- Global trade compliance relates to the processes an organization undertakes to ensure it is operating in compliance with domestic and international trade rules, regulations, and laws.
- 3 key components of global trade compliance are the harmonized system code, country of origin determination, and product valuation.
- Implementing a global trade compliance program can give businesses many benefits, including reduced duty rates, an efficient supply chain, and a strong reputation.
- This article is for business leaders who want to develop an understanding of global trade compliance and how to play by the rules.
In today’s international economy, global trade compliance stands along other forms of global compliance in becoming an increasingly critical element for business success.
While there are financial impacts for non-compliance, global trade rules also provide a competitive advantage if understood, strategized, and planned for correctly.
So, here’s how you can ensure global trade compliance and maximize your position.
What is Global Trade Compliance?
Global trade compliance relates to processes and procedures an organization undertakes to ensure it is operating in compliance with the domestic and international trade rules, regulations, and laws.
In other words, global trade compliance means your business is operating within the law and following the regulations associated with importing and exporting goods across country borders. This relates not only to physical items shipped overseas but products, services, and technology.
It is your duty to understand and adhere to the global trade rules in the countries which you’re operating, or you may be faced with penalties.
Hence,Flashglobal states, “A trade compliance violation occurs when a company, person or third-party entity knowingly or unknowingly commits an act that violates aspects of a recognized and established rule or regulation governing the movement of goods across a country’s border.”
The penalties for global trade non-compliance can relate to:
- Shipment delays
- Government inspections
- Seizure of goods
- Customs audits
- Loss of import privileges.
Although, regardless of the specific consequence, non-compliance is ultimately going to affect your bottom line.
In many instances, lost revenue and fines are easily going to equate to 6-7 figures: For example, in the 1990s, car manufacturer Ford was fined $13 million for under-claiming the value of their imports.
What is a Global Trade Compliance Manager?
The person who manages global trade compliance in an organization may be the head of logistics, the purchasing manager, the finance manager, or even the owner themselves in a small business.
Although, a large business or a business serious about global trade compliance will have a dedicated global trade compliance manager within their organization.
A global trade compliance manager is someone who must be an expert in both foreign and domestic trade practices, logistics, and international law. They will have the responsibilities of:
In short, a global trade compliance manager is the head of international trade. They have the responsibility of ensuring smooth international trade transactions for their company.
Beyond knowing what a global trade compliance manager is, what are the basics to ensuring global trade compliance in your business?
How to Ensure Global Trade Compliance in Your Company
When you’re importing and exporting goods across country borders, or thinking about doing so as part of an international expansion, global trade compliance ultimately boils down to knowing the answers to three key questions:
1. What is the product?
Every product you import must have a tariff code associated with it. Also known as a Harmonized System code (HS code), this declares what category of goods your freight falls under and used to determine how much customs duty and import VAT you will pay.
To find out what HS Code you need to use on your product, you can use an online tariff finder tool, such as findhs. However, note that the first digits are always locked in internationally; the last digits vary by country.
The code you select must be accurate based on the product’s descriptions and not reflective of which code has the lowest duty. If you are found to be using the wrong tariff classification, you will be fined at the border.
2. What is its valuation?
The World Trade Organisation (WTO) sets out six valuation methods for imported goods, and every shipment must comply with one of them.
The primary method countries will ask you to use is the transaction value method. This means the amount of money you, as the importer, paid to the foreign seller.
This is not just the dollar value on the commercial invoice, however, it may also include other assists, such as packaging costs or brokerage fees.
Customs ask for this valuation as it is used to determine the customs duty and import VAT that you will pay on your imported goods.
If you are found to be making valuation errors, that would mean you are under or overpaying customs duties, which can lead to fines, penalties, and audits.
3. How is origin determined?
In global trade, country of origin is not necessarily where the products have been shipped from, but where they have been produced, manufactured, or grown.
Country of origin determination is often made on a country-by-country basis, as different countries have different rules. Therefore, you must diligently research the origin rules for each country you are operating in.
If you incorrectly declare a product’s origin, this would lead to fines and penalties as it is used to determine customs duties and applicable free trade agreements.
What are the Benefits of Global Trade Compliance?
International trade compliance takes consistent time and resources. However, negligence or non-compliance will ultimately cost you more in the long run.
By investing into a well resourced global trade compliance program — whether internal or external — companies can see benefits of:
1. Reduced duty rates
By seeing trade compliance through an expert lens, your company will be able to compliantly reduce duty rates by taking advantage of things like free trade agreements, tariff engineering, foreign trade zones and other technical factors that impact duty rates.
2. An efficient supply chain
In the absence of compliance controls, your shipments are prone to being stuck at borders and interrogated by customs. However, effective trade compliance ensures your goods are swiftly moved through customs, which improves delivery time and customer satisfaction.
3. A strong reputation
Engaging in malpractice at the borders, even if by mistake, is going to hurt your business and reputation with government agencies. Custom processing delays and large fines are regular for businesses that don’t get it right. Although, implementing compliance controls ensure you maintain a good standing with trading partners and customs.
Global trade compliance — 5 key things to know (video: Flash Global)
Taking care of global trade compliance
Some businesses view establishing a global trade compliance programme as expensive. However, the real cost is in not having effective compliance controls in place.
One error in tariff treatment, importation valuation, or country of origin determination can lead to a fine that far outweighs the costs of any compliance programme.
If your company lacks the resources to develop global trade compliance internally, use an outsourcing solution to optimize trade operations while minimizing risks and costs.
To ensure complete global trade compliance for your company, it is worth considering whether a global relocation firm could help: These companies specialize in the movement of people and goods across borders and will be able to ensure that your global trade is compliant.
Global Trade Compliance FAQs
Country of origin determination is a crucial component of global trade compliance as it is used to determine duty rates, free trade agreements, trade sanctions, and import quotas. However, country of origin is not necessarily where the products have been shipped from, but where they have been produced, manufactured, or grown.
In the United States, Customs use three different rules to determine country of origin, including the “wholly produced” rule, the “de minimis” rule, and the “substantial transformation” rule.
Export compliance relates to processes and procedures a business undertakes to comply with international export laws when selling goods and services in the global market.