Why You Shouldn’t Underestimate the Border Clearance Process
As analysts and journalists still try to make sense of Target Corporation’s ill-fated attempt to expand to Canada, a common theme is that the company misread the Canadian market and failed to take into account both consumer demand and the complexity of building a Canadian supply chain.
“We’re sort of like Chile sideways… a long, thin country in many ways,” Dr. Barry Prentice, a professor of supply chain management at the University of Manitoba in Winnipeg, said in a podcast discussing the Target failure. “If they could’ve just extended U.S. distribution to [Canadian] stores, it would have been easy, because most of the cities are within 150 kilometers of the border. But they couldn’t do that. They had to have distribution in Canada, and that, I think, was a complicating factor.”
Canadian news magazine Maclean’s noted speculation that Target’s Minneapolis headquarters was to blame “for trying to force its processes and procedures on the Canadian operation despite evidence they weren’t working.”
While speculation will likely continue about Target’s abrupt and complete 2015 withdrawal from Canada, there are clear lessons to be learned from this example, namely, the need to prioritize a Canada-specific logistics strategy. A company can have a phenomenal inventory of products, but without a solid strategy for moving shipments through the U.S./Canadian customs process and into a Canadian distribution network, there is a high probability of failure.
Did you know, for example, that incomplete or missing paperwork along with improper tariff classifications are top reasons for shipment delays at the border? Or that most U.S. transportation carriers do not have the capacity to seamlessly deliver throughout Canada? Or that shipments to Canada must be labeled in both English and French, since that country is officially bilingual?
These are just a few examples of common mistakes made by U.S. businesses – mistakes that can usually be easily avoided. Many businesses take a “how hard can it be” approach to shipping to Canada, assuming that the closeness of the two countries – both geographically and culturally – extends to cross-border shipments. In fact, shipping to Canada is a “uniquely Canadian” experience that warrants an understanding of the border clearance process and of the nuances of that market.
The Importance of Not Underestimating the Border Clearance Process
Successfully moving goods into Canada – which also means successfully exporting goods out of the United States – is a multi-step process that requires detailed knowledge of the process. Failure to successfully navigate any of these steps can result in shipment delays and fines. This is why most businesses choose to entrust the compliance process to an experienced customs broker or logistics provider. According to U.S. Customs and Border Protection (CBP), 90 percent of all import transactions are filed through a broker.
Border delays can add hours or days to a Canada-bound shipment’s transit time.
But even with an experienced broker managing the clearance process, a business still has an important role to play. Keep in mind that the shipper is ultimately responsible for all information supplied to customs. As such, CBP and/or Canada Border Services Agency (CBSA) will hold the shipper – and not the customs broker or transportation carrier – responsible for any mistake.
CBP estimates 20 percent of shipments are delayed at the border due to incomplete or missing documentation. Common sense says that a customs form should be completed in full. So the question then is why would anyone submit a form with missing information? In some instances, information is omitted simply because of an oversight. Other times, the individual completing the form may not have the required information or understand what is being requested.
While specific documentation and forms required will vary based on a shipment’s contents, all shipments heading to Canada will require specific information that includes:
- Shipment Valuation – how much is the shipment worth?
- Country of Origin – where did the shipment come from?
- Tariff Classification – what is the shipment’s unique 10-digit identification code?
For each of these required data points, supplying the correct information can be easier said than done. Following is a brief overview of each category and suggestions for ensuring correct information is listed on all customs forms:
Shipment Valuation Every product entering either Canada or the United States must be assigned a value that is used for a number of purposes, including assessing duties, collecting accurate statistics, and determining applicability of additional legal requirements. However, determining the correct valuation can be complicated since many factors may need to be addressed.
In general, the value listed on a commercial invoice should be the price a buyer has paid for a product (and not the amount the goods will be sold for). This is called the product’s transaction value and should also reflect money paid for commissions, assists, royalties, production costs, and packaging, and these items should be included on the commercial invoice. Important to note though, transaction value should not include transportation or insurance costs, or any taxes paid on the item.
Failure to include the above factors, according to CBP, “is undervaluing the goods and may result in penalties.” The agency also advises that all prices in foreign currency must be converted to U.S. dollars on invoices and other entry documents.
In some situations, it is not possible to assign a transaction value. In those situations, alternate processes for determining value will be applied in this order:
- Transaction Value of Identical Merchandise
- Transaction Value of Similar Merchandise
- Deductive Value – This is essentially the resale price in the United States, with deductions for certain items. According to CBP, the deductive value is generally calculated by starting with a unit price and making certain additions to, and deductions from, that price.
- Computed Value – If none of the above valuation methods can be applied, a computed value may be determined. This consists of the sum of the following items: materials used in producing the merchandise + profit and general expenses + packing costs.
Once a valuation is determined, that information is provided to CBP or, for shipments entering Canada, to CBSA. Customs agents will review; if a valuation seems questionable, they will either delay the shipment, pending additional information, possibly reject the claim outright, or impose a financial penalty on the importer.
Country of Origin Determination
Importers also have an obligation to provide specific information about a product’s country of origin. This information is necessary for several reasons, including:
- Determining eligibility for free trade agreement benefits
- Determining rate of duty
- Assessing applicability of antidumping or countervailing duties
- Determining eligibility for import
For shipments in which a product is 100 percent grown or produced in a single country, and proof of that origin is easily accessible, compliance with CBP or CBSA requirements is not difficult. Unfortunately, this is not usually the case.
Since many imported goods consist of materials from more than one country, or are manufactured in processes performed in multiple countries, complex rules have been established to determine the country of origin. In these instances, a “substantial transformation” standard is most often applied, whereby country of origin is determined based on the country in which the product last underwent a process resulting in the article having a new name, character, or use distinct from that of the article or articles from which it was transformed.
Every product entering Canada must be assigned a 10-digit Customs Tariff code that is used to assess tariff and duty obligations, and to assist in determining eligibility for free trade agreement benefits. Canada’s tariff coding system, like virtually every other developed country’s, is rooted in the Harmonized Commodity Description and Coding System (HS), developed and maintained by the Brussels-based World Customs Organization.
In many instances, there are only slight variations between codes. But, assigning an improper code can have a substantial impact on the amount of tariff that is assessed. For example, Chapter 57 of the tariff schedule includes codes for “Carpets and other Textile Floor Coverings.” Within that chapter, classification code 5701.10.10.00 covers carpets and other textile floor coverings “of wool or fine animal hair – machine knotted” and carries a tariff rate of 13 percent. But tariff classification 5701.10.90.00 includes carpets and textile products “of wool or fine animal hair – other” and carries a 6.5 percent tariff rate. Sounds like a slight product variation, but the difference in tariff rates is significant.
Thus it is very important for a product to be assigned the tariff code that best meets its precise characteristics. Unfortunately though, determining the exact code can be a time-consuming and exacting process, and unless the individual making the classification assignment truly understands the process, it is easy for errors to occur.
And while every business understands the need to pay duties and tariffs, there is no reason to pay more than is legally owed. Not only does a misclassified shipment run the risk of missing out on trade benefits, or of overpaying duties, but it also faces potential fines and legal repercussions.
Partner with the Expert in Navigating the Border Clearance Process
Successfully moving goods into Canada requires the expertise and experience of a trusted logistics partner. At Purolator International, we help companies prevent shipment delays and unnecessary fines by carefully navigating each step of the process. Our knowledge and experience in the industry is complemented by our unparalleled level of customer support, and we will be with you every step of the way to ensure that your shipments make it on time, every time.
For assistance with the border clearance process or more information, contact Purolator International today.