Customs Developments Affecting the Supply Chain

Forthcoming changes in the area of Customs this year serve to remind transportation managers of the importance of including Customs issues when planning supply chain strategy.

Since joining the World Customs Organization (WCO) in 1971, Canada has subscribed to the Harmonized Commodity Description and Coding System (HS), a multipurpose international product nomenclature developed by the WCO. The HS system comprises about 5,000 commodity groups, each identified by a six digit code, with a set of rules to determine product classification for Customs purposes (in layman’s terms, the HS forms the basis of the system used to determine rates of Customs duty). According to the WCO, the HS system is used by more than 200 countries and affects more than 98% of products in international trade.

In 2011, the WCO announced a number of modifications to the HS system as a result of changes in technology and international trade patterns. These modifications resulted in a number of changes to the Canadian Customs Tariff effective January 1, 2012, prompting importers to review products whose tariff classifications may have changed, which in turn may require revisions to Certificates of Origin pertaining to Free Trade Agreements, and Customs rulings for various product classifications.

Based on trade statistics reported by Foreign Affairs and International Trade Canada in 2010, the HS system determines rates of duty on merchandise imports from virtually all of Canada’s Top 10 import-trade partners: 1. the United States, 2. China, 3. Mexico, 4. Japan, 5. Germany, 6. United Kingdom, 7. Korea, 8. France, 9. Italy and 10. Taiwan.

The impact of these changes for transportation managers is (potentially) twofold. First, they may result in company-supplier changes within origin countries based on lower negotiated product costs to compensate for increased duty rates, and/or changes in suppliers to between origin countries. For transportation managers this can be a troublesome scenario as purchasing departments scramble to find alternate sources of supply. New supplier locations may not coincide with existing carrier rate agreements, necessitating new carrier rate negotiations, or proximity to origin ports, resulting in increased transportation handling and freight costs. Both of these scenarios reinforce the importance of Customs for transportation managers in terms of awareness of Customs issues, changes in world trade that can affect Canadian importers, and the need to integrate transportation and purchasing operations to support flexible, cost-effective supply chain processes.

Another Customs issue of concern for Canadian importers is Phase 3 of the Advance Commercial Information (ACI) program, more commonly known as “eManifest”. ACI is designed to provide the Canada Border Services Agency (CBSA) with electronic pre-arrival information regarding cargo shipments destined for Canada.

ACI Phase 1 was implemented in 2004, requiring marine transportation carriers to electronically transmit pre-arrival information to CBSA 24-hours before loading cargo at a foreign port. ACI Phase2 was implemented in 2006, requiring air carriers and freight forwarders to electronically transmit cargo data to CBSA 4-hours before arrival in Canada, as well as expanding the marine requirements in Phase 1 to shipments loaded in the United States.

ACI Phase 3, or “eManifest”, will require electronic transmission of cargo data from carriers for all highway and rail shipments, the majority of import shipments to Canada originating from, or transiting through, the United States by surface modes transport. ACI Phase 3 will impact the largest number of shipments destined for Canadian importers, with highway carriers required to send shipment details electronically to CBSA at least one hour before reaching the Canadian border.

The requirement for surface carriers to electronically transmit information to CBSA before shipments arrive in Canada has tremendous significance in terms of the possibility for delay, or potential inadmissibility, of shipments. Transportation managers who control inbound freight movements for example, may wish to verify eManifest transmission capabilities with their existing carriers.  This may also be reason to reexamine supplier agreements where freight costs are prepaid (included in the product price), or freight collect where the supplier is responsible for carrier selection.

CBSA commenced eManifest implementation for highway carriers on November 1, 2011. Based on a rolling 0-12-18 month schedule, highway carriers that do not comply with the requirement to electronically transmit cargo data prior to arrival at the border by November 1, 2012 will be denied entry and may incur zero-rated penalties. Highway carriers that do not comply with eManifest requirements by May 1, 2013 may be denied entry to Canada and face monetary penalties.

The United States has implemented similar eManifest requirements under its Automated Commercial Environment (ACE) program. It is also worth noting that the data required under eManifest is harmonized where possible with the WCO in order to streamline the administrative burdens.

As a result, for importers concerned about timely cross-border delivery, control of the cargo movement, ensuring that eManifest requirements are adhered to, may form the basis of Shipper/Receiver/Carrier/Customs broker partnerships in future.

Posted by: Laurie Turnbull, CITT, P.MM – Supply Chain Consultant, Cole International

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