Tensions Mount In The International Trade Arena

Wednesday, October 1, 2008 - 01:00

Editor: Would each of you tell our readers something about your professional experience?

Murphy : I have been practicing in the area of customs and international trade since leaving law school in 1985 and concentrate my practice in U.S. and global trade regulation. Drinker Biddle's Customs and International Trade Team consists of a group of lawyers and other professionals who serve our clients' vast global trade needs by advising them on the complex and diverse issues that can arise in this arena. Our lawyers and their colleagues are sensitive to the accelerating pace of change that globalization represents, particularly over the past several years.

Lobdell: I've been with Drinker Biddle for three years. I have 21 years of prior experience in the supply chain logistics side of international trade, and I am not an attorney. With respect to logistics, I have experience in a wide range of functional areas, including operational management, business development, sales and marketing, and trade security with particular reference to the post 9/11 period.

Koenig : I have been engaged in international trade work for about 15 years, about half of which was in house at General Motors. My focus has been on the export side for the last 10 years, including during my three years at Drinker Biddle. There is a security feature to much of my work, since U.S. export controls extend to a wide range of weapons systems, encryption software and technology that might be used in ways harmful to domestic security. In addition, I deal with foreign policy restrictions in my practice, including embargos and sanctions relating to counties such as Cuba, Iran and Sudan, and to individuals who have been identified as narcotics traffickers, terrorists and so on.

Editor: Please tell us about the import and export landscape in the U.S. at present. What impact has September 11 had on this landscape?

Murphy: U.S. Customs and Border Protection (CBP) officials will tell you that they have a two-fold mission - to secure the U.S. borders and to facilitate trade. Since 9/11, the first of these objectives has been paramount and often at the expense of the second. Simply put, many global traders engaged in cross-border trade believe that CBP has neglected its responsibility to facilitate trade in recent years.

Lobdell: With respect to the impact of 9/11, there is no question that an immediate shift occurred in the landscape from standard compliance with CBP on the movement of goods and services to protection and securing the homeland. That has been a huge focus on the part of U.S. Customs over the past seven years. The most prominent of these Customs' initiatives is the voluntary Customs-Trade Partnership Against Terrorism, or C-TPAT, which is a government-business program meant to build cooperative relationships that strengthen and secure the international supply chain. Other initiatives include the Trade Act of 2002, which requires Customs to obtain additional information from an importer before goods depart from a foreign origin for the U.S. and which enables Customs to engage in specific types of risk targeting. These initiatives do result in additional information being made available to U.S. authorities, but they can be very cumbersome in practice and they can have a dampening effect on trade. Confidentiality issues also may arise in the wake of any attempt to implement these initiatives. They represent a considerable cost to trade.

Just now we are waiting for the implementation of a controversial rule known as the Importers Security Filing or "10+2" for the number of data elements to be required. Compliance is going to be very costly and I think there is a legitimate argument concerning the likely benefits of the program. In any event, I do not think these post-9/11 developments are going to be modified in any meaningful way any time soon.

One global development underway, however, is not necessarily negative. A number of our foreign trading partners have developed programs similar to C-TPAT under the World Customs Organization (WCO) SAFE framework. To the extent that such programs avoid contradicting each other and are applied in a consistent and transparent manner, trade benefits. A sound international trade system requires a certain degree of predictability.

Editor: U.S. Customs has taken some unexpected, and controversial, steps since setting up the Office of International Trade two years ago. Would you give us some background on these policy shifts?

Murphy: Many in the trade believe that the newly created Office of International Trade, or OT, derives in large part from an independent audit directed a few years ago by the Office of Management and Budget, OMB. This review painted a critical viewpoint of CBP and, in particular, scrutinized its lack of necessary internal controls to collect the appropriate level of import duties and taxes. Next to the IRS, it is CBP that provides the most important revenue flow to the U.S. Treasury.

OT brings together under one roof policy, compliance and enforcement. For example, shortly after its formation, OT announced the imminent adoption of a directive - probably originating in Customs - to the effect that CBP headquarters would take an active hand in pursuing penalties against importers. Prior to this the individual ports of entry determined whether a violation had occurred and how to respond to it. There was an immediate outcry from the trade - the directive was simply too harsh and there were virtually no guidelines on implementation. As a result, OT was forced to back off. I do not believe we have heard the last of this, however.

Another controversial change in policy has to do with the valuation of imported goods subject to multi-tiered sales transactions. Since at least the early 90s the U.S. importer has been able to take advantage of the lower first sales price. Earlier this year, when OT attempted to revise this practice by focusing on the higher second sale between the middleman and the U.S. importer, there was again a vigorous response from the industry and, at least until January 2011, this appears to be on the back burner. In the meantime Congress has gotten actively involved in the discussion and the hope is that when this is revisited a little over two years from now, both Congress and the industry will have a better sense of whether it is necessary to force a major policy shift in how we determine value in the context of multi-tiered transactions.

Customs has also previewed for the trade what it calls its New Trade Strategy, which largely pertains to "priority trade issues." These are seven in number - textiles, agriculture, import safety, IP rights, revenue collection, anti-dumping/countervailing duties and penalties - and derive from the agency's analysis of trade risks. U.S. ports of entry will be addressing each of these issues as high priority security, safety and compliance concerns going forward. Consistency and uniformity with respect to the application of penalties - one face at the border - is also a priority.

Editor: In an era of globalization some of these trends might be perceived as inhibiting the benefits of free trade. Is there a way of packaging our international trade initiatives that accomplishes what is necessary without negative overtones?

Lobdell: On the security side, we are having issues with respect to how our actions over the past few years are perceived globally. C-TPAT was received well and that program has been emulated by many of our trading partners. Many of the regulatory initiatives have not been well received, however. The 9/11 Commission Recommendations Act of 2007 - which stems from the political arena rather than from Customs - requires, by 2012, all U.S. bound containers - 100 percent - to be scanned at the foreign port of origin by the foreign shipper prior to departure for the U.S. Needless to say, our trading partners have reacted with outrage, and there is some fear that reciprocal treatment with respect to U.S. exports will result. That would impose a huge burden on U.S. exporters. U.S. Customs and the industry are on the same page on this issue. They both believe that 100 percent scanning may be appropriate for certain high-risk trade lanes, where it can be targeted. Congress, however, has been determined to see this requirement imposed across the board.

I mentioned the implementation of the 10+2 rule earlier. Among the data elements to be obtained are elements that were inconsistent with the World Customs Organization standard security data set. The perception, of course, is that the U.S. is making unilateral decisions based on its security concerns, and that is not in the best interests of the global economy.

Koenig: On the export side there has always been sensitivity in this area because U.S. rules are far more extraterritorial than those of other countries. Our rules may prevent something exported to the UK, for example, from being re-exported to Iran or Sudan. Foreign subsidiaries of U.S. companies cannot transact business with Cuba.

Since 9/11 the scrutiny of export documentation has become much more intense. A license application that would have been accepted without question 10 years ago is often summarily rejected today, and the penalties are both higher and imposed with much greater vigor than in the past. Foreign customers are increasingly coming to the conclusion that they cannot afford to buy components from a U.S. suppliers in light of the risks involved. What might have been an acceptable cost of doing business in the past is now in the process of becoming unacceptable.

Editor: At a time of accelerating globalization, where do we draw the line between encouraging the free flow of people and products and IP, on the one hand, and security on the other?

Lobdell: I think all of our trading partners agree with us on the crucial importance of security. The key question is whether we can find a way in which we ensure security consistently and in a way that does not impose an unacceptable burden on our ability to do business in the international arena.

We are seeing that attempting to address our security concerns unilaterally has a very negative impact on our trading partners, but that working with them in a collaborative fashion - at the WCO level, for example - has the potential to get the job done without compromising our security. This is a slow process, to be sure, but the final result may justify recourse to a participatory process that leaves every participant with a sense of having had its particular concerns aired. Considering what is at stake - our position in the global trade arena - it is essential to get this process right.

Koenig: From the trade compliance standpoint, I am not sure that what has been presented as "priority trade issues" is going to facilitate trade. This particular initiative appears to reflect our country's increasing entrenchment in its own regulatory schemes. As Karen so rightly points out, cooperation at the international level, using vehicles such as the WCO or the DOHA multilateral trade negotiations, is what is necessary to get us past our largely internal orientation on these issues.

Please email the interviewees at kathleen.murphy@dbr.com, karen.lobdell@dbr.com or joan.koenig@dbr.com with questions about this interview.