Shipping Solutions Newsletter

By Mark Neville email | bio

Goods qualifying under a Free Trade Agreement (FTA) are treated differently from other goods. One of the hallmarks of the FTAs in place is that the economic benefit of duty-free or reduced duty treatment is strictly limited—by treaty, statute and regulations. The benefit of an FTA is reserved for those goods that qualify under the applicable rules of origin.

In order to achieve certain other goals as may be set forth in its foreign relations agenda, the United States is willing to forego customs duties on imports of qualifying goods. That is why the rules of origin of each FTA spell out in detail what goods will qualify. Some of those rules make it difficult for goods made in the FTA country with non-qualifying parts or materials (i.e., the parts or materials had previously been imported into the FTA country) to qualify. It can be frustrating to see an importer’s bid for FTA benefits not succeed if the goods fail to qualify.

Given the strictness of the rules of origin and understanding that they are designed to ensure that the economic benefit is conferred on the FTA partner, such failures may be expected. Nothing can be more frustrating than to witness an otherwise qualifying entry be denied those FTA benefits because the goods were not shipped directly to the United States.

Shipped Directly Criterion

Trade laws that only confer benefits to goods that qualify under specific rules of origin also require that the goods are imported directly into the United States. In broad terms, the rules specify that only emergencies that threaten the cargo will excuse the goods being transshipped through an intermediate country.

For examples we could start with the Generalized System of Preferences (GSP), the regulations that clearly remove most goods from GSP consideration if they are transshipped through an intermediate country. The GSP generally only permits loading and unloading and other activities necessary to preserve the articles in good condition. (19 CFR 10.175.)

Each FTA contains a requirement that the qualifying goods be imported directly into the United States. In the case of NAFTA, the origin rules make it clear that a good is not an originating good if it is withdrawn from customs control outside the NAFTA territories or if it undergoes further production or other operation outside the NAFTA territories beyond that which is required to preserve the good. (19 CFR Pt. 181, App. Section 16.) We have an excellent example of how things can go wrong in the context of the FTA with Chile.

In the case of this FTA, the rules of origin (at General Note 26 (b) to the Harmonized Tariff Schedule) specify that a good will qualify only if each non-originating material undergoes an applicable change in tariff classification as set out in the rules.

Tariff Shift for Non-Originating Materials

Consider the question of dressed sheepskin from Spain that was shipped to Chile where it was cut to shape and sewn into shearling jackets. Such a tariff shift for the Spanish-origin materials (from heading 4302 to heading 4303, HTS) would qualify the shearling jackets as being eligible for the FTA tariff preference.

But what if the jackets had not been exported directly to the United States? What if, instead, these jackets were packed in bulk and shipped first from Chile to Canada? In Canada, they were then offloaded and unpacked, inspected, vacuumed, pressed, placed on hangers and individually bagged. Would such a fact pattern be consistent with the US/Chile FTA rules?

This begs the question: What are the US/Chile FTA rules about direct shipment? The rule is quite specific and is quite consistent with the rules that apply to other FTAs and tariff preference programs. The rules (19 CFR 10.463 (a)) state that

A good that has undergone production necessary to qualify as an originating good under this note shall not be considered an originating good if, subsequent to that production, the good undergoes further production or any other operation outside the territory of Chile or of the United States, other than unloading, reloading, or any other process necessary to preserve the good in condition or to transport the good to the territory of Chile or of the United States.

In short, otherwise qualifying goods will lose their FTA eligibility if they are transshipped via an intermediate country instead of being sent directly to the United States from Chile. Thus, it would seem that the handling of the jackets in Canada would oust them from FTA treatment.

In fact, this is exactly the fact presented to Customs in 2005 by a broker on behalf of its customer. In response to the ruling request, CBP replied that the merchandise did not qualify for preferential treatment under the FTA because the operations in Canada are more than unloading, reloading or any other process necessary to preserve the goods in good condition. Ruling number L84820 (6/6/05).

Not to be outdone, the broker promptly applied to CBP for reconsideration of this ruling. The ensuing ruling issued by CBP Headquarters (ruling number 563304 (5/18/06) recited the arguments made by the broker in more detail.

The broker claimed that the vacuuming and pressing were operations necessary to preserve the garments in good condition so as to make them saleable. As was originally implied by the facts, the second ruling specifically referred to the fact that the initial ruling request had noted that the jackets had been tightly packed when shipped from Chile to save on shipping costs. Further, hangers at this first stage would have left undesirable impressions on the garments. The broker also contended that the vacuuming and pressing, which cost some $5 per garment, were not “production” and should be seen merely as “processes” necessary to preserve the goods in good condition and thus permissible under the origin rules.

CBP rejected the arguments on the strength of the facts presented. The operations in Canada were clearly beyond those permitted under the transit and transshipment rules.

Conclusion

CBP takes a strict approach to the transshipment rules. The bottom line as shown in the rulings: somebody may have saved a few bucks on shipping, but the importer had to pay duty at the full four percent duty rate. The lesson: whatever you are planning to do, do it in Chile, before it is shipped, or in the United States, after it is received. It is hard enough to qualify for the tariff preference; it is a crying shame that the tariff preference could be lost on these bases!

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By Prema Nakra, Ph.D. email | bio

International trade shows or trade fairs are an absolute must for companies wishing to move ahead in the fiercely competitive global market environment. In this article I will discuss the importance of trade shows or trade fairs for companies large and small who seek to compete effectively in the current market environment.

Introduction

In the dynamic Chinese city of Shanghai, creating news was near revolutionary during the period November 1st to the 5th in 2006. During this time period four major trade shows had been staged simultaneously. Approximately 704 companies from 26 countries flocked in to partake in this revolution. The event was held at the Shanghai New International Expo Center whereby as many as 39,875 visitors from 68 countries passed through the turnstile to participate in this event.

The four events included: ENERGY ASIA, Factory Automation ASIA, INTERKAMA ASIA and Metal Working. These four shows were accompanied by an extensive supporting program featuring multiple forums, lectures and seminars including the Seminar of the Shanghai Association of Automation, the Forum on Power Distribution Intelligence Technology, the China Metal Working Summit, among many others.

The massive turnout of market leaders to meet clients face to face at these events attests to the fact that international trade shows are alive and well and their importance has not diminished even as technology-based means of communication have become more sophisticated and accessible. The success of this event also demonstrates that trade shows or trade fairs are an absolute must for companies wishing to move ahead in the fiercely competitive global market environment.

Strategic Importance of Trade Shows and Trade Fairs

A typical trade show is an event at which manufacturers, distributors and other vendors display their products or describe their services to current and prospective customers, suppliers, other business associates and the press. Often a trade fair is the first communication step in the process of export development for the small and medium-sized company. Because of the strategic audience and the publicity provided by the major trade fairs, firms use them to show off their latest products and services. Many industries, firms and investors are routinely showcasing their products at international trade shows.

Trade shows and exhibitions provide a neutral location for doing business. They bring together managers from different departments in buyer organizations, which increases the probability of meeting the decision makers and those influencing the purchasing decision. Participation in these shows especially helps businesses seeking to explore marketing opportunities in another country, to make contact with paramount distributors, to build formidable relationships as well as determine the best way to market products in another country.

Trade fairs can be valuable not only for well established firms for purposes of prestige, public image and introduction of new products, but also for new firms that might not have other readily available ways to expose their products to the right audience. For new product announcements and demonstrations, the trade fair is an ideal forum for display.

International trade fairs offer many advantages, and international marketers are well advised to consider them when planning promotional programs. A firm can test sales and determine potential distributor reaction in the market before committing itself. Potential distributors and licensees favor trade fairs for the same reason. They can see a firm’s products and observe the market reaction. In effect trade fairs are used to buy and sell products, to develop and sign contracts, and to arrange for international distributorships and agent relationships.

Trade fairs are also used for CI (competitive intelligence); to check on one another’s most recent developments. In most surveys done at exhibitions, 30% to 40% of the respondents cited market research—also known as CI or checking out competitive products—as central to participation and marketing. Attending a trade show enables company representatives to learn a great deal about competitors’ technologies, pricing and the depth of market penetration.

Several thousand international trade fairs occur annually in more than 70 nations. Specialized fairs in individual sectors such as computers, the automotive industry, fashion and home furnishing regularly take place. Several hundred fairs are held in Eastern Europe annually.

Government Support in Trade Fair Participation

Countries and governments are often involved in ensuring that national and local companies are represented at important fairs. The great appeal of these trade fairs is also embodied in the presence of international pavilions organized by industry associations and trade agencies from Germany, Switzerland, Korea, the Czech Republic, Spain, America, Japan, China, Taiwan and Spain. These international pavilions provide a unique opportunity for visitors to see and compare innovative products and services without having to travel the world.

Usually, the U.S. government shares in the cost of the exhibits by sponsoring a national pavilion at the different fairs. As a part of its international promotion activities, the U.S. Department of Commerce sponsors trade fairs in many cities around the world. The publication of the Department of Commerce, Business America, has a periodic listing of international trade fairs. Additionally there are trade shows sponsored by local governments, in most countries. African countries, for example, host more than 70 industry specific trade shows.

Recommendations

When participating in such a fair, advance preparation is crucial including contact initiation and translation of material into the language of the host country. Planning must begin 12 to 18 months in advance. If the decision is made to attend trade fairs, the first step is to identify those relevant to their products and services.

Select Wisely

Make sure the trade fair you attend is targeting visitors who are likely prospects and potential customers. The firm should include its subsidiaries, distributors and licensees so that maximum value can be obtained by all of the firm’s operations. To take full advantage of your participation in the trade fair, it is important to not just attend the show as an exhibitor but to plan additional events that coincide with exhibiting at the trade show – e.g. a technical seminar or a cocktail party held at the hotel recommended for accommodation of exhibitors by the trade show exhibitors. It is typical to use local distributors, consultants and sales representatives to help with the logistics of bridging local culture.

Make it Easy for Them to Find You

As an exhibitor you have to remember that time is very precious, and you have to find ways to expose your offerings to the potential buyers or distributors within a short period. If you use a country-centric pavilion to exhibit your products, it would be a lot easier for buyers to develop relationships between the offerings from a specific country without roaming about in the wilderness. In other words, if the exhibitors from a country are clubbed together, it is a lot easier for visitors to locate any country specific product under one pavilion.

Calculate the Full Cost of Participation

Costs include renting space, dressing the exhibit, putting up Customs bond, renting furniture and equipment for the exhibit, hiring local people to assist and interpret, sending executives to staff the booth, preparing supplemental promotional material, and hosting activities to attract visitors to the firm’s exhibits. These include direct mail, advertising, PR activities and contingency plans.

Follow-Up

What happens after the trade show is just as important as what happens at the trade show. Research indicates that more than 80% of leads gathered at trade shows are never followed up. One of the reasons for such a large number of leads falling on the way side is lack of enough information. Many of the leads have no substance. They are either just cold business cards or the name of the person written on a yellow pad.

To truly benefit from all the hard work that went into planning the show, exhibitors must prepare a checklist of information that must be collected about the visitors. It is important to maintain a detailed record of visitors, such as their business cards, list of products that interest them, and whether or not you promised to call them or send them additional information or samples of products.

Final Words

Trade shows are the most important vehicle for selling products, reaching prospective customers, contacting and evaluating potential agents and distributors, and marketing in most countries. They have resided at the very center of commerce in Europe for centuries. European trade shows attract high-level decision makers who are not attending just to get their latest products out but are in attendance to buy.

In difficult economic times and/or political circumstances, online trade shows become a useful but obviously less than adequate substitute. An example is the world’s premier mobile telephony event, 3GSM World Congress, which has nearly 1,000 marketers showcasing their latest mobile products, services and solutions.

Finally, while in the U.S. trade shows are staffed by the sales representatives and middle managers, at global trade shows customers expect to meet the chief executive officer (CEO) and other senior management. It is vitally important that the CEO and the senior executives are visible at the international trade shows to gauge the market opportunities and to establish relationships with other vendors, potential customers, alliance partners and distributors.

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