Global Trade Changes Course

As a supply chain professional, you’re responsible for staying ahead of the continually increasing and expanding rules and regulations that govern materials and goods moving within and across borders. “Regulations are changing more rapidly,” says Renee Roe, director with BPE Global, a San Francisco-based trade compliance consultancy. “New trade compliance regulations are issued daily. It’s a challenge for importers and exporters to keep up with ever-changing regulations and figure out how they will impact their specific situation.”

While the rules and regulations related to trade and supply chains can fill volumes, the following six are particularly important right now.

#1 Changes to the Harmonized System

The World Customs Organization (WCO) maintains the Harmonized Commodity Description and Coding System, an “international product nomenclature” more commonly known as the Harmonized System (HS). More than 200 countries base their tariffs, assess anti-dumping duties, and collect data through the system.

“HS codes play an important role in establishing rules for cross-border shipping and proper duties and taxes,” says Jamin Dick, senior vice president, supply chain and logistics, global e-commerce, with technology company Pitney Bowes. Just about every product companies ship across borders is classified under the HS.

On Jan. 1, 2017, more than 230 sets of changes to the system went into effect; such amendments occur every five years. A variety of factors can prompt changes, says Kristine Bols, director of global content with Amber Road, a provider of global trade management solutions based in East Rutherford, N.J. For instance, in an effort to boost public safety, the revised HS will provide a more detailed breakout of malaria-fighting tools. Concerns about resource management have led to changes that make it easier to track tropical woods, Bols says.

Supply chain professionals need to ensure they update their systems and databases to account for the changes. An improper classification can mean tariffs are applied incorrectly, or that shipments are detained.

The job isn’t as straightforward as it might appear. For starters, many countries tweak the standard WCO codes to gather additional data. Thus, each code can vary slightly from one country to the next. Some countries prepare concordance tables that show their previous tariff numbers and the corresponding changes, but not all do. Moreover, even once the WCO issues the changes, member states are not obligated to implement them, Bols notes. Most countries do, but some follow a different time frame.

The upshot? “There’s no fully automated way to reclassify” a company’s products, Bols says. Supply chain professionals need to assess which products are affected and how the changes will impact their journeys through customs. They’ll need to identify the systems that require updating, and decide who will handle these responsibilities. Finally, companies should develop a response plan and escalation process in case a shipment is delayed due to a classification problem, she adds.

#2 Streamlined hazardous waste export and import regulations

Revisions to the Hazardous Waste Export-Import Regulations went into effect Dec. 31, 2016. “The final rule improves and consolidates previous regulations so that one set of requirements—the Organization for Economic Cooperation and Development’s (OECD) more stringent controlling transboundary movements of hazardous waste requirements—applies to all U.S. hazardous waste exports and imports,” according to an Environmental Protection Agency (EPA) statement.

“The primary change is that the rule consolidated requirements that were spread about in different legal statutes,” says Peggy Otum, a partner with Arnold & Porter, a law firm focused on environmental law. “The intent is to modernize import and export requirements, and consolidate them so they’re easy to find.” Pertinent information will be electronically reported to EPA, and from there, can be electronically linked to U.S. Customs and Border Protection, as well as to the individual states and the general public, she adds.

While some electronic reporting will be required when the rule becomes effective, the full range of electronic reporting won’t be mandatory until the electronic reporting functions are built and beta tested, the EPA said. A separate compliance date will be announced at that point.

Another significant change is the requirement that companies track international hazardous waste shipments from start to finish, Otum says. This should reduce the likelihood the waste is abandoned or shipped to facilities that don’t have the resources to handle it safely.

The greater transparency resulting from the new electronic reporting requirements will make it easier for government agencies to monitor companies’ compliance. That means enforcement is apt to increase. “It’s incumbent on companies to prepare to be in compliance,” Otum says.

#3 Guidance on voluntary self-disclosures

In October 2016, the Department of Justice (DOJ) issued a document entitled “Guidance regarding voluntary self-disclosures, cooperation and remediation in export control and sanctions investigations involving business organizations.”

While the title is a mouthful, the document is an effort by the DOJ to find more effective ways for companies to self-disclose potential violations of export regulations and laws. “The business world is becoming one world, but law enforcement still has jurisdictions,” say Baruch Weiss, a partner with Arnold & Porter, and former acting deputy general counsel with the Department of Homeland Security.

“The guidance gives a lot more specificity about how to apply the general principles of corporate self-disclosure,” Weiss says. For instance, it lists examples of “aggravating circumstances” the department will consider when deciding where on the spectrum of possible prosecutorial actions a particular case might fall. He gives an example: Two companies both disclose violations of roughly the same dollar value, and both adopt stricter internal compliance programs. However, one company exported farm tractors, and another, chemicals that could be used as weapons.

“Common sense tells you they won’t treat the cases alike,” Weiss says. One may receive a lower penalty or a deferred prosecution (that is, the criminal charges can be dismissed, so long as the company fulfills certain obligations) while the other likely will be charged with a felony. In either case, however, companies almost always are treated better if they self-disclose, Weiss adds.

The guidance generally relates to violations of export control laws and sanctions, rather than imports, says Melvin Schwechter, partner and co-chair of the international trade compliance practice with Baker Hostetler. The U.S. Department of Commerce, the Office of Foreign Assets Control (OFAC), or the State Department administers most export control regulations, all of which have rules regarding voluntary self-disclosures. In the past, if these regulators believed a company’s conduct was more than an administrative mistake and amounted to a criminal violation of the regulations, they would refer a self-disclosure to the Justice Department.

“Now, the Justice Department is getting into the game,” Schwechter says. “In effect, they’re telling companies, ‘if you think you have a willful, criminal violation, file a self-disclosure with us.”

That leaves companies that uncover evidence of a violation of export regulations with several critical decisions: whether or not to disclose, and if they do disclose, to which agencies. “Disclosure to one agency doesn’t constitute disclosure to all,” Weiss notes.

“It’s a pragmatic, practical decision,” Weiss says. Management may decide any violation was inadvertent, and the company will tighten its control to ensure it doesn’t happen again. Or, it may determine a whistleblower or competitor is apt to alert regulators to the violation, and if the company doesn’t come forward, it will lose the benefits of voluntary disclosure.

Of course, the best course of action is to minimize the risk of violations by having implemented an effective export control and sanctions compliance program that’s integrated throughout the company, Schwechter says. That reduces the risk the business units engage in questionable transactions the compliance department knows nothing about. “Senior management has to make it clear to employees that trade compliance is important to the company,” he adds.

#4 Changes to Cuba sanctions

With the passing of Fidel Castro in November 2016, and former President Obama’s 2014 announcement of a change in the relationship between the United States and its island neighbor, it may seem like Cuba is open for business. Indeed, in October 2016, the Department of the Treasury’s OFAC amended the Cuban Assets Control Regulations, which modified some trade-related authorizations, among other changes.

Many questions have yet to be answered, however. “What you see in the news is a little misleading,” Roe notes. “Things are changing, but it always takes a while for regulations to reflect the actual impact of the announced intent to relax sanctions. Everyone is waiting to see where the political climate takes us in 2017.” Despite the headlines, companies’ ability to ship goods in and out of Cuba remains restricted.

While former president Obama took a number of executive actions that addressed various aspects of the embargo between the United States and Cuba, his ability to lift the sanctions were extraordinarily limited, Weiss says. Many sanctions involving Cuba originated through legislation, rather than regulation. “The President can’t do away with them without going to Congress,” he adds.

Still, shippers and supply chain professionals will want to pay attention to several changes. The re-import of goods previously exported to Cuba now is allowed in certain circumstances, says Robert Freeman, government relations principal with Cozen O’Connor. For instance, it may be possible to return the U.S. equipment previously exported to Cuba that now needs repairs that will be easier to handle stateside. In another change, certain contingent contracts—that is, contracts contingent on the embargo being lifted at some point down the road—also may be allowed.

The determination of which previously exported items will be allowed back into the United States, or which contingent contracts will be allowed, will come down to the details, Freeman says. “A general question of ‘Can I negotiate a contingent contract to sell widgets in Cuba?’ won’t get an answer.” Instead, OFAC will want to know where the widgets are made, how they’ll be utilized, and if they’ll travel through a third party, among other information. “It’s not go and do what you want,” he says.

Freeman advises businesses interested in doing business with Cuba to proceed carefully: “Engaging with regulators early and often is probably the best course of action.”

#5 Electronic logging devices

Starting in December 2017, many carriers and truck drivers will need to begin using electronic logging devices, or ELDs. Carriers and drivers currently using paper logs or logging software must transition to ELDsno later than Dec. 18, 2017, while carriers and drivers who use automatic onboard recording devices (AOBRDs) have to either ensure these devices comply with the new rules, or shift to ELDsno later than Dec. 16, 2019. This stipulation applies to most drivers and carriers who are required to maintain records of duty status.

“Since hours-of-service regulations went into effect in the 1930s, the industry has been using pencil and paper to log hours,” says Sean McNally, spokesperson with the American Trucking Associations (ATA), whose members have indicated that shifting to electronic records boosts both safety and efficiency. “It will improve compliance with the hours-of-service rules,” he says. And moving to automated systems reduces the time drivers and carriers spend documenting compliance with regulations.

However, not all carriers are interested in making the switch. A very small percentage of drivers quit when their firms implement ELDs, says Bob Costello, chief economist with the ATA. While some have been able to find work with other firms that hadn’t yet implemented the devices, that option soon will evaporate. “What happens one year from now?” Costello asks. On top of that, a few smaller carrier firms may decide to close shop, rather than invest in ELDs. Even a drop of 1 or 2 percent in the number of available drivers will exacerbate the current shortage.

#6 Lithium batteries regulations

The International Air Transport Association (IATA) changed its provisions for the transport of lithium batteries, effective in April 2016. Among other changes, it now requires that lithium ion cells and batteries be offered for transport at a state of charge (SoC) that doesn’t exceed 30 percent of their rated design capacity.

In addition, lithium batteries can’t be shipped as cargo on passenger aircraft. These changes impacted many shippers due to the inability to accurately track SoC as well as unclear enforcement of this regulation, Dick from Pitney Bowes says. Manufacturers are responsible for ensuring the batteries are at a state-of-charge of less than 30 percent, but few have communicated these details, he adds.

More changes are coming. FedEx Express, for instance, says it is imposing more stringent requirements on shipments of lithium batteries, including rules regarding their packaging and labeling. These became effective in January 2017.

Logistics professionals’ responsibilities today extend beyond moving products from Point A to Point B. “It now includes an expectation of reasonable care and knowledge of regulations,” Dick says.

Shippers need to either develop expertise internally, or engage outside experts. “While many of the agencies in more developed countries have a great deal of information online, that’s not the case everywhere,” Roe says. “Practical knowledge and expertise in interpreting the regulations are key to maintaining a compliant operation.”