Making sense of the ins and outs of cross-border shipping
May 1, 2017
by Michael Power
From the April 2017 print edition.
Cross-border shipping can be a daunting task for organizations moving goods internationally. Security issues, a shifting regulatory landscape, duties and tariffs, the intricacies of free trade deals such as the North American Free Trade Agreement (NAFTA) and the Canada/Europe Comprehensive Economic and Trade Agreement (CETA)—all of these factors present challenges for Canada’s importers and exporters. To help with this complexity, PurchasingB2B—in collaboration with FedEx Trade Networks (Canada)—held a roundtable conversation on March 9 at the Radisson Admiral Toronto Waterfront Hotel.
The experts who gathered for the event outlined the main challenges and pressures associated with moving products safely and securely, while providing tips and strategies to make the process as smooth and effective as possible. At the table were: Kyri Fabios, managing director of operations, Canada, at FedEx Trade Networks; Joy Nott, president and CEO of the Canadian Importers and Exporters Association (IE Canada); Jeff Russell, director of procurement, Crane Supply; John Kreller, logistics manager at Rimowa North America Inc.; and Ruth Snowden, executive director of the Canadian International Freight Forwarders Association (CIFFA).
First on the agenda was trade compliance, which covers several areas, said Fabios, including issues involving the CBSA, international freight forwarding and free trade agreements like NAFTA. When it comes to CBSA and the US’s Customs and Border Protection, the rules are defined through regulations—but there’s room for interpretation which can depend on an officer’s opinion. This is often a pain point for companies, Fabios said. “We’ve seen situations where, in the case of compliance, there’s typically wiggle room if it’s done properly,” Fabios said. “Nine times out of ten the import community tries to be compliant, and wants to be compliant. By the same token there have been circumstances were we’ve seen non-compliance. It’s not the fault of the importer, it’s just not knowing or not being aware enough about the regulations—that’s where we step in.”
Nott described IE Canada’s role, noting that the organization contacts the government about regulatory leeway. Many assume that, within North America, rules and regulations surrounding goods must be the same in the US as in Canada or Europe. “Unfortunately, in the world of global trade and the movement of goods across borders, it’s a combination of where policy meets politics, because there are often slight differences in regulatory environments, and that’s done on purpose by countries,” Nott said. “That’s where the politics comes into things.”
Trade organizations like IE Canada explain to government agencies how policies can protect the Canadian economy and jobs, but can also move Canada towards becoming less competitive, Nott said. Over the past five years, several regulatory changes and reforms have cropped up due to security, political or economic reasons, as well as the work of government policy analysts. Sometimes, Nott said, those analysts lack a full understanding of how an integrated global supply chain works. “They have the very best of intentions when they draft a piece of regulation or put a policy in place, and they’re not trying to slow down the Canadian economy,” she said. “However, if they don’t have that full view of how it works, they often end up with unintended consequences.”
As a manufacturer, his company imports goods from around the world—primarily Europe, said Kreller. Some information about those imports isn’t always available; much background work is necessary on certain imported items. The company relies on its brokers to help clarify HS codes and other details to help ensure compliance. “Where it becomes a little disconcerting is, we import into the US, they might use terminology like, ‘falsifying and fraudulent information,’ when it’s just a mistake,” Kreller said. “It’s just a wrong piece of information that we’re not aware of, that we work tirelessly to correct and become more compliant. The more education we can get doing our documentation the better it will be for us going forward.”
Procurement hits compliance problems when it’s out of touch and unaware of requirements for sending purchase orders overseas, said Russell. As well, companies in countries like China or Korea may not be aware of CBSA requirements. “‘Why do you need this document? Why do you need a statement of origin with this shipment? It’s coming from China,’” said Russell, noting frequent supplier questions. “I understand it’s coming from China, but this is a requirement for CBSA. You either give me a certificate of origin or you can give me a statement of origin. It’s basically a statement that says, ‘this product originated from this country.’ Without it, we could be taxed.”
Kreller agreed, noting that another challenge arises when overseas suppliers may be required to submit documents but aren’t accustomed to the process. “They are used to a domestic customer, rather than an international customer, who may not have the necessary knowledge,” he said. Kreller also noted that he had begun bringing expertise in house.
There’s a complexity inherent with trade compliance since it involves more than just CBSA regulations on goods coming into Canada, said Snowden. When exporting into the US, if the goods are manufactured in China but are travelling on Canadian wood pallets, CBP notes the origin of the wood as the same as the product—in this case China—which can cause delays. “Just these arcane little rules; how does an organization bring that knowledge—whether it’s of product compliance, CFIA (Canadian Food Inspection Agency) compliance—into an organization?” Snowden said. “They do it different ways, through training and systems, and through using a competent freight forwarder and customs broker who has these systems.”
Nott noted that most companies have well-trained accountants to handle the intricacies of the tax world—but that standard doesn’t hold true for international trade. Even a company’s customs or logistics manager can lack the necessary training or background. “Or, the company doesn’t realize that this is a very complex job with huge legal ramifications and potential financial ramifications if this person isn’t trained right and doesn’t have the right kind of support,” she said.
Several panelists agreed that proper skills and training is an important component of dealing with trade. And whether it’s taking courses, attending webinars or reading online, it pays to stay current, said Snowden. Kreller agreed, noting that an ever-evolving landscape means it’s more important than ever to not only stay on top of information but to work with outside organizations. “Those partnerships are very important and you have to stay on top of continuing education,” he said.
Several panelists agreed that, with a rapidly changing regulatory environment, joining an association provides valuable information. It’s tough to stay abreast of US regulatory changes otherwise, noted Snowden, while Nott said she encourages IE Canada members to view their customs brokers, freight forwarders and other service providers as partners that, for example, can sit in during strategic planning sessions. “We strongly encourage that, because a service provider is only as good to the degree that they actually understand your company,” she said.
Over the past 15 years, the trend has been towards collaboration with service providers, said Fabios, with larger customers having FedEx Trade Networks representatives attend quarterly reviews and other strategic sessions. Small- and medium-sized businesses haven’t yet followed suit to the same degree. “I think you do need to integrate as partners more, rather than looking at each other as vendor and customer,” Fabios said. “That said, there does still have to be that cost-benefit ratio.”
Duties and tariffs
The group then moved on to discussing duties and tariffs with Fabios explaining tariff classifications—numbers used to determine duty rates on commodities entering or leaving the country. Sometimes, confusion arises when a company thinks a classification should be one thing, while customs gives another opinion, Fabios said. It’s therefore important to investigate product lines beforehand, as a company can incur penalties if there’s a classification mistake. There’s also a trend towards customs performing more reviews, Fabios noted. Sometimes, reviews are based on what the commodity being shipped is, while other times it’s a random spot check. “It’s important that you’re doing the work up front, and making sure the quality is on the front end rather than waiting for the bill that’s going to come out the back end,” he said. “So the importing community is getting smarter. They’re starting to say, ‘when I have a new product I’d rather get a ruling done first to make sure I have the appropriate tariff classification attached to it, and then it’s not up for argument down the line when I have a shipment sitting at the border.’”
While customs provides a list twice a year explaining what’s being targeted for inspection, that list doesn’t include spot checks, Fabios said. There’s no defined strategy regarding what the government is looking for. While e-commerce is changing the landscape, some key targets include valuation, country of origin and commodity description. It can attract customs’ attention when a description is only a series of numbers, or if it’s too brief. “To this day, I see shipments where the description is ‘stuff.’ Those are definitely going to get the attention of customs,” Fabios said.
Nott recommended considering a tariff classification number as like a trade compliance key—that key determines whether a product will qualify for NAFTA or another agreement and whether it’s subject to other government department or agency regulatory requirements. “It’s a key, so think about international trade like a door, and it’s locked, and you need to ensure you’ve got the right key,” she said. “That key is your tariff classification.”
Such potential issues make education all the more important, noted Kreller. Employees developing a product may not realize its value, or may even assume it has no value if it’s a prototype. “Again, it’s that internal education where I could go and take courses and then bring that information back and say, ‘here’s exactly why,’” he said. “Whereas, they think shipping is, ‘oh, you just give that to a shipper and it crosses the border and that’s that, easy-peasy.”
It’s good strategy to get customs authorities involved in a company’s business, said Snowden. Meet them, show them products and ask them to visit your facility, she advised. Belonging to programs like C-TPAT and Partners In Protection is also helpful. “If you’re a member of one of those programs, you have a secure profile, you’re a trusted trader with the customs organization so they trust you better because they know you,” she said.
Meanwhile, the US has for years been known as a finicky regulator, said Nott. In the past few years, Canadian authorities have begun adopting a similar kind of fussiness. Authorities should know—after a few audits or visits—when a company has good governance in place regarding customs practices, she added. “Mistakes may happen, but if they’ve come once, twice or three times and they really haven’t found any egregious evidence of you either trying to defraud or gross non-compliance and negligence (issues) and whatever else, then the question becomes, ‘why are you going back the third time, the fourth time?’” she asked.
Among the other topics that the group touched on was eManifest. The term describes the advance, electronic conveyance of freight information to customs officials before a shipment arrives at a border. The concept is “brilliant,” noted Snowden, with the Canadian International Freight Forwarders Association supporting the project. “It’s going to drive uniformity, it’s going to get rid of paper, it’s going to allow us to have nationally standardized practices and procedures across the whole country—rather than having to train employees differently in Winnipeg than we do here,” she said. “And we could centralize our import operations if we wanted to.”
The highway eManifest program for trucks is working well, with high compliance and truckers reporting before they get to the border, Snowden said. The program is also working for railways, she said. For freight forwarders, the program isn’t working as well. The final phase of the program covers importers. “And that’s later,” Snowden said. “They haven’t even started the regulatory process for the importer piece yet, and any regulatory process takes 18 months to two years, and then it would probably have a one- to two-year roll out on that.”
Nott added that most likely, importers will have a service provider do the transmission portion, but the importer will be responsible for some data—but what data remains unclear. Some data elements the importer will never know, because it involves the movement of goods. “The freight forwarder might know it, the customs broker might know it, the transportation company might know it, but you will not know that piece of data,” she said.
Kreller said his organization has told some overseas providers that when they book a container, they must forward a copy of the commercial invoice and packing slip to ensure they match the purchase order. The container is then released if everything matches. “Sometimes we’ve got good suppliers that will actually provide it to us, and then we’ve got others that we’re constantly chasing,” he said. In the future, replied Nott, that information will be a government requirement. “It’s a load, no-load kind of thing,” she said. “If all the data’s not in place, the container won’t load.” Going forward, the importer will be responsible for ensuring that information is transmitted in a timely fashion.
FedEx Trade Networks has a team dedicated to help companies comply with eManifest, said Fabios. The company advises customers to ensure equivalent information on both sides and to have a single database regarding tariffs, with a single product dictionary. “As the importer of record, if you’re ultimately responsible for all of this, don’t leave it in the hands of your shipper to define HS (harmonized item description and coding system) tariff,” he said.
Free trade agreements
Regarding free trade agreements, several participants agreed that while offering benefits, they could also present challenges. Protectionism is rising in several countries with free trade blamed for jobs and manufacturing moving overseas, said Nott. But often, advancing technology causes that change. “I think free trade agreements overall actually do open markets, and they help create jobs, and they help create opportunities—I know that that may not seem like a popular thing to say these days, but it’s true,” she said.
From procurement’s perspective, such agreements open doors to sourcing globally and in the short term eliminate some duties, said Russell. At the same time, there can still be trade action launched if the goods are dumped in Canada. Worst case, a company may say it manufacturers in the US, but its product doesn’t qualify for NAFTA if it imports certain parts from overseas before finishing the product in the US, Russell said. A US origin product versus qualifying for NAFTA aren’t necessarily the same thing. “It opens rules around the country of origin, and how you properly assess the true country of origin for a given product that will allow you to either be free trade or non-free trade,” Russell said.
Often, the issue isn’t free trade agreements but the cost of labour in other countries that can drive domestic job losses, noted Kreller. In China, for example, labour can be inexpensive but purchasers must ensure that the quality of goods doesn’t suffer. “You have to look at what markets opened up because of all these trade agreements and what you can do with that,” he said.
To know the right rule of origin for goods in a free trade agreement, the first thing to know is the tariff classification, said Nott. To learn that, companies can ask for a ruling from the government on what the classification should be. That way, the government is obliged to adhere to that classification. But be careful what you wish for, she cautioned. “You look at the rule of origin for Z and now you’re, ‘oh my goodness, all my supply and all my procurement contracts, now I don’t qualify,’” Nott said. “So how do you ensure that you’re dealing with the right tariff classification? Get a ruling, but beware. Do your homework before you actually request it.”
In wrapping up, the group discussed transportation modes and effective ways to shift among those modes. A trend that Fabios noted was, while airfreight was once the main way to move cargo, ocean freight is becoming more common. That shift is mainly the result of cost, he said. Still, the mode chosen depends on factors like the model a company chooses to support its supply chain, the commodity imported and the type of customer being serviced. “Is it a just-in-time model? Is it a model where you want to maintain a warehouse here in Canada? A bonded situation?” said Fabios. “When it’s trade with the US, we’re seeing a lot more truck than anything else, where in certain circumstances you would see a courier air shipment coming up, now they’re saying to themselves, ‘I can wait for a couple of days, it’s not that big a deal.’”
What modes a company uses, and what can be done to mitigate challenges, depends on the industry a company is operating in, said Kreller. In consumer electronics, in which products become obsolete relatively quickly, airfreight is often the first choice, he said. “We’re using ocean pretty much when we’re shipping overseas,” Kreller noted. “We’ll have to airfreight something based on the customer’s urgency, but they’re paying for that.
Much of the focus now is on adaptability, said Snowden, and with the cost of ocean freight low, companies are building time into the process. But the challenge is that, if something goes wrong on the ocean, it’s virtually impossible to recover. “When something goes sideways like a Hanjin (bankruptcy) or a port strike or your containers are called for exam, what do you do? Then you air freight. Then you’re over-flying the next order,” she said.
The time it takes for shipments to cross the Pacific to Canada may be quick, but goods may then dwell in the Vancouver or Prince Rupert terminals, thereby lengthening the overall journey. Infrastructure needs to catch up to the larger container vessels that now cross the Pacific. Unfortunately, the cost to freight goods across the country from the West Coast is similar to that of moving a container from Shanghai to Toronto, Russell noted. “Rail car, truck, it’s pretty costly, especially across Canada,” he said. “In wholesale distribution, the last thing you want is to start moving product from warehouse to warehouse to warehouse, because now you’ve got all the extra material handling involved, so you try to do full containers directly into primary DCs.”
Cross-border shipping is an endeavor filled with challenges—but there’s no shortage of resources available to help deal with those challenges. Supply chain and procurement professionals would do well to tap those resources when dealing with this complex but crucial component of the supply chain.