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The Hidden Risks of FTA’s

With the Trans-Pacific Partnership looming on the horizon and well over 100 FTA’s currently in effect, there has never been a better time to start utilizing the worlds various Free Trade Agreements (FTA).  When an FTA matches up with a major shipping lane, a properly implemented program can easily save a company millions of dollars yearly.   However, these savings come at a cost. If parts are not vetted and records are not kept about their qualification, a company can find themselves back paying millions in duty or worse.

The Common Misconception about FTA’s


The most common FTA errors result from a misunderstanding of the qualification process.  Companies with little or no compliance program in place often think that goods manufactured in a country count as originating in that country. At surface level this is correct, however in today’s global marketplace it is extremely rare that a good is made entirely in one country or incorporates parts solely from that country.  Products can be assembled from parts sourced abroad or manufactured in stages that happen in numerous countries.  Because of this, FTA’s have very specific rules of origin laid out to determine which goods qualify as originating and which goods don’t. Rules of origin define specific requirements on the acceptable amount of change needed for a good to be originating.  They can either be qualitative (i.e. a change in tariff heading), or quantitative (i.e. how much value was added locally).  When Customs questions an FTA claim, they ask what Rule of Origin was used.  If a company does not have evidence that their goods meet the rule of origin, then they are subject to any of consequences below.


Risks of Misdeclaring Goods


The risks of misdeclaration vary a large degree from country to country, but can include any of the following:

Owed Duties and Interest – This is the best case scenario and relies on the local customs authority determining that the mistake was not a result of negligence or fraud.

Fees, Fines, and Forfeitures – If the local customs authority decides that there was negligence or fraud on the part of the importer, the penalties can become much larger.  Goods can be seized and fines, fees and penalties can be assessed against the damages.  The amounts vary from country to country, but in the US fines can be as high as 8x that of the lost revenue.

Criminal Charges (Smuggling) – This is the worst case scenario.  Different countries have varying degrees of due process and, depending on the government, a misdeclaration could be determined as an act of smuggling.  This means that the charged company could have to answer these charges in court, which could result in any of the charges listed previously with the addition of the company being barred from doing business in that country.

Exposure – In addition to the monetary costs above.  Any error that happens raises a metaphorical flag over the offending company’s entries, telling customs that they should either pay closer attention to their future shipments or open an investigation into their past shipments.  This could compound the issue leading to a snowball effect of quickly accumulating fines and fees.

Proper use of FTA’s requires more than a certificate in the proper format. For more information on the hidden risks of FTA’s or for more information on how Allyn can assist with your free trade agreement program, please reach us at sales@allynintl.com

 

Allyn Contributor: Michael Kader

 

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