Understanding the Recent Ruling on Conflict Minerals

Posted on September 5, 2012 by Anthony Hardenburgh

Existing Global Trade Management and Supply Chain Technology will need to Adapt to these Regulations

The US Securities and Exchange Commission (SEC) has proposed regulations that require US and certain foreign companies to report the use of “conflict minerals” from the Democratic Republic of the Congo (DRC) or adjoining countries in their products.

Conflict minerals are mined under conditions of armed conflict and human rights abuse. Areas notably affected are in the eastern parts of Africa, where various armed rebel groups within the DRC are largely responsible for using these natural resources to finance continued fighting, but neighboring countries such as Burundi, Rwanda and Uganda have also profited significantly. Conflict minerals mined in the DRC are typically passed through various intermediaries before being finally purchased.

At present, four minerals are listed as conflict minerals:

Columbite-tantalite, or commonly known as Coltan – used primarily in the production of capacitors, hearing aids, pacemakers, airbags, GPS, ignition systems, anti-lock braking systems, laptop computers, mobile phones, video game consoles, cameras, etc.
Cassiterite – used in production of tin, a common component of biocides, fungicides, high performance paint manufacturing, etc.
Wolframite – an important source of tungsten, used in fishing weights, dart tips and golf club heads, in addition to use in other metalworking tools.
Gold – used in jewelry, electronics and dental products.

In practical terms, what does this ruling mean for companies whose products use these minerals? According to the National Retail Federation, the regulations will apply not only to manufacturers but also to retailers considered to be “contracting to manufacture” private-label merchandise.

A retailer simply placing its brand on a generic product would not be covered, but those that have “some actual influence over the manufacturing of that product” would be covered, NRF explained. Retailers selling only third-party merchandise under the product’s own brand rather than the store’s brand are not affected. Companies are able to avoid the disclosure rules if they use recycled or scrap minerals.Companies will have until May 31, 2014, to make their first disclosures about whether the minerals they use are “conflict free,” meaning they did not finance or benefit armed groups in Central Africa. And for two years — four years for smaller firms — companies will be able to disclose simply that they could not determine whether the minerals were helping to finance fighting in the DRC.

Final Thoughts

Existing global trade management and supply chain technology will need to adapt to these regulations. Here are some initial steps companies can take to ensure they are ready for compliance in 2014:

Ensure that your source of global trade content lists sanctions against the conflict mineral countries and the minerals themselves.
Consider using questionnaires or surveys to determine whether your product suppliers are obtaining minerals from conflicted areas. Much the same way that suppliers certify eligibility for preferential duty treatment, they can also certify that their products do not contain conflict minerals.
Perform admissibility reviews on transactions that contain the minerals or products made with the minerals.
Update your standard operating procedures to include processes for requesting and capturing declarations from suppliers and for performing transaction reviews.

The Importance of Global Trade Content for Managing Free Trade Agreements

Posted on June 7, 2012 by Anthony Hardenburgh

Users also need to Understand the Trade Content that Powers their Solutions

On May 14, 2012, President Obama signed the presidential proclamation that put the US-Colombia free trade agreement into force. Designed to promote the flow of certain goods and services between the countries, the free trade agreement was years in the making.

According to the Office of the US Trade Representative (USTR), the tariff reductions in the Agreement will expand exports of US goods alone by more than $1.1 billion, supporting thousands of additional American jobs. The ITC also projected that the Agreement will increase US GDP by $2.5 billion. The Agreement will remove significant barriers to US goods from entering Colombia’s market, as over 80 percent of US exports of consumer and industrial products to Colombia will become duty free immediately, with remaining tariffs phased out over 10 years.

Because the agreement specifies changes in rules of origin and HS codes, it is critical that any organization using global trade management software ensure that its vendor made the appropriate updates to the underlying trade content and put them in place immediately. In fact, the US-Colombia FTA is affecting over 20,000 HS codes and over 800 rules of origin. This is a significant amount of content that required collection, analysis and interpretation so that it could be implemented in conjunction with the president’s signature.

Especially for organizations already doing business with Colombia, the FTA could mean substantial reductions in landed costs due to preferential treatment as of the effective date. Supply chain managers should be able to run scenarios that reflect preferential rates as they make sourcing decisions that may now include items from Colombia.

Don’t be afraid to speak with a representative from your GTM software vendor. Find out whether it anticipated the formalization of the agreement with the necessary updates to its trade content. You may also want to ask about how many trade specialists are on staff to monitor government information feeds from around the world as trade regulations change. Those specialists should have extensive backgrounds in compliance and global trade, as well as speak the languages of their countries of expertise.

Final Thoughts

GTM software users need to understand the importance of the trade content that powers their solutions and the critical role it plays in areas like free trade agreement management. As countries continue to expand the scope of these preferential programs, choosing a GTM vendor that offers both depth and breadth of trade content will become even more critical.

Understanding Anti-Dumping and Countervailing Duties

Posted on April 5, 2012 by Anthony Hardenburgh

The Importance of These Duties to Supply Chain Managers

The terms “countervailing” and “anti-dumping duties” are often used together without necessarily distinguishing the two — in fact they are often abbreviated as ADD/CVD. What are these duties, and why are they important to supply chain managers?

Countervailing duties address the consequences of subsidies granted by governments for the production of certain goods. Subsidies effectively make goods less expensive, and when subsidized goods enter other countries, they may undercut or injure local producers. If there is a determination that Country A’s producers have been injured by Country B’s subsidies, then Country A may impose countervailing duties on the goods to close the price gap. Countervailing duties neutralize the negative effects of subsidies.

Dumping refers to actions taken by companies, not governments. If a company exports a product at a price lower than the price it normally charges within its own home market, it is said to be “dumping” the product. Therefore, when a government imposes anti-dumping duties, it is attempting to bring an imported product’s price closer to a “normal value.” The net objective is to protect domestic businesses from unfair pricing practices.

The actions that governments may take in anti-dumping or anti-subsidy situations are closely regulated by the World Trade Organization, however, whether a government chooses to take those actions is determined by its own legislature. For example, on March 14, 2012, President Obama signed legislation that clarifies the Commerce Department’s ability to apply countervailing duties on subsidized imports from non-market economies, including China and Vietnam.

In ADD/CVD investigations, the Commerce Department determines whether the alleged subsidies or dumping are actually occurring and, if so, at what levels (e.g., the subsidy or dumping “margin”). The US International Trade Commission (USITC) determines whether a US industry is materially injured by the dumped or subsidized imports. If both agencies’ final determinations are affirmative, duties can be imposed and collected.

Supply chain managers need to understand how ADD/CVD affect the total landed cost of goods. Parts and products that may initially look attractive based on price may be less economical when these duties are factored in. There is a searchable database with over 16,000 ADD/CVD entries available from USCBP, and several global trade management software solutions also track ADD/CVD by Harmonized Schedule (HS) numbers.

Understanding INCOTERMS 2010

Posted on March 2, 2012 by Anthony Hardenburgh

An Inbound Logistics article in October 2003, “Understanding Incoterms,” does an excellent job of explaining the concept of Incoterms, why they are necessary and how they work. We’d like to bring this article up-to-date with a discussion of the changes to Incoterms that began in January 2011.

To recap, Incoterms are an internationally accepted set of standard commercial terms used between buyers and sellers. The terms determine who pays the cost of each transportation segment, who is responsible for loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment.

Managed by the International Chamber of Commerce (ICC), Incoterms are amended every 10 years. Recent changes saw the deletion of four existing terms and their replacement with two new terms. This brought the total number of Incoterms from 13 to 11.

Understanding the Changes to Incoterms

Formerly, categories of Incoterms reflected the stages of shipment—departure, carriage (paid and unpaid) and arrival. With the 2010 revisions, the ICC recognized that the evolution in trade, supply chain management and cross-border security warranted changes to the rules and the way they are organized.

The rules are now divided into two categories that better reflect the usage of Incoterms for multiple modes of transit—one set for any mode of transportation, the other specifically for water. The first set can certainly be used for ocean, but also applies more broadly to road, rail and air. The second set refers to ports, so is exclusively for water transport, and it eliminates the confusion around the use of FOB by making it clear that the term is only for water shipments.

Deliveries By Any Mode Of Transport (Sea, Road, Air, Rail)

Ex Works (EXW)
Free Carrier (FCA)
Carriage Paid To (CPT)
Carriage and Insurance Paid to (CIP)
Delivered at Terminal (DAT)
Delivered at Place (DAP)
Delivered Duty Paid (DDP)

Deliveries By Sea And Inland Waterways Transport

Free Alongside Ship (FAS)
Free on Board (FOB)
Cost and Freight (CFR)
Cost, Insurance and Freight (CIF)

The 2010 Incoterms make more general use of the terms “terminal” and “place,” acknowledging that these locations are relevant across modes. The rules that were added—Delivered at Terminal (DAT) and Delivered at Place (DAP)—made four of the previous rules superfluous. Those were DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered at Quay) and DDU (Delivered Duty Unpaid).

An objective of the ICC for Incoterms 2010 was to foster uniformity and certainty in global business transactions, thereby reducing the potential for costly disputes. The Incoterms changed to state that export and import formalities only have to be complied with where necessary, reflecting their usage in places where these formalities have been reduced by trade agreements or trading blocs. Many countries, such as the US, are also adopting Incoterms for domestic transport, and the 2010 rules flexibly support that application.

Aside from additions and deletions to the Incoterms themselves, there were other changes in their usage.

Electronic communication— Incoterms 2010 allows for “electronic record or procedure” where this is agreed or customary. This is a progression from previous Incoterms, which only allowed for the use of Electronic Data Information. The change facilitates the adoption of new electronic procedures and supports those already in use.

Security clearance— Buyer and seller must cooperate more closely, since Incoterms 2010 allocates their obligations to supply information needed to obtain export and import clearance. This increased degree of cooperation required is a result of growing concern over security and chain-of-custody for shipped goods.

Terminal handling charges— Incoterms 2010 reduces the potential for buyers to be charged twice for terminal handling charges. Pass-through of the cost of carriage of goods to an agreed destination, which previously resulted in buyers being charged twice, disappears with amendments to CIP, CPT, CFR, CIF, DAT, DAP and CCP Incoterms.

String sales— String sales, or the multiple sale of goods during transit, is clarified in Incoterms 2010. Specifically, FCA, CPT, CIP, FAS, FOB, CFR and CIF Incoterms are amended to provide that the seller in the middle of a string sale has an obligation to “procure goods shipped” and not to “ship” the goods. The seller’s obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage.

Remember that Incoterms are not implied in the buying and selling of goods. They must be specified, along with designation of location. If you wish to still use the 2000 version, you must explicitly state that, otherwise the 2010 rules apply by default.

Understanding the Compliance Risks of Deemed Exports

Posted on February 2, 2012 by Anthony Hardenburgh

Every year I attend a number of industry conferences focused on global trade compliance. I speak with a lot of different people at these events, and they hold a range of job responsibilities, with varying degrees of trade compliance expertise. One of the questions I am frequently asked is: What trade regulations should I be concerned about that I may not be aware of today?

Regulations that govern deemed exports immediately come to mind. According to the Export Administration Regulations (EAR)¹ the release of certain sensitive technology or source code that has both military and civilian applications to a foreign national within the United States is deemed an export to the home country of the foreign national. Specifically, a deemed export occurs when US technology is made available to foreign nationals by verbal communication, visual inspection, or in practical use within or outside the United States.²

There are numerous situations when this could occur, making the Deemed Export rule one of the most difficult to comply with. Because of the close relationship between the government and academia for important and often sensitive research, an academic environment is high risk for deemed export violations. The fact that openness and information sharing are part of academic culture naturally increases that risk. However, deemed exports can occur in many situations, so it is important to recognize when there is risk and what you can do about it.

Recognizing Deemed Export Risk

Within the Department of Commerce, the Bureau of Industry and Security (BIS) maintains the Commerce Control List (CCL), which covers trade items (e.g., commodities, software, technology) that are subject to the agency’s export control and licensing authority. Most of the technologies at risk for deemed export are on that list, in categories like nuclear materials and equipment, electronics, computers, sensors and lasers, telecommunications, navigation and avionics, and propulsion systems.

Work that is considered “fundamental research” is excluded from the Deemed Export rule. Fundamental research is defined as comprising basic and applied research in science and engineering, the results of which “ordinarily are published and shared broadly within the scientific community,” such as in peer reviewed publications.

Although the fundamental research exclusion is meant to provide some flexibility to academic and research facilities, compliance officers must still be aware that a deemed export can happen just about any time a foreign national and sensitive technology are in close proximity. For example, it is not a deemed export if a foreign graduate student has access to your iPod – the technology in an iPod is commercially available. But, if a foreign graduate student has access to electronics included in the CCL, then a deemed export has occurred.

Activities that seem natural in an academic setting, such as discussing research with a colleague, presenting a paper at a conference, or traveling with a laptop, can be openings for violations of the Deemed Export rule if sensitive technology and foreign nationals are also involved. Similarly, activities that might seem natural in a corporate setting may pose a risk, depending on the nature of the work at that facility. It could be as simple as a visitor tour, conference call, or e-mail to a foreign national.

Taking Appropriate Action

If you are a compliance officer in a high-risk setting for deemed export violations, what can you do? As with most compliance issues, the best approach is prevention. Preventive steps involve education, communication, and adherence to a formalized export compliance program. Understanding the nature of the work at your institution is important, but it is also unlikely that you will know about (or understand) everything happening in every lab in every department. Therefore, it is critically important for you to educate researchers, staff, and students about their responsibility to recognize and prevent potential violations.

If your commercial organization has a foreign national working in proximity to sensitive technology, you may be required to obtain an export license before information can be revealed to that employee in the normal course of business. Similarly, a university researcher conducting a project involving a foreign student may be required to obtain an export license before sharing knowledge with that student relating to equipment or technology that might also have a military application (i.e., dual use).

Under both the International Traffic in Arms Regulations (ITAR)³ and EAR, it is the exporter’s responsibility to identify whether a proposed export requires a license or is eligible for a license exception. These determinations are made based on the item’s EAR classification or ITAR listing, the export’s destination and, sometimes, the end user. The export regulations are statutorily based and apply whether the recipient receives funding via a grant, cooperative agreement, or contract, and whether or not the EAR or ITAR are cited explicitly in the award document.

Securing a license is generally a complex undertaking, and an institution unfamiliar with the export license application process may want to seek legal assistance. If the technology is subject to export controls and requires a license, the next step is to see whether the technology is destined for one of the countries on the US embargo or restriction of trade list. If this is the case, the policy of the United States is to deny licenses or other approvals for shipment to these countries.

Consequences Of Deemed Export Violations

Although it may be tempting to shrug off deemed export controls or downplay their importance in the day-to-day affairs of a university, research institution, or commercial organization, the reality is that compliance is not optional. There are severe administrative and criminal penalties for violations of export control regulations.

Under the 2007 International Emergency Economic Powers Enhancement Act, a penalty amounting to the greater of $250,000 or twice the value of the transaction may be imposed for each violation for administrative cases. Administrative penalties may also include the denial of export privileges, which prohibits an exporter from participating, in any way, in any export transaction subject to EAR. For a university or research facility, this could mean the loss of federal contracts and grants.

More seriously, for criminal cases, violators may be fined up to $1 million and/or be imprisoned for up to 20 years. For example, J. Reece Roth, a Professor Emeritus at the University of Tennessee, was sentenced to 48 months in prison and two years of supervised release for allowing foreign students access to export-controlled research. In this case, the University of Tennessee was not indicted, primarily because the institution had an export compliance program in place. Roth’s compliance officer had repeatedly instructed him that he could not expose his foreign students to the materials associated with the project and could not take any project-related items on his laptop during a trip to China.⁴

Final Thoughts

Depending on the type of technology you develop or the research your organization conducts, you may need to pay more attention to the issue of deemed exports. Especially in an academic or business environment where foreign nationals are present, deemed export is a real and critical consideration for the way daily activities are conducted.

Compliance officers need to educate their colleagues on how to identify and avoid deemed export violations. They’ll also need to understand which technologies may require export licenses and how to safeguard those technologies from entities who are not permitted to see them. A comprehensive export compliance program, with emphasis on frequent communication and consultation with researchers and faculty, is the best way to protect your institution from the pitfalls of the Deemed Export rule.

Notes:

1 The EAR database is no longer supported. The Department of Commerce encourages users to access EAR regulations (Title 15) through the Electronic Code of Federal Regulations (eCFR). Available at http://ecfr.gpoaccess. gov/cgi/t/text/text-idx?sid=36b 69ea812722a27c646d1f6fb059 888&c=ecfr&tpl=/ecfrbrowse/ Title15/15tab_02.tpl

2 The Deemed Export Advisory Committee report: The Deemed Export Rule in the Era of Globalization. December 20, 2007. Available at http://tac.bis.doc. gov/2007/deacreport.pdf

3 US Department of State, Directorate of Defense Trade Controls: Consolidated ITAR. Available at http://www.pmddtc. state.gov/regulations_laws/itar_ consolidated.html

4 Jamie Saterfield: “Ex-University of Tennessee Professor Sentenced to Prison.” Knoxville News Sentinel, July 2, 2009. Available at http:// www.knoxnews.com/news/2009/ jul/02/prison-for-ex-ut-professor/