Global Trade: U.S./Mexico Trade—7 steps to close the gap
May 01, 2013 - LM Editorial
The U.S. is only two years away from a five-year goal to double exports, hoping to revive the economy and create two million jobs along the way. And if you’re keeping score, last year cross-border activity with Mexico accounted for over $216 billion dollars in U.S. exports and over $277 billion in imports.
With a shared border of just over 1,950 miles and representing our second largest export market, Mexico is a critical part of the U.S. job creation plan attributed to export shipping. But at the same time, the U.S. struggles with enforcing immigration policies through increased border protectionism, with new horse patrols, fencing, and around-the-clock surveillance by drones.
For U.S. importers and exporters, the challenge is how to draw value from this incredible market, one that continues to grow 5 percent annually and offers exceptional opportunities through the North American Free Trade Agreement (NAFTA), while remaining aware of areas of risk that may impede trading capabilities both here in the U.S. and Mexico. Strategically, there are several steps a company needs to take in order to improve their cross-border activity.
1) Recognize trends in customs transactions
The past 10 years have seen major changes in the way U.S. Customs and Border Protection (CBP) both views and manages U.S.-based importers and exporters. Through voluntary cargo security and trade compliance programs, CBP labels companies as Trusted Accounts if they agree to join the Customs-Trade Partnership against Terrorism (C-TPAT) cargo security program, which opens the door to
participation in the Importer Self-Assessment (ISA) compliance program.
These programs have influenced similar initiatives in both Canada and Mexico. The C-TPAT equivalent program in Canada is Partners in Protection (PIP), while in Mexico an eligible firm may join C-TPAT or the newly developed Nuevo Esquema de Empresas Certificadas (NEEC). For trade compliance, the ISA equivalent in Canada is the Canadian Self Assessment (CSA) program, while Mexico is busy developing their Ventanilla Unica, or Single Window for the collection and analysis of trade data.
The U.S. continues to lead the change that affects a company’s shipping process with the creation of 10 Centers of Excellence and Expertise (CEE). These industry-specific centers will oversee the clearance of entries into the U.S. through a single, specialized import team dedicated to improving transparency within industries and increasing enforcement for non-compliance.
Most importantly, with limited resources under the sequestration, CBP has confirmed that priority will be given first to companies who partner in both C-TPAT and ISA, followed by those only in C-TPAT, and then finally all other firms that choose not to partner with CBP.
2) Leverage these programs for cross-border transactions
In light of these changes and their impact on border-crossing capabilities, strategically leveraging participation in these programs would greatly affect a company’s North American supply chain operations.
U.S. companies that participate in C-TPAT and also have Mexican plants may leverage centralized procedures to support their Mexican plants’ C-TPAT applications and secure fast lane clearance opportunities in the process.
In mid-to-late 2013, CBP will introduce an updated C-TPAT web portal that will allow a U.S. C-TPAT participant to create a single company profile, pulling in all of their related C-TPAT accounts. In doing so, the number of C-TPAT validations will be limited to a single site, thus reducing the amount of work as compared to preparing multiple sites for the validation process.
Participating in C-TPAT on both sides of the Mexican border will improve clearance times, while changing trends within CBP will support multiple site applications and review processes through a single site.
3) Master the Ventanilla Unica
Similar to CBP’s Center of Excellence and Expertise (CEE) functionality, Mexican Customs has developed a modernized approach to clearance capabilities through the single window concept, or Ventanilla Unica (VUCE). Data collected from Mexican importers/exporters will be captured in this single repository with information shared across 30 stakeholders including government agencies and carriers.
Mexican importers are required to update their electronic processing capabilities and file their invoices, abbreviated as COVE via the VUCE system. This electronic sharing of shipment data is intended to reduce costs and paperwork, though not eliminate it, and allow for greater efficiency in the clearing process.
The unique number assigned to each transmission will then be used by the customs broker to release the final release, which is known as the pedimento. While Phase I of the implementation process was initiated in mid-June 2012, companies are still working to perfect their data sharing efforts and ensure a smooth process at the border.
4) Identify and report savings through NAFTA
While the Ventanilla Unica offers cost savings advantages in processing, additional savings are still obtainable through the qualification of products eligible for NAFTA. The most difficult aspect of trading with Mexico, however, is acknowledging that all products made or purchased in the U.S. do not necessarily qualify for NAFTA.
Qualifying product for this trade agreement requires a very strategic and detailed program to classify the product being exported and then confirm through NAFTA rules of origin that the product qualifies for conditionally duty-free treatment. While NAFTA remains the key trade agreement upon which most other free-trade agreements are based, it remains challenging for companies to undertake the necessary steps to confirm that their products actually qualify.
What’s stopping companies from taking these strategic steps? Most often, it’s the lack of knowledge of potential savings attributed to the free-trade agreement initiative followed by improperly trained personnel. In order to evaluate products for NAFTA qualification, companies must have a strong knowledge of classification rules as well as NAFTA origin rules. Hiring or developing these skill sets requires strong management support and dedicated training.
Despite the hurdles for developing NAFTA and Free Trade Agreement (FTA) expertise, the programs bring strong benefits to companies. For exporters, signing a NAFTA certificate allows their customers to legally declare a lower, preferential duty rate in the receiving country—making the exporter’s product more competitive on pricing than exporters not qualifying their product for NAFTA.
For an importer, cost savings associated with NAFTA-qualifying products can be significant, resulting in a major impact on the company’s bottom line. Working closely with their suppliers, importers are generally seeking NAFTA certificates for qualifying product at the start of each New Year, seeking to take advantage of reduced duty benefits all year long.
Over 20 percent of all of the survey participants from a 2010 white paper by Customs and Trade Solutions, Inc. recognized savings of $50,000 to $500,000 annually due to NAFTA or other FTA qualifications—a strong indicator for the company to continue to pursue FTA programs.
As a best practice, companies should build expertise on trade agreements that use similar rules of origin programs such as tariff-shift concepts.
Knowledge used to qualify product for NAFTA may be transferable to other trade agreements using similar rules including the Dominican Republic-Central America-U.S. Free Trade Agreement (CAFTA-DR), and the U.S.-Singapore, U.S.-Korea, and U.S.-Australia Free Trade Agreements.
5) Verify eligibility, reduce risk
In light of these potentially high-duty savings, it’s important to confirm that your customs compliance team has verified the necessary documentation to support your NAFTA claim.
All free trade agreements are conditionally duty free. However, NAFTA has a unique audit aspect; that is, any exporter or producer may be audited for their NAFTA program by any one of the three governments—Canada, Mexico, or the U.S. Equally as important is the need to document and maintain your verification for five years from the date of import or export.
In the past two years, Mexico has aggressively audited U.S. exporters for their NAFTA verification process. Many of these reviews have been initiated with a request for documents from 2008 or 2009 and are required to be translated into Spanish before submission to the Mexican authorities.
These reviews are lengthy, lasting up to a year before closing or settling any open issues. Companies lacking proper supporting documents may see a reversal from their original duty-free status to a dutiable value. This requires not only payment of past duties due, but also interest on those duties as well as any potential penalties that may be assigned as part of the process.
6) Tighten training programs, recognize savings
Despite these warning signs, U.S. firms continue to export without adequate documentation to support their NAFTA claims. Qualifying product for any trade agreement first requires a strong understanding of classification rules.
With the NAFTA trade agreement soon to celebrate its 20th anniversary since implementation, many companies have yet to master its rules and requirements. Companies with best practices place strong emphasis on continuing education focused on both classification and qualification of product lines as part of their efforts to legally reduce duty fees and avoid unnecessary penalties from future audits.
7) Take a fresh approach
It’s said that the longer you know a customer the more likely it is that you don’t know anything about them at all.
While this initially may seem unlikely, it demonstrates that in order to keep all relationships fresh and updated, one must constantly communicate, question assumptions, and research the changing landscape. Customs practices in both the U.S. and Mexico offer U.S. companies an opportunity to reassess their land border activities and reconsider how bottom line savings can be achieved through updated programs and a renewed stance towards initiating best-in-class programs.
Participation in C-TPAT and ISA will provide U.S.-based companies the highest level of partnership with CBP and expedited clearance processing capabilities. Mastering Mexico’s advance trade data single window approach, under the Ventanilla Unica, will expedite U.S. exports and provide greater visibility of supply chain metrics as part of the process.
Benchmarking your company’s trade initiatives against these practices with a continued focus on education and verification of your trade lane priorities will ensure that your firm is successfully managing this market for the greatest savings and efficiency in your cross-border supply chain.
Suzanne Richer is President, Customs & Trade Solutions, Inc. and a Contributing Editor to Logistics Management.
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