers of branded products and services.
Bottom of the Pyramid (BOP)
Though South Africa is often classified as an emerging economy, it might be more correctly seen as having two economies"”the normal economy of sophisticated consumers and firms that are investing all over the world, and the rural economy that still contains many subsistence farmers or peoples who are living off of meager agricultural incomes and assistance from the state or their more fortunate relatives. One of the key challenges for post-apartheid South Africa is bringing the benefits of the country's formal, first-class economy to the low-income people who make a sizable majority of the population. Unemployment at the BOP could be as high as 70%.
A large percentage of the poorest households continue to live in informal and traditional dwellings. Approximately 66% of South Africa's poorest have electricity, while less than 50% of all poor households have running water. Since the majority of poor live in the rural area, about 50% of them live more than 30 minutes from the nearest clinic, post office or formal retail store. Reaching them can be a real marketing challenge.
Social Unrest
The crime rate in South Africa is high, one of the highest in the world since it affects the everyday lives of people. Rising social tensions among the South African poor have resulted in incidents of violence. For the greater part of 2009, many townships in South Africa were literally burning up with mass protests against poor service delivery and the slow pace of development in their communities. The people were angry with their government for not fulfilling most of the promises made to them during election campaigns. Although the political situation is stable in South Africa, nationwide strikes and demonstrations can occur.
Skilled Labor Shortage
Although the education system has been reformed and all South Africans now have access to education, approximately 7.5 million people are functionally illiterate. Businesses in many different sectors in the South Africa economy experience severe difficulty in recruiting because of this skills shortage.
The prevalence of HIV infections in South Africa is, like other countries in southern Africa, among the highest in the world. These health-related issues impact workforce productivity and the life expectancy of workers.
As one can see from this article, entering the South African market is no sure thing. Despite the many opportunities that exist in this country, there are challenges that must be overcome. In my final article of this series, I make some recommendations for businesses looking to enter and succeed in South Africa.
In the second article of this three part series, I discussed some common variations in terms and practices in the Incoterms® 2010 rules and definitions. In this article I will focus on some best practices that sellers and buyers may use to manage their delivery term risks.
As discussed in previous articles, there are variations in how sellers and buyers do business, yet each has to manage their risk exposure in the transaction. I will consider this from both the cost and risk point of view.
Best Practice for Costs and Risks
One of the critical factors for sellers and buyers is undoubtedly cost. The seller needs to carefully gather all necessary information to be able to set an appropriate cost that, whilst producing the highest profit possible, will still make the price attractive to buyers in the marketplace. The buyer's role is to gain the best deal possible.
Even though both parties view the transaction from opposite sides, they share a common requirement: being able to determine the cost of the transaction properly"”what to include and what not to include depending on the Incoterms® 2010 rule chosen in the particular transaction.
There are a number of methods that may be used to capture cost data, but one of the most commonly used approaches remains the checklist. This is where the seller or the buyer builds up the cost from the chosen Incoterms® 2010 delivery point to destination, unless that happens to be a DDP transaction, in which case the buyer essentially has the total cost already. It appears, though, that a number of the checklists that are commonly used lack the detail required to make sure all costs are captured and that, more importantly, double charging does not occur.
For the best situation to develop, the seller and the buyer need to communicate with each other about what exactly is being offered and accepted. It may seem basic and common sense, but without this conversation it is not possible for the buyer to ascertain whether the seller's price includes unloading costs, for example, if these are included in the freight charges. If the seller cannot provide this sort of detail, this should signal to the buyer that the seller has not paid enough attention to the costs, and that raises all sort of questions about the accuracy of other cost information.
Against each consignment the details of charges should be specified, especially where contentious or uncertain fees may occur such as loading and unloading, terminal handling charges, or even delays in border clearance.
Another method of making sure costs are reasonable from the buyer's perspective is to seek differential costing with physical details of the consignment to be shipped. For example, a consignment of 10,000 kilograms with a volume of five cubic metres needs to be moved between two points. What will the difference in cost be if the price is FCA ex seller's premises, FCA port of departure, CPT or CIP? The buyer is in a position to do their own "transport shopping" and work out whether it is better to buy using one Incoterms® 2010 rule or another.
A prudent seller will operate transparently, enabling the buyer to achieve certainty on the accrual of charges so product costing can be accurately determined down to the last dollar.
In choosing to trade with another party, the issue of risk is an inevitable aspect of any transaction. Risks and cost are inextricably linked as ultimately risk is quantified in monetary terms.
The checklist approach described above is a good risk-management tool. Another important consideration is being clear about the delivery point and the risk transfer point. Yes, the Incoterms® 2010 book says it all, but I bet a lot of individuals have not read this thoroughly or considered the risk element enough. So, develop your checklist, make it comprehensive, and customise it to particular trade routes or carriers so that you know what is being charged and why.
If you are a seller and you are agreeing to provide a transport document when it is not necessary (such as in FCA or FOB transactions), you are entering into a contract of carriage. You should carefully consider the implications. Will you prepay the freight on behalf of the customer even when you are offering extended payment terms, or will you make a separate arrangement for the payment of freight? Will this actually work?
There are cash flow implications in pursuing this option as the seller pays the carrier now but does not recover the cost of the sale (that includes freight charges) until the future settlement date. Under these circumstances the seller is effectively subsidising the cost of freight.
If we consider the issue of letter of credit trading under these circumstances, this would need to be set up with a split payment option allowing for the immediate reimbursement of freight charges on lodgement of transport documents with the bank. However, the bank needs to check the documents for compliance before making the payment.
It is unlikely that the bank will agree to these arrangements. Seeking payment of freight charges outside the letter of credit may not work in reality, because unless a letter of credit is being used to satisfy government requirements, it is used where there is insufficient payment trust between the seller and the buyer"”a risky situation indeed. It may mean that the seller has to add a finance factor on the freight charges to recoup the "out of pocket expenses."
In conclusion, to manage your risks and costs you need to understand the transaction and have complete knowledge about its details. Be specific about what you include in your selling or buying prices; that is the only way to eliminate cost surprises.
We have an export customer who placed a telephone order for a shipment of goods they needed quickly. They gave us a purchase order number and instructed us to bill one of their subsidiaries. We processed the order quickly and shipped with all the documents showing the customer as the subsidiary company as requested.
When we received a hard copy of the purchase order it was actually from the parent company and not the subsidiary. Now they are telling us that the parent company IS the customer and that all paperwork should match the purchase order. All documents, including the commercial invoice, ocean bill of lading, AES filing etc. show the subsidiary company as the customer. The shipment is on the water and due to arrive in port tomorrow or the next day. The customer is asking us to correct the paperwork before the shipment clears customs. Is there any way we can correct the documents to show the correct customer at this point before it clears customs overseas?
Our paperwork essentially shows the wrong customer! Any advice would be greatly appreciated.
Thanks in advance,
L. Luckless
Dear L. Luckless:
If the order was under an open account or cash in advance transaction then the three step process provided below should be helpful. If any of the three conditions listed here are true, however, then the recommendations provided below need significant modification:
The order is under a letter of credit or documentary collection shipment.
An export license was issued. If an export license was issued, there are additional issues to contend with that may require (internal and/or external) legal guidance.
A foreign government agency or consulate stamped documents to verify that they were presented to them for additional certification.
There are challenges that you will face in correcting the documentation as the customer wishes; I hope these ideas for next steps will help smooth the way for you:
Contact the carrier that issued the international bill of lading and ask them for the exact procedure for cancelling and reissuing the international bill of lading. This may include issuance of a letter by your corporate legal or director level officer indicating that you are holding them harmless for mis-delivery of the goods to an incorrect party.
Reissue the commercial documentation with the new name and forward them via courier to the designated individual at their specified address along with an original copy to the designated import broker and then email copies to all parties.
Amend the AES filing once you are sure that all of this is possible and they have validated the names, address, phone, and fax numbers.
This will take tight coordination and there will likely be additional expenses involved, which you may be able to bill the buyer. Good luck.
All the best!
Cathy
Dear Cathy:
Thanks for your help with our paperwork question.
It's a good customer and we sold on credit. We normally require payment in advance. The product does not require an export license. Whew!!
Our customer's forwarder actually handled the export details. We just forwarded the documents and requested verification. However, this was a shipment to Saudi Arabia and there was legalization, I believe, of the commercial invoice and certificate of origin. I guess one concern now is having enough time to legalize new documents.
Also, I am wondering if there is any way to prevent the shipment from being released to customs until we correct the paperwork?
If you have any more thoughts, let me know. I am relatively new to all of this so thank you very, very much for being willing to help.
Again, thanks in advance,
L. Luckless
Dear L. Luckless:
This is one of those shipments that will take some amount of time to manage, and it may not be a pretty result. The buyer's forwarder will need to be involved and may already be in communication with the buyer. As the buyer's forwarder, they should be able to help you and the buyer resolve the issues with the carrier, obtain expedited legalization of the documents, and instruct their counterpart in Saudi Arabia to hold the shipment for new documentation.
My recommendations are:
Obtain written instructions from all parties.
Provide written communication to all parties after conversations.
Write the communications as if you were writing to a dear great grandparent with full respect and without the use of any slang.
Be clear in the initial communication that the buyer is responsible for all related expenses for this correction and they are to be paid by the forwarder who will invoice the buyer.
Work with your international sales team and keep them involved in every step of this process as they may be able to assist.
Remember that the advice I'm giving is without full or complete knowledge of the situation at hand, and there may be extenuating circumstances that should change the responses. Good luck.
I've been continuing my exploration of chapter 98, the basement of the U.S. Harmonized Tariff Schedule (HTS), and stumbled across the following classifications:
Articles specially designed or adapted for the use or benefit of the blind or other physically or mentally handicapped persons; parts and accessories (except parts and accessories of braces and artificial limb prosthetics) that are specially designed or adapted for use in the foregoing articles:
Articles for the blind:
9817.00.92
Books, music and pamphlets, in raised print, used exclusively by or for them
9817.00.94
Braille tablets, cubarithms, and special apparatus, machines, presses, and types for their use or benefit exclusively
Other
9817.00.96
The description of the first two classifications is self explanatory. What piqued my interest was naturally the magical word FREE that follows each of the three classifications in the HTS. I was also curious about what could possibly fall under the third, and apparently broad, category of "other."
Classifications within chapter 98 frequently come with a history and this grouping is no different. It turns out that in 1952 the United Nations enacted the Agreement on the Importation of Educational, Scientific and Cultural Materials also known as "The Florence Agreement." Under this program signatories agreed to allow the duty-free treatment of goods that were determined to facilitate the free exchange of knowledge and ideas. In 1976 the program was modified to incorporate the "Nairobi Protocol" that expanded the scope of the Florence Agreement to incorporate articles for the betterment of the physically and mentally disabled as well as for the blind.
The U.S. first implemented the Florence Agreement, including the Nairobi Protocol, in 1983. The law has undergone several revisions ultimately resulting in the three classifications above. The program is administered by the U.S. International Trade Administration (ITA) that, until 2010, required importers to submit a supplementary form to the ITA. The ITA no longer requires the form; rather, it collects its information through entry data submitted by importers. The ITA reserves the right, however, to request additional information from importers of goods using these classifications.
We are still no closer to understanding what might fall under the third classification of 9817.00.96 or "Other."
(i) All articles specially designed for the educational, scientific or cultural advancement of the blind which are imported directly by institutions or organizations concerned with the education of, or assistance to, the blind, approved by the competent authorities of the importing country for the purpose of duty-free entry of these types or articles, including:
(a) talking books (discs, cassettes or other sound reproductions) and large-print books;
(b) phonographs and cassette players, specially designed or adapted for the blind and other handicapped persons and required to play the talking books;
(c) equipment for the reading of normal print by the blind and partially sighted, such as electronic reading machines, television-enlargers and optical aids;
(d) equipment for the mechanical or computerized production of Braille and recorded material, such as stereo-typing machines, electronic Braille, transfer and pressing machines; Braille computer terminals and displays;
(e) Braille paper, magnetic tapes and cassettes for the production of Braille and talking books;
(f) aids for improving the mobility of the blind, such as electronic orientation and obstacle detection appliances and white canes;
(g) technical aids for the education, rehabilitation, vocational training employment of the blind, such as Braille watches, Braille typewriters, teaching and learning aids, games and other instruments specifically adapted for the use of the blind.
(ii) All materials specially designed for the education, employment and social advancement of other physically or mentally handicapped persons, directly imported by institutions or organizations concerned with the education of, or assistance to, such persons, approved by the competent authorities of the importing country for the purpose of duty-free entry of these types of articles, provided that equivalent objects are not being manufactured in the importing country.
While the above list provides a better understanding of articles for the blind, bullet (ii) does not provide us with any more information about the "other" classification.
A peek into the Customs Ruling Online Search System (CROSS) and searches on the word "Nairobi" or the number "9817.00.96" begin to answer the question. Within CROSS we find nearly 400 rulings that either extend the duty-free benefit under the Nairobi Protocol or limit its application.
A wide range of goods are found to fall under the protocol including:
Hearing aids,
Grab bars,
Pacemakers,
Incontinence briefs,
Diabetes monitoring devices,
Specially designed or modified furniture, and
Electronic voice synthesizers.
The rulings also underline that parts and accessories that are exclusive to goods falling under these classifications are also subject to the protocol. When meeting this exclusivity test the following articles have been found to be duty free:
Hearing aid batteries,
Carrying cases, and
Wheel chair components.
Readers are encouraged to peruse CROSS to gain a deeper understanding of additional articles, components and accessories that are included and excluded from the protocol. If an importer has a question about whether a product is eligible for the protocol, submitting for a binding ruling is a surefire method of answering that question.
When taking advantage of the Nairobi Protocol classifications of 9817.00.92, 9817.00.94, and 9817.00.96, the importer must also report the 10-digit classification of the good as provided for within chapters 1-97 of the tariff. The importer will also report the statistical quantity associated with that classification.
The astute among you may have noted that many of the goods that qualify for duty-free treatment under the Nairobi Protocol are already themselves listed as duty free within chapters 1"“97. Why would an importer take on the additional administrative burden of claiming the additional exemption in chapter 98? Classification under the Nairobi Protocol not only eliminates duty but it also eliminates application of the merchandise processing fee or MPF.
Use of the Nairobi Protocol is based on actual end use. This requires the importer to be able to demonstrate that end use through business records. For some this may be simple matter. For others, such as distributors of components, it may require surveying customers to demonstrate a qualifying end use.
As with many of the provisions under chapter 98, the use of the Nairobi Protocol is not mandatory. If your goods, however, qualify for the program, why would you not take advantage of it?
Now excuse me as I go back into the basement and see what other interesting duty exemption provisions I can uncover.
Located at the southern tip of the continent of Africa, South Africa has considerable advantages as a location for doing business. It boasts a strategic location, a favorable regulatory environment, a sophisticated financial structure, a well-developed transportation system, an established manufacturing base, and a sophisticated information technology structure.
Given South Africa's value proposition outlined in my last article, there are numerous opportunities for marketing and selling consumer and business-to-business products in multiple sectors and in multiple industries. Let us review the global players that have taken advantage of opportunities offered by South Africa:
In November 2010, the Airbus A400M military transport aircraft began its manufacturing operations in South Africa, which is a testament to the fact that South African manufacturers can hold their own with the best in the world when it comes to high-end engineering.
Mercedes-Benz South Africa made a $281-million investment in its East London plant ahead of its manufacture of the next generation C-Class, which will hit global markets in 2014.
Toyota South Africa was established in 1961. For the past 30 years Toyota has sold more vehicles than any other car manufacturer in South Africa and currently holds a market share of about 23%. It has sold more than three million vehicles since its formation and has an annual production capacity of more than 200,000 vehicles.
Vehicle manufacturers such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota have production plants in the country. Automotive component manufacturers including Arvin Exhaust, Bloxwitch, Corning and Senior Flexonics have all established production bases in the country.
ABB South Africa, a subsidiary of global power and automation technology group ABB, plans to add business to its process automation portfolio for customers in the mining sector.
Brazilian firm WEG has acquired a 51% stake in South Africa's Zest Electric Group as part of its African expansion strategy. During the 30 years that Zest has represented WEG in southern Africa, it has become the market leader in the supply of electric motors throughout Africa.
Leading telecommunication brands like Siemens, Alcatel-Lucent, SBC Communications, Telekom Malaysia, Cell C and Vodacom have made significant investments in the country. In a bid to exploit South Africa's abundant sunshine and reduce reliance on electricity, Vodacom has launched a low-cost solar-powered mobile phone with the unique ability to charge on the go.
Global retailers entering South Africa include operators such as Pick n Pay, Edgars, Woolworths, ShopRite, PEP Stores and Walmart.
Future Prospects in Select Groups of Industries
In the electronics industry, investment opportunities lie in developing access control systems and security equipment, automotive electronic subsystems, systems and software in the banking and financial services sectors, silicon processing for fiber optics, integrated circuits, and solar cells. There are also significant opportunities for the export of hardware and associated services as well as software and peripherals.
There is strong growth in private security industry technology, such as closed-circuit television and digital surveillance equipment, sophisticated access control systems (smart card technology), and IT systems. Many cities have introduced surveillance cameras, and businesses are increasingly updating systems with the latest technology. Home security is another key area.
The agricultural sector is a mainstay in South Africa's economy and holds many opportunities with both large commercial and emerging farmers in areas such as capital investment, training, equipment and services supply. One of the main areas of growth is the demand from small and medium-sized companies for high-end computer systems. This is set to become a major target for IT companies in the near future. The South African government is also expected to be a major purchaser of software.
South Africa has always had a well-developed food and beverage industry, partly because of the country's major agricultural activity and partly because of its relatively sophisticated food requirements. A number of multinational companies have formed partnerships with local food companies, and new opportunities have opened up. For example, Nestlé is building two new multimillion-rand factories in Babelegi, a small town in the North West Province, where it will manufacture some of the products it currently imports.
A September 2007 study by Euromonitor International found that as a growing number of women enter the work place, South Africans are finding it harder to find the time to prepare meals at home. Demand for fast-food restaurants to serve time-strapped families is increasing. With an expanding consumer base and a growing disposable income, South African consumers are prepared to pay premium prices for well recognized international brands.
As these examples clearly illustrate, opportunities exist for doing business in South Africa. That doesn't mean there aren't difficulties. In Part 3 of my series, I will discuss the challenges of doing business in South Africa.
In the first article of this three-part series, I discussed the responsibilities of the seller and buyer in relation to freight and associated charges depending on the Incoterms® 2010 rule chosen in the contract of sale.
In this article I will focus on some of the most common variations in terms and practices that sellers and buyers need to consider so that the cost of the transaction can be properly accrued and to ensure certainty about the point at which risk is transferred.
First, I will concentrate on the multimodal term FCA (and by implication CPT and CIP) and DAT and DAP; then I will discuss the sea and inland waterways transport term FOB (and by implication CFR and CIF). For the purpose of this article I will be focusing on international transactions only.
FCA"”Free Carrier
Whilst the term FCA is very flexible, it can give rise to some misunderstandings between the seller and the buyer as to which costs accrue to which party and who is responsible for providing transport documents. This is because the delivery point under FCA can vary anywhere from the seller's premises to the point of export, be it the wharf or the airport, or where land-based transport is used for export, the road or rail terminal.
Given that the majority of goods are transported by sea and that these are typically carried in containers, I will primarily concentrate on this aspect.
Consignments carried in containers are inevitably part of a multimodal transport movement as they may leave the exporter's premises loose (unpacked) destined for a container packing warehouse and subsequently on to a freight forwarder's premises for eventual delivery to the export wharf. In fact, most containers are not delivered directly from the exporter's premises to the wharf; rather they are 'staged,' meaning one or more parties are involved in the handling of the consignment from the time it leaves the export premises until it reaches the export wharf.
Recent statistics from the Port of Melbourne in Australia confirm this, as approximately 54% of export containers are staged. It is therefore important for both sellers and buyers to pinpoint exactly where delivery is to take place.
Let us work through a couple of examples.
Example 1
Imagine that the seller agrees to FCA Incoterms® 2010 ex seller's premises (substitute this for an actual collection point with full postal address details). On this basis, the seller's cost responsibility is limited to the mandatory provision of export clearance, with no additional costs being incurred. The responsibility of collecting the goods from the exporter's premises and having them forwarded to the final destination is the responsibility of the buyer. The risk in transit transfer point also happens to be at the seller's premises.
This means that the buyer bears any transport risk whilst the goods are travelling within the exporter's country. The buyer may well expect to achieve a comparatively lower buying price but has comparatively more costs to bear as they are now responsible for the movement of the goods.
Example 2
Imagine that the seller agrees to FCA Incoterms® 2010 Port of Imagination, Fantasyland (substitute this for an actual port location and country of your choice). On this basis, the seller's costs are extended to delivering the goods to the nominated export wharf, and the risk associated with the movement of the goods until they reach that wharf remains with the seller.
This means that any costs levied by the freight forwarder from the time the goods leave the exporter's premises until they reach the wharf apportion to the seller. This may include any container loading and unloading costs up until delivery is achieved. Terminal handling fees, loading and unloading charges (and other associated charges) continue to be a problem as freight forwarders and carriers across the world use different methods for charging these. For example, at times loading and unloading costs are separately shown from freight costs, whereas at other times freight charges are all inclusive.
Therefore, it is important that the seller and the buyer are able to determine which costs are included/excluded from the selling price and also at which point the risk transfers.
One of the potential sources of problems that may occur in FCA is where the buyer wishes the seller to procure a transport document or where a bank through a letter of credit insists on a transport document being provided. Strictly speaking, the seller is under no obligation to provide a transport document to the buyer, but even the Incoterms® 2010 rules recognise that this happens and allow for this, as long as the seller is willing to do so.
There are some issues that may arise out of this situation. There may be a "blurring" of the risk and cost responsibilities between the seller and the buyer because of uncertainties about the additional costs incurred by the seller in procuring the transport document that will need to be recovered from the buyer. Additionally, the seller is likely to be financially worse off by agreeing to this course of action as carriers typically wish to be paid prior to the carriage of the goods or soon after the sailing of the vessel. However, the seller may have offered extended trading terms to the buyer, for example, 90 days payment terms. Under this circumstance, the seller effectively subsidises the freight cost to the buyer unless a separate invoice is issued requiring immediate payment. This may not be practicable or not so easily done where letter of credit payment terms are in place.
Under CPT and CIP Incoterms® 2010 rules, the situation is somewhat different and simpler as the seller does have an obligation to provide a transport document to the buyer and additionally has responsibility for the payment of freight charges to destination. Whether unloading charges at destination are included in the freight charges or not is a matter for the seller to inform the buyer. However, the risk transfer point under CPT and CIP depends on where the first carrier becomes involved. The default position of the Incoterms® 2010 rules is that the risk transfers from seller to buyer once the goods are made available at the disposal of the first carrier involved in the journey.
DAT and DAP
The situation with charges is simpler under DAT and DAP, as under the Incoterms® 2010 rules the seller is responsible for all charges and risk in transit until the goods reach their agreed destination point. Under DAT, the seller is responsible for unloading the goods at the nominated terminal, whereas under DAP the buyer is responsible for unloading the goods at the agreed delivery place.
FOB
By far the biggest problem with FOB is its continued incorrect application to container traffic. As discussed above the majority of container traffic is not delivered directly to the wharf; rather it is staged. The notion of FOB relies on delivering the goods alongside the ship to be loaded onto the vessel directly from the delivery vehicle. This is hardly the case these days in practice. In fact, with the increased security measures in place at ports across the world, it is very unlikely that a delivery vehicle will get anywhere near the vessel with a container.
It must also be remembered that the term FOB was coined at least two centuries before containers became a reality. How can a term that was invented two hundred years ago suddenly become 'the norm' with containers that have only been around for 50 years?
The basic responsibility under FOB is for the seller to pay for all charges until the goods have been loaded onto the vessel at the agreed port. This includes loading charges. Where the buyer wishes the seller to provide a transport document, under FOB double charging may occur depending on how the carrier issues the invoice. Where the carrier separates loading charges at origin, the seller bears these, but this is not the case where the carrier only issues a total invoice charge. In this circumstance, the buyer will be paying for the loading charges at origin as they cannot be determined. Therefore, there is a 'hidden' increase in costs.
These examples hopefully provide the reader with the understanding that the incorrect use of FOB for container traffic complicates the issue of who is responsible for bearing which charges, particularly port charges, as the lines of responsibilities become blurred. Therefore, please use FCA for sea container traffic instead.
Lastly, in relation to FOB, it should be noted that the ship's rail under Incoterms® 2010 rules is no longer the risk transfer point as it was in the past. The seller now has to deliver the goods on board.
The situation with CFR and CIF Incoterms® 2010 rules is simpler. Under these terms the seller is responsible for providing a transport document and paying for loading charges at origin, but not unloading charges at destination, unless these were part of the contract of carriage.
In conclusion, sellers and buyers need to be clear about the charges that may accrue to one party or the other to avoid surprises. Variations to the standard terms need to be carefully considered prior to signing the contract of sale. Changes in practices may also be required to more accurately select the appropriate term for the correct mode of transport.
In my next article I will focus on some best practices that sellers and buyers may use to manage their delivery terms risks.
"Change is inevitable in a progressive society. Change is constant." - Benjamin Disraeli
Perhaps you've heard? The Harmonized System Convention (HS) is to be revised yet again! It seems as if it were only yesterday when the World Customs Organization (WCO) released the HS 2007 edition.
As you might recall the HS is the six-digit nomenclature on which the U.S. Harmonized Tariff Schedule and the Schedule B are built.
"Oh bother!" - Winnie the Pooh
Yes, change can be a bother. When the underlying HS changes it causes a cascading affect that influences national tariffs such as the U.S. HTS. It also influences trade agreements that use tariff-change rules. As importers and exporters it means we need to update our classification databases to reflect the changes.
"The world hates change, yet it is the only thing that has brought us progress." - Charles Kettering
Change can also be good. The Harmonized System was designed to be a dynamic nomenclature, one that would reflect goods in contemporary trade. The HS convention allows for the system to undergo updates on a four- to six-year cycle. The 2012 amendments represent the fifth edition of the convention since it was first released in 1983.
"All change is inevitable, except from a vending machine." - Robert C. Gallagher
The amendments to the 2012 edition of the HS may or may not cause a change for your company. According to a news release from the WCO, the HS 2012 includes 220 sets of amendments divided as follows:
98 relate to the agricultural sector,
27 to the chemical sector,
9 to the paper sector,
14 to the textile sector,
5 to the base metal sector,
30 to the machinery sector, and
37 to the remaining sectors of the HS.
The news release from the WCO also states:
Environmental and social issues of global concern are the major feature of these amendments, particularly the use of the HS as the standard for classifying and coding goods of specific importance to food security and the early warning data system of the Food and Agriculture Organization of the United Nations (FAO.)
This statement reflects the fact that the majority of amendments found in the HS 2012 are in the agricultural and chemical sectors. The WCO has released a pair of correlation tables that compare the HS 2007 to the HS 2012 and visa versa. These are available on the WCO website.
What Should a U.S. Importer or Exporter Do?
The U.S. is committed to adopting the HS 2012, but the timeline for doing so is not yet clear. Indeed some of the administrative formalities behind implementation of changes are still pending. The intent is for the changes to go into affect with the 2012 versions of the HTS and the Schedule B. These have yet to be made available to the general public on the USITC or Census websites.
Even more unclear will be the changes to the tariff-change appendices of the various free trade agreements. For example, it took until the fall of 2009 for the HS 2007 changes to appear within the NAFTA rules of origination. Other FTAs still reference HS 2002.
Despite the uncertainty U.S. importers and exporters can discover if their headings and subheadings will be affected by querying the correlation tables above.
"All change is not growth, as all movement is not forward." - Ellen Glasgow
Admittedly I'm not going to convince all of you change is good. When it comes to the Harmonized System, however, it is inevitable. Even before implementation of HS 2012, plans are already underway for issuing an HS 2017 edition. The question for all of you will be how you deal with the change.
"Only the wisest and stupidest of men never change." "“ Confucius
Located at the southern tip of the continent of Africa, South Africa is a middle-income emerging market with an abundant supply of natural and labor resources; well-developed financial, legal, communications, energy, and transportation sectors; a stock exchange that is the 18th largest in the world; and a modern infrastructure supporting a relatively efficient distribution of goods to major urban centers throughout the region.
In my first article in this series about doing business in South Africa, I introduced the country, its economy and resources. In this second article, I'll discuss the country's value proposition.
South Africa: The Value Proposition
South Africa's scenic beauty, magnificent outdoors, sunny climate, cultural diversity, breathtaking scenery, acres of golf courses, and reputation for delivering value for money have made it one of the world's fastest growing leisure"”and business"”travel destinations. Little wonder South Africa is increasingly becoming an ideal location for international congresses and conventions.
World-class venues and a supporting infrastructure, top international events, and South Africans' passion for sport combine to make the country a huge draw for sports fans as well. More than 10% of foreign tourists come to South Africa to watch or participate in sporting events, with spectators accounting for 60% to 80% of these arrivals. According to the Department of Tourism, the 2010 World Cup showcased the country to an international audience of approximately 32 million viewers and introduced South Africa to non-traditional markets in Latin America, Eastern Europe and Asia.
In addition, South Africa boasts a strategic location, a favorable regulatory environment, a sophisticated financial infrastructure, a well-developed transportation system, an established manufacturing base, and a sophisticated information technology structure. The country's favorable demographics and rising middle class make it an attractive market opportunity for consumer as well as business-to-business products and services.
Strategic Location
South Africa is a gateway to the rest of Africa. This country accounts for six percent of the population, 18% of the total gross domestic product, and 50% of the purchasing power on the continent, according to U.S. Commercial Service estimates. South Africa is the best entry point into the bigger African market, and most companies are using it to test the waters before a full-fledged dive into Africa.
Major shipping lanes pass along the South African coastline in the south Atlantic and Indian oceans. Approximately 96% of the country's exports are conveyed by sea, and seven commercial ports are conduits for trade between South Africa and its Southern African partners.
Favorable Regulatory Environment
Since the World Trade Organization's (WTO) Uruguay Round in 1994, Southern African Customs Union (SACU) countries, led by South Africa, have reformed and simplified their common tariff structure. Tariff rates have been reduced from a simple average of more than 20% to 5.8%. Notwithstanding these reforms, importers have complained that the SACU tariff schedule remains complex and can create uncertainty.
The government has developed a number of policies and has passed a number of laws that aim to alleviate the pressures of social imbalances on natural resources and to promote sustainable development. The government has also initiated several housing development, electrification and water services programs, as well as identified focal areas for economic development and job creation. South Africa's intellectual property laws and practices generally conform to those of developed countries, except in the area of geographical indications where there are notable deficiencies.
Sophisticated Financial Sector
South Africa's financial services sector, backed by a sound regulatory and legal framework, is superb. Dozens of domestic and foreign institutions provide a full range of services: commercial, retail and merchant banking; mortgage lending; insurance and investment. Foreign banks are well represented and electronic banking facilities have nationwide networks of automatic teller machines (ATMs) and internet banking facilities. The Banks Act is primarily based on similar legislation in the United Kingdom, Australia and Canada.
Transportation Infrastructure
South Africa has a modern and well-developed transportation infrastructure. The air and rail networks are the largest on the continent. And the country's ports provide a natural stopover for shipping to and from Europe, the Americas, Asia, Australia and both coasts of Africa. In 2009, the Chinese Ministry of Commerce reported that about 1,000 Chinese enterprises do business in Africa, spanning fields such as trade, transportation, agriculture, and the processing of agricultural products.
Established Manufacturing Base
South Africa has developed an established, diversified manufacturing base that has shown its resilience and potential to compete in the global economy. The main sector of South African manufacturing includes automobiles and their associated parts, textiles and clothing, food processing and beverages, mineral-based industries, machinery and equipment, and pulp and paper. The manufacturing sector provides a locus for stimulating the growth of other activities and industries.
Information and Communications Technologies
The country's established and sophisticated indigenous information and communications technology (ICT) and electronics sector comprises more than 3,000 companies. It has ready access to cutting-edge technologies, equipment and skills and has the advantage of access to the rapid expansion of telecommunications and IT throughout the African continent. South African software developers are recognized as world leaders in innovation, production and cost efficiency backed by an excellent local infrastructure.
With the diversity of the local market, first world know-how, and a developing country environment, South Africa is an ideal test lab for new innovations. Gartner, the international research group, rates South Africa as one of its top 30 software development outsourcing destinations putting it on par with Israel, in the Europe, Middle East and Africa region, and next to Australia and India globally.
Favorable Demographics
South Africa's black middle class has grown by 30% in just over a year, with their numbers increasing from two million to 2.6 million. The percentage of South African households with a middle class standard of living increased from 23% in the period 1998-2000 to 26% in 2004-2006.
The black middle class in South Africa are called Black Diamonds. They are a product of the South African government's Black Economic Empowerment (BEE) program that began in 1994 after the end of the apartheid era. They form approximately 10% of the 22 million over-18-year-old black South Africans and contribute up to 40% of the spending in this group. This segment is growing rapidly.
South Africa's well-off middle class has the spending power, and the country's millions of upwardly mobile poor hold tremendous buying potential. Most of these people are entering the middle class for the first time and materialistic possessions like houses, cars and electronics are being bought with gusto. Their spending remained resilient despite the recent recession.
Summary
Given South Africa's value proposition outlined above, there are numerous opportunities to market and sell consumer and business-to-business products in multiple sectors and in multiple industries. In my next article in this series, I will discuss some of the global companies that are taking advantage of these opportunities in South Africa.
I've been rummaging around in chapter 98, the basement of the Harmonized Tariff (HTS), doing some spring cleaning. Chapter 98 of the HTS, as you recall, is an exciting, magical place full of obscure and arcane tariff provisions most of them associated with the four-letter word FREE. I love that word!
During my rummaging I rediscovered the following classification:
9817.85.01 Prototypes to be used exclusively for development, testing, product evaluation, or quality control purposes . . . .FREE
As the economist Milton Freedom fondly stated, "There's no such thing as a free lunch." So it is with this classification. The details of this classification are found within U.S. note 7 to subchapter XVII of chapter 98 of the HTS. Additional requirements for this classification are found in 19CFR §10.91.
What is a Prototype?
The term prototype means originals or models of articles that are either in the preproduction, production or postproduction stage and are to be used exclusively for development, testing, product evaluation or quality control purposes. In the case of originals or models of articles that are either in the production or postproduction stage, prototypes are associated with a design change from current production (including a refinement, advancement, improvement, development, or quality control in either the product itself or the means for producing the product).
Generally we think of prototypes as those articles that clutter the corners of the quality control department or engineering office. If they are functioning they are typically used within a controlled environment for evaluation purposes. They would never be used or consumed for commercial purposes.
Articles subject to licensing requirements, or which must comply with laws, rules or regulations of agencies other than CBP, may also be classified as prototypes.
What isn't a Prototype?
As an example, a race car entered in a commercial competition would not be considered to be used for development, testing, product evaluation or quality control even if that is one of the side benefits of the race.
Likewise a simple sample for the purposes of soliciting an order may not be considered a prototype. This can be confusing as businesses frequently refer to their prototypes as "samples." Commercial samples are classified elsewhere in chapter 98.
Articles subject to quantitative restrictions, antidumping orders or countervailing duty orders may not be classified as prototypes.
Limited Quantity
Prototypes may be imported only in limited, noncommercial quantities in accordance with industry practice. This is a vague requirement that is up to the importer to define and justify to CBP. For one company it may be a single item. For another it may be a dozen items that will be put through a testing laboratory to evaluate quality or performance characteristics.
Sale of Prototypes
Prototypes or parts of prototypes may not be sold after importation or be incorporated into other products that are sold. They may be passed along to a client without there being a sale. If the prototype is passed along it may be difficult for the importer to prove to CBP that the article was indeed used as a prototype.
Selling Prototypes for Scrap
If a prototype is sold for scrap duties will be owed on the value of the scrap and the duty rate associated with the classification of the scrap material. Prototypes that are disposed of in any other manner would not be subject to additional duties.
Proving Your Case
The CBP port director may require a declaration of actual use from the importer within three years of importation. If the importer does not provide adequate proof of actual use, the entry will liquidate as dutiable.
Making the Claim
At time of entry summary the importer will claim the classification 9817.00.01 along with the 10-digit number appearing in chapters 1-97 that would otherwise be applicable. The importer will also report the appropriate statistical information as required under chapters 1-97.
If your company imports prototypes, classification 9817.00.01 might be you. The administrative burden of participation is minimal, and the duty rate can't be beat!
In my last article I introduced you to the resources available through the Export-Import Bank of the United States (Ex-Im Bank). So, now that I've convinced you to look into their services, you may be wondering: "How do I begin?" The Ex-Im Bank knows you'll need assistance managing two basic objectives: how to borrow money and how to get paid. Whether you're interested in borrowing, getting paid, or both, you can find the appropriate service listed below to access the information you'll need to get started.
If you want to borrow, check out the Working Capital Guarantee that lets you buy the materials you need to begin exporting, pay operating and overhead costs, and provides cash for international receivables. By securing financing for your international buyer's Ex-Im's insurance policy allows you to extend medium-term credit to your customers overseas.
The Ex-Im Bank assumes risks at levels unacceptable to most private lenders and insurance companies, expanding the options for any exporter interested in selling abroad. Ex-Im Bank allows you to secure adequate working capital, protect your company from foreign buyer nonpayment, and extend credit to your buyers. Everything they do is designed to give you the competitive advantage when selling abroad.
The Ex-Im Bank states in their web site that a high percentage of Ex-Im Bank's transactions, approximately 85%, support small businesses, (implying that only 15% apply to large firms) with virtually no transaction too big or too small to help the smaller exporter. So if you think your company is too small to benefit from their services, think again, because they are mandated and dedicated to growing small businesses.
The fact that 95% of the world's consumers live outside of the U.S. means it's becoming increasingly important for American businesses to sell internationally. The International Trade Administration reports that less than one percent of U.S. small businesses currently export. One obstacle is the difficulty in obtaining financing for overseas endeavors as credit markets slowly thaw.
The Ex-Im Bank program aims to help small businesses begin exporting or expand their efforts. Many small companies are afraid to venture overseas because of the perceived financial risks of exporting. This is especially true with regard to developing nations where a lot of future sales can be made by those willing to step out of the "it's just too risky" paradigm. Rather than thinking and going outside the box, I suggest that you create a bigger box to engage in. Make the world your marketplace. The U.S. Ex-Im Bank is there to help you and to take the financial risk out of it.
To be sure, Ex-Im Bank has set ambitious goals for five fiscal years, 2009-2014, including the production of $30 billion in small business activity and the addition of 5,000 small businesses to its portfolio. The support provided by the Ex-Im Bank results in export sales that otherwise would not have been made. This means that many more U.S. workers are employed to fill new export orders. In the Ex-Im Bank's news releases you can find current figures on the number of jobs created as a result of their programs and services. At the end of fiscal 2010, Ex-Im Bank was working with about 900 small businesses. Fully 85% of Ex-Im's work is with small businesses through loan guarantees"”which generally cover 90% of a bank loan, including principal and interest"”and export insurance.
Ex-Im Bank set a record for its fiscal year ended September 30, 2010, giving $5 billion in small business loan guarantees. More is expected in 2011. Business owners apply for loans at an Ex-Im regional office or through a lending partner. Exporters can also apply through their own bank but may have to suggest working with Ex-Im Bank.
Loans of any size qualify for Ex-Im Bank financing. Interest rates are set by the lender, and the loan has a term of one to three years. Those loans give small businesses the ability to build inventory and buy production equipment and give overseas customers more time to pay.
On a personal note, a long-term friend and professional associate has used the U.S. Ex-Im Bank for more than 14 years. He exports worldwide and is very favorable towards the Ex-Im Bank. He once told me, "Don't tell my competitors about the Ex-Im. They are one of the reasons I enjoy exporting successfully." This is about as good a testimony as it gets from a long-time user of the U.S. Ex-Im Bank. By the way, he owns a very small exporting company; he has only three employees including himself.
The world of commerce has become more complicated and faster paced worldwide requiring that you, the exporter, get all the assistance you can. The U.S. Ex-Im Bank is one more tool that you and other small- and medium-sized exporters can use to your successful advantage if you take the time and effort to follow through.
From lumber to educational materials, from medical supplies to fire trucks, from Indiana to India, from New Hampshire to New Zealand, and from Arizona to Africa, the U.S. Ex-Im Bank has provided assistance to all of these and is there to help you too. You'll find more than 25 small business success stories at their website. Check it out and may your exports grow well and profitably.
Editor's Note: With the recent killing of Osama bin Laden, analysts around the world have various opinions about what his death means for al Quida and global terrorism. In an excellent report published by STRATFOR Global Intelligence, Scott Stewart offers the most comprehensive overview that I've read so far of the new state of terrorism in a post-bin Laden world.
This report is republished with permission of STRATFOR.
By Scott Stewart
U.S. President Barack Obama appeared in a hastily arranged televised address the night of May 1, 2011, to inform the world that U.S. counterterrorism forces had located and killed Osama bin Laden. The operation, which reportedly happened in the early hours of May 2 local time, targeted a compound in Abbottabad, a city located some 31 miles north of Islamabad, Pakistan's capital. The nighttime raid resulted in a brief firefight that left bin Laden and several others dead. A U.S. helicopter reportedly was damaged in the raid and later destroyed by U.S. forces. Obama reported that no U.S. personnel were lost in the operation. After a brief search of the compound, the U.S. forces left with bin Laden's body and presumably anything else that appeared to have intelligence value. From Obama's carefully scripted speech, it would appear that the U.S. conducted the operation unilaterally with no Pakistani assistance"”or even knowledge.
As evidenced by the spontaneous celebrations that erupted in Washington, New York and across the United States, the killing of bin Laden has struck a chord with many Americans. This was true not only of those who lost family members as a result of the attack, but of those who were vicariously terrorized and still vividly recall the deep sense of fear they felt the morning of Sept. 11, 2001, as they watched aircraft strike the World Trade Center Towers and saw those towers collapse on live television, and then heard reports of the Pentagon being struck by a third aircraft and of a fourth aircraft prevented from being used in another attack when it crashed in rural Pennsylvania. As that fear turned to anger, a deep-seated thirst for vengeance led the United States to invade Afghanistan in October 2001 and to declare a "global war on terrorism."
Because of this sense of fulfilled vengeance, the death of bin Laden will certainly be one of those events that people will remember, like the 9/11 attacks themselves. In spite of the sense of justice and closure the killing of bin Laden brings, however, his death will likely have very little practical impact on the jihadist movement. More important will be the reaction of the Pakistani government to the operation and the impact it has on U.S.-Pakistani relations.
Foundations
To understand the impact of bin Laden's death on the global jihadist movement, we must first remember that the phenomenon of jihadism is far wider than just the al Qaeda core leadership of bin Laden and his closest followers. Rather than a monolithic entity based on the al Qaeda group, jihadism has devolved into a far more diffuse network composed of many different parts. These parts include the core al Qaeda group formerly headed by bin Laden; a network of various regional franchise groups such as al Qaeda in the Arabian Peninsula (AQAP); and last, a broad array of grassroots operatives who are adherents to the jihadist ideology but who are not formally affiliated with the al Qaeda core or one of the regional franchises.
The al Qaeda core always has been a fairly small and elite vanguard. Since 9/11, intense pressure has been placed upon this core organization by the U.S. government and its allies. This pressure has resulted in the death or capture of many al Qaeda cadres and has served to keep the group small due to overriding operational security concerns. This insular group has laid low in Pakistan, and this isolation has significantly degraded its ability to conduct attacks. All of this has caused the al Qaeda core to become primarily an organization that produces propaganda and provides guidance and inspiration to the other jihadist elements rather than an organization focused on conducting operations. While bin Laden and the al Qaeda core have received a great deal of media attention, the core group comprises only a very small portion of the larger jihadist movement.
As STRATFOR has analyzed the war between the jihadist movement and the rest of the world, we have come to view the battlefield as being divided into two distinct parts, the physical battlefield and the ideological battlefield. The post-9/11 assault on the al Qaeda core group hindered its ability to act upon the physical battlefield. For the past several years, they have been limited to fighting on the ideological battlefield, waging a war of propaganda and attempting to promote the ideology of jihadism in an effort to radicalize Muslims and prompt them to act. The danger has always existed that if pressure were taken off this core, it could regroup and return to the physical struggle. But the pressure has been relentless and the group has been unable to return to its pre-9/11 level of operational capability. This has resulted in the grassroots and franchise groups like AQAP taking the lead on the physical battlefield.
As we noted in our annual forecast of the jihadist movement, the al Qaeda core group not only has been eclipsed on the physical battlefield, over the past few years it has been overshadowed on the ideological battlefield as well. Groups such as AQAP have begun setting the tone on the ideological realm"”as in its call for Muslims to assume the leaderless resistance model rather than traveling to join groups"”and we have seen the al Qaeda core follow the lead of AQAP rather than set the tone themselves. We believe this deference to AQAP is a sign of the al Qaeda core's weakness, and of its struggle to remain relevant on the ideological battlefield. There also have been many disagreements among various actors in the jihadist movement over doctrinal issues such as targeting foreigners over local security forces and attacks that kill Muslims.
The Emir is Dead, Long Live the Emir
While the al Qaeda core has been marginalized recently, it has practiced good operational security and has been able to protect its apex leadership for nearly 10 years from one of the most intense manhunts in human history. It clearly foresaw the possibility that one of its apex leaders could be taken out and planned accordingly. This means keeping bin Laden and his deputy, Egyptian physician Ayman al-Zawahiri, in different locations and having a succession plan. There is also very little question that al-Zawahiri is firmly in command of the core group. Even prior to bin Laden's death, many analysts considered al-Zawahiri to be the man in charge of most of the operational aspects of the al Qaeda group"” the "chief executive officer," with bin Laden being more of a figurehead or "chairman of the board." That said, the intelligence collected during the operation against bin Laden could provide leads to track down other leaders, and this may make them nervous in spite of their efforts to practice good operational security.
Certainly, bin Laden was an important person who was able to raise much funding and who became an international icon following 9/11; because of this, it will be hard to replace him. At the same time, the jihadist movement has weathered the loss of a number of influential individuals, from the assassination of Abdullah Azzam to the arrests of the Blind Sheikh and Khalid Sheikh Mohammed to the death of Abu Musab al-Zarqawi. Yet in spite of these losses, the ideology has continued, new members have been recruited and new leaders have stepped up to fill the void. Ideologies are far harder to kill than individuals, especially ideologies that encourage their followers to embrace martyrdom whether their leaders are dead or alive. This means that we do not believe the death of bin Laden will result in the death of the global jihadist movement: A man is dead but the ideology lives on.
The Threat
The survival of the ideology of jihadism means the threat of terrorist attacks remains. The good news is that as one moves down the jihadist pyramid from the al Qaeda core to the regional franchises to the grassroots, the level of terrorist tradecraft these individuals possess diminishes and the threat they pose is not as severe. Certainly, grassroots terrorists can and will continue to kill people, but they lack the ability to conduct dramatic, strategic attacks. Thus, though the threat becomes more widespread and harder to guard against, at the same time it becomes less severe. There obviously will be some concerns regarding some sort of major attack in retribution for bin Laden's death. Indeed, jihadists have long threatened to conduct attacks over the arrests and deaths of key figures. Analytically, however, the idea that al Qaeda or one of its regional franchise groups has some sort of superattack on standby for activation upon bin Laden's death is simply not logical. First, the al Qaeda core group has attempted to conduct many attacks against the U.S. homeland following 9/11, as have franchise groups like AQAP. While these plots did not succeed, it was not for lack of trying. Jihadists have also made many empty threats regarding a follow-on to the 9/11 attacks"”only to be embarrassed by their inability to follow through. Third, so many plots have been thwarted over the past decade that if the core al Qaeda group or a franchise group had a plan primed and ready to go, it would not sit on it and run the risk of its being discovered and compromised. Instead, it would execute such an attack as soon as it was ready. Furthermore, jihadists"”especially those at the grassroots and regional franchise levels"”have not demonstrated the sophisticated apparatus required to conduct off-the-shelf planning exhibited by groups like Hezbollah. They generally tend to work on attack plans from scratch and execute those plans when ready.
Undoubtedly, there were jihadists planning attacks on the United States before the death of bin Laden, and there are jihadists planning attacks today. However, these individuals probably would have carried out this planning and any eventual attack"”if possible"”regardless of bin Laden's fate. Will groups conducting future attacks claim they were acting in retribution for bin Laden? Probably. Would they have attempted such an attack if he were still alive? Probably.
The potential for low-level impulsive retribution attacks by unprepared individuals or groups directed at American or other Western targets does exist, however. This type of impromptu attack would be more likely a shooting rather than an attack using an explosive device, so there is good reason for the U.S. government to increase security measures around the globe.
The result of all this is that the threat from the global jihadist movement will continue in the short term with no real change. This means that pressure needs to be maintained on the al Qaeda core so it will not have the chance to recover, retool and return to attacking the United States. Pressure also needs to be maintained on the jihadist franchise groups so they cannot mature operationally to the point where they become transnational, strategic threats. Finally, efforts must continue to identify grassroots jihadists before they can launch attacks against soft targets. But these same imperatives also were valid last week; nothing has really changed at the tactical level.
Where the big change may be happening is at the political level. That bin Laden was located in Khyber-Pakhtunkhwa province (formerly known as the North-West Frontier Province) did not come as a surprise"”STRATFOR has discussed this likelihood since 2005. We have also discussed the distrust and suspicion between the U.S. and Pakistan"”which was clearly evidenced by the unilateral U.S. action in this case. The significant thing to watch for is the reaction of the Pakistani government and public to the raid. In the past, the Pakistani government has found creative ways of displaying its displeasure with the actions of the U.S. government"”like manipulating the Pakistani public into the November 1979 sacking and destruction of the U.S. Embassy in Islamabad. While the average Pakistani may not care too much about bin Laden, public sentiment is running very high against U.S. operations in Pakistan, and this operation could serve to inflame such sentiments. These two elements mean that the coming weeks could be a very tense time for U.S. diplomatic and commercial interests in that country.
This report is republished with permission of STRATFOR.
