Trade compliance—protecting supply chains from the risks of global trade

From the April 2019 print edition

As supply chains grow more global and complex, the risks to organizations that use those supply chains has increased. And while the recent proliferation of trade deals in which Canada is involved is designed to make the process of global trade and sourcing easier, supply chain professionals must ensure they are as up-to-date as possible on the rules, regulations and risks involved in global trade. Among these challenges is trade and customs compliance. But what does trade compliance involve, what are the risks and how can supply chain professionals mitigate them?

Image: Angelica Yiacoupis

Between new trade deals, no trade deals, political interference in global trade and so on, sourcing professionals face quite a bit of uncertainty, says Garland Chow, associate professor emeritus, operations and logistics division and past director, bureau of intelligent transportation systems and freight security at UBC Sauder School of Business. In fact, surveys of procurement and sourcing senior management routinely place risk management at the top of the list of concerns.

“There was just no question about it—when you go to global sourcing, you’re generally increasing your risk because you’re now sourcing from multiple partners in different environments, with different factors that could possibly change,” he says. “When you source domestically, that’s one of the reasons why you do that. You generally have more information, you have generally more reliable information and if there’s a trade war it affects you less although it can affect you if your domestic supplier depends on a foreign supplier.”

Compliance defined
Customs compliance is the process of scrutinizing the standards, documentation, taxes and the duties that a customs authority or regulatory body needs to ensure all obligations and requirements are met to prevent an organization from facing fines and penalties, says Cora Di Pietro, vice-president and general manager, global trade consulting at Livingston International. Customs compliance also allows businesses to take advantage of monetary recovery and cost savings through customs initiatives, including duty drawback and free trade agreements.

Trade agreements are instrumental in facilitating open trade, but they also increase the requirements for import documentation and regulatory oversight, Di Pietro notes. Those trade agreements also heighten the requirements for import documentation and regulatory oversight. For example, the new rules for automobiles and auto parts in the not-yet-ratified United States-Canada-Mexico Agreement (USMCA) place a wide range of requirements on businesses that import these products to prove that they are eligible for duty deferral under the new trade deal, she says. Her compliance team at Livingston has been combing through the document’s 4,000 pages to extract the minute details and the changes in compliance requirements between it and NAFTA.

“Businesses need to keep abreast of any and all changes in a free trade agreement to ensure they are mitigating any potential risk and liability, but also to ensure they are taking full advantage of existing and new agreements,” she says.

This increased complexity also means more potential for the risk of costly errors. One of the most common missteps regarding trade compliance involves the misclassification of imports. Each import must be classified using a specific code, Di Pietro notes. Goods that are not properly classified can mean incorrect duty applied to that product—either too much or not enough. If it’s not enough, the company may face retroactive payments or significant penalties. For high-volume shippers, these retroactive payments and fines could mean millions of dollars.

“Classification is the foundation of trade compliance and incorrect classification of a product used in the qualification of a good for any free trade agreement may also cause that product to not qualify for that particular free trade agreement,” she says.

Often, misclassification can be avoided by ensuring all pertinent information is provided in order to classify the product correctly—including the form, fit and function of the product, Di Pietro says. Communicating this information to those responsible for the product’s classification is important, as is providing specification sheets, diagrams, comprehensive descriptions and other documents. High-volume shipments with multiple products can mean hundreds of classification codes, she says. “If such shipments occur frequently, it could become difficult to manage the associated data and things begin to fall through the cracks.”

Di Pietro recommends developing an overall trade compliance strategy, and she and her team spends much of their time doing so on behalf of clients, many of which are looking to enter new markets. Often, these markets have their own unique regulatory regimes, trade agreements and customs processes.

When developing a strategy, ensure to evaluate sourcing and selling markets to understand the requirements for each market and determine how to optimize time in transit and duty outlay while minimizing risk exposure, Di Pietro says. How onerous are the regulatory requirements? What is the administrative burden? Are there tariff barriers and, if so, is there another market that has a free trade agreement to help contain costs and allow a business to compete in that market? What are the risks of being in a certain market – from transport delays and inadequate infrastructure to customs clearance times? Are there alternative sourcing markets in the same region to serve as supplements in the event the terms of trade change in the primary market? These and other factors must be considered and evaluated to achieve optimization, Di Pietro recommends.

For more information, check out the websites of customs agencies like the Canada Border Services Agency or U.S. Customs & Border Protection, Di Pietro recommends, along with industry associations including Export Development Canada.

Canadian companies looking to source from foreign suppliers must ensure those suppliers are compliant with export regulations to begin with, says procurement professional Jeff Russell. For example, exporters in China must obtain an export compliance licence. Without one, Canadian companies could end up violating Chinese law by importing from that Chinese vendor.

“You’ve got that type of compliance that you have to be aware of,” Russell says. “Do they have the necessary requirements to ship the material out of their own country? If they don’t, you could be doing something wrong right off the bat.”

Rules of origin
Another pitfall lies in recent changes to rules of origin. For example, if goods manufactured in Canada that happen to include Chinese raw materials, those goods may be classified by the US government as originating in China. This could be the case even if the products are shipped to the US for distribution, Russell adds. A Canadian company caught in this situation may find itself paying duty on those goods if they go to the US. “It’s making it more complex,” he says. “Now, you have to trace your supply chain components further down the line to see where they’re coming from. Procurement professionals are going to have to start understanding their traceability on these things down the road.”

To mitigate such risks, supply chain professionals must understand as fully as possible everything about the products they are importing to avoid paying unexpected duties, Russell advises. Engage with the process as much as possible.

“Otherwise the purchasing decisions that you’re making could be having a negative impact on your organization as you move forward,” he notes. “Procurement people need to get fully engaged in understanding the product—how it’s made, how it’s manufactured, it’s uses, it’s end use so that you can be more involved in the overall business.”

Supply chain professionals can’t stop supply chains from becoming more complex. But they can arm themselves with knowledge of processes such as trade compliance to ensure that they’re as protected as possible from the risks that come with that added complexity.