How is your knowledge of trade compliance?
Ignorance is bliss they say, and it is possible to grow your business for years while being unaware of the risks lurking in each transaction as a result of non-compliance.
How comfortable are you that your international transactions are compliant?
Our team has the in-depth knowledge required to assist our customers achieve trade compliance excellence, in every aspect of international trade that they may be involved with.
Export Controls (Canada, US, Europe, Other)
Separately from the Controlled Goods Program (CGP) and the International Traffic in Arms Regulations (ITAR), the US and Canada (as well as other countries) impose export controls on a multitude of goods and technology.
The US Export Administration Regulations (EAR) is administered by the Bureau of Industry and Security (BIS), part of the US Department of Commerce. The list of items controlled by the EAR is the Commerce Control List (CCL) which includes Export Control Classification Codes (ECCN). The remainder of the EAR govern other aspect s of export controls including the export license process and levels of control by country of destination.
The Canadian Export and Import Permits Act (EIPA) is administered by the Trade Controls Bureau (TID) of Global Affairs Canada. The Export Controls Division (TIE), which reports to TID,
manages the export permit process of items listed in the Export Control List (ECL) of Canada.
European Union Regulation (EC) No 428/2009 (2017 consolidated version) governs the EU’s export control regime, which includes common export control rules, including a common set of assessment criteria and common types of authorisations (individual, global and general authorisations). The responsibility of enforcing the regulations falls to each country, but these regulations ensure that enforcement is relatively uniform throughout the EU.
Other Countries like Australia, New Zealand, Japan, South Korea and India have export controls and processes in place similar to those of western European countries.
Controlled Goods Program
Canada’s defence establishment enjoys a unique relationship with the US, ever since the Hyde Park Declaration in 1941. Sharing of production and development of defence material between the two countries is unparalleled and has been reaffirmed numerous times over the years. The International Traffic in Arms Regulations (ITAR) is a US regulatory regime to control both the export of and foreign access to defence and military-related goods and technology to safeguard items on the U.S. Munitions List (USML). (See the Intelligence Section on ITAR for more details).
Section 126.5 of the ITAR contains the “Canadian Exemptions” that no other country enjoys. It includes such benefits as not requiring an export license (in most cases) to ship certain USML goods and technology from the US to Canada. The Controlled Goods Program (CGP) was established at the turn of the millennium to safeguard those exemptions. and ensure that Canadian manufacturers would continue to benefit from close cooperation with some of the world’s largest military material OEM based in the USA.
The possession of controlled goods requires registration in the CGP. This requires a security assessment of key employees, the establishment of a security plan, as well as detailed logs of activities related to controlled goods.
The “Arms Export Control Act” (AECA) and related regulations “International Traffic in Arms Regulations” (ITAR) were enacted in 1976 as a unilateral arms export control program by the United States, in line with the multilateral CoCom embargo on the Soviet Union in place since 1949.
The ITAR has much evolved since then, with the United States Munitions List (USML), containing the descriptions of goods subject to ITAR control, generally a reflection of the international Wassenar Arrangement list, with some unique US modifications and interpretations. The USML is organized in twenty-one categories based on broad groupings, such as Guns and Armament, Ammunition/Ordnance, and Tanks and Military Vehicles.
Among other things ITAR requires, even domestically, that companies and individuals having access to controlled items be registered with the Directorate of Defense Trade Controls (DDTC) and obtain special “authorisations” from the Department of State in order to:
- share technical information related to ITAR goods with others, through a Technical Assistance Agreement (“TAA”)
- outsource some or all of the manufacturing of ITAR goods through a Manufacturing License Agreement (“MLA”),
- establish a warehouse or distribution point abroad for defense articles to be exported from the United States for subsequent distribution to entities in an approved sales territory, though a Warehousing and Distribution Agreement (“WDA”)
All exports or temporary imports of “defense services” or “defense articles,” including related “technical data,” require prior approval from DDTC unless the export or import qualifies for an exemption. The ITAR’s licensing requirements apply extraterritorially also. After export from the U.S., prior authorization is required before a defense article or defense service can be transferred to an end-use, end-user, or destination not previously authorized – a so-called “reexport or retransfer.” In short, all transfers of defense articles or defense services are subject to ITAR licensing requirements, from the initial export from the U.S. to subsequent transfers among foreign countries or persons.
Since the Export Control Reform Initiative (ECRI) began under President Obama in 2009, many items have now been removed from the USML. Nonetheless, the USML remains a very thorough list of goods and technology. Items that have been removed from the USML may still be controlled under the Commerce Control List (CCL) pursuant to the US EAR. The EAR is administered by the Bureau of Industry and Security (BIS) located in the Department of Commerce (See the Section on Export Control for more information). It is also important to note that US export controls are not identical to Canadian controls and in some cases a US license is required but a Canadian export permit is not; in other cases, the reverse is true.
Harmonized System Tariff Codes
The Harmonized Commodity Description and Coding System, also known as the Harmonized System (HS) of tariff classification is an internationally standardized system of names and numbers to classify traded goods, under the umbrella of the World Customs Organization (WCO). The WCO maintains the first 6 digits of the HS code, known as the ‘sub-heading” level and this then becomes the basis for HS code systems in every country, where authorities may add anywhere from 2 to 5 digits to the code for their own purpose.
The fact that this system is virtually universal means, in theory, that the classification should be the same in every country, up to the sub heading level.
The two main significant purposes of the HS:
- Identify a product on a national basis for imposing import duty rates, for statistical data gathering, for export control flagging, and other uses,
- In the context of free-trade agreements, determine the rules of origin by which a product will be deemed to be “Made in” a country that is party to that free-trade agreement.
While some argue that anyone can apply HS classifications to products, the reality is that as precise as expressions seem to be in the nomenclature, there is quite a bit of room for interpretation, and an unfortunate selection of HS code can lead to anti-dumping duties, or special additional duties as we are seeing during these days of international trade wars.HS classifications are contained in texts of law, and interpreted according to very strict legal rules.
Classifying a product may be relatively simple, but finding and legally justifying a given classification is a complex function, with very onerous repercussions.
Free Trade Agreements (NAFTA, CETA, USMCA and many more)
A Free Trade Agreement (FTA) is a type of agreement between two or more countries or block of countries, for liberalising trade among themselves, from mutual recognition of certain standards (labor, phyto-sanitary, etc), to opening up government procurement to competitive bidding. There are currently over 400 bilateral and multilateral trade agreements worldwide.
The most visible and publicized component of an FTA is no doubt the removal of import duties on goods “made” by one of the partners.
Perhaps the least understood component of an FTA is how to determine if a good is, in fact, “made in” the country where it was finished. This is defined within the rules of origin.
The modern FTA no longer uses the 50%+ rule of early trade agreements, but relies instead on a combination of factors, including:
- The “Tariff Shift” is a concept by which the HS classification of foreign raw materials and components “shift” to the HS classification of the good whose origin is being established. The rule of origin will define what that shift must be for a good to be considered “made in” and qualifying to the FTA,
- The Regional Value Content (RVC) is a percentage in value of raw materials, components, labor and overhead that can be reasonably attributed to the country in which the good was finished,
- Origin accumulation is a concept whereby a raw material or component that is foreign, but is made in a country that benefits from an FTA with the manufacturing country, may be considered in the RVC if they also share an FTA with the country of destination of the manufactured good
Understanding rules of origin is crucial to the determination of origin when preparing an origin certification, as well as having a good grasp of HS classification to apply to raw materials, components and manufactured good.
International Trade Documentation
The single most common cause of international shipment delays, by a very wide margin, is found in incomplete or incorrect customs documentation.
Customs requirements are complicated. Every border that your goods cross will have its own set of rules and regulations concerning everything from acceptable marking/packaging, to safety of materials and articles, as well as intellectual rights through to environmental concerns.
Remember every export is an import to another country.
How you as the exporter navigate the requirements abroad can greatly impact costs, delivery time, and compliance. You as the exporter, due to contractual obligations, may need to consider those import details and requirements. If any piece of the complex puzzle that encompasses trade requirements is not complete or is incomplete (such as proper documentation) it can cause costly delays to exports and imports, and can lead to the application of administrative financial penalties and ultimately to seizure of the goods.