What Is Global Trade Compliance?
Global trade compliance is having an up-to-date and exhaustive understanding of the laws that govern your industry, and then obeying those laws.
Depending on your industry, this could involve only a handful of countries, or many different governments, throughout your product’s supply chain. Your company’s home country, the country that exports the materials you use, the end user’s country, any ports the product stops at along the way, and other players in the chain will all have their own set of rules that you must follow.
The complexity of global trade compliance often motivates many large international businesses to employ an entire team focused on trade compliance, relying on automated screening processes and third-party record-keeping to ensure all transactions are lawful.
What Are Some Key Global Trade Regulations?
Each country will have its own laws, but there are many principles and regulations shared between them. For example, regulations established by the World Trade Organization (WTO) are the standard for international imports/exports.
The Tariff Classification Harmonized System
What it is:
The WTO created the Harmonized System (HS) to identify imports and exports correctly. All 164 WTO member countries use this uniform system. It is regularly updated to include new types of products and reviewed to eliminate unclear or confusing wording.
How it is important:
A uniform code shared between all countries limits errors. If even a single error involving tariffs occurs, it can trigger a chain of errors. These errors require government investigation and will slow down the delivery of your product and harm your reputation for reliability and consistency.
Transfer Pricing
What it is:
Transfer pricing is the price of assets, services, and funds transferred within an organization. At first glance, this may seem unrelated to global trade and is purely an internal company affair. However, situations exist where a large company moves assets from one subsidiary to another across borders.
How it is important:
There are cases where a company uses transfer pricing to their own benefit as a way to circumnavigate proper customs and taxes. If transfer pricing misrepresents the actual value of the transferred asset, then it invites audits, investigations, and eventually penalties.
Ultimately, a company will easily repay more duty than they need to after penalties are applied. This is not to mention the wasted time and energy complying with customs investigations that would cut into operating expenses.
Rule of Origin and Trade Agreements
What it is:
Trade agreements between countries are treaties designed to lessen or eliminate barriers to free trade. These barriers include tariffs, taxes, quotas, and more. However, the trade agreements typically require a strict rule of origin–that means providing proof of where the imports/exports originate from. This ensures that goods are actually from within the scope of the trade agreement.
How it is important:
Taking advantage of trade agreements can save significant amounts of money by freeing goods from the usual customs duties. On the other hand, improperly trying to apply a trade agreement to something outside of its scope brings a risk of heavy penalties.
Customs Compliance, Verification, and Audit
What it is:
Many required pieces of documentation must be provided to customs on import. Verification is the process of giving proof that confirms the accuracy of documentation given to customs. Meanwhile, an audit is the examination of records and documents provided.
How it is important:
Complying with this necessary paperwork creates an importer profile for your company. Once your company is a familiar player, with a history of respecting the law and cooperating with customs, it will facilitate the movement of all future imports.
The Consequences of Ignoring Global Trade Regulations
The main threat of ignoring global trade regulations is criminal or administrative fines. These fines are significant and are enough to seriously damage the profits of a major company, and the feasibility of continued operations for a smaller business.
The United States Department of the Treasury keeps a public record of companies and individuals that have violated U.S. trade law. The record goes back nearly twenty years, and offers a sobering reminder of the importance of trade compliance.
- In just the first month of 2022, more than $5 million worth of penalties has been doled out.
- In 2019 alone, more than $1.3 Billion worth of penalties and settlements against violating entities were collected.
These numbers should give any company reason enough to redouble their compliance efforts. Additional consequences include the loss of export privileges, and even prison time.
The Importance of Trade Compliance
The benefits behind global trade regulations and the harm that can result in ignoring them are clear. The overview of global trade compliance provided in this article can help your company to maximize its competitiveness and minimize its risk of running afoul of the law.
All businesses and individuals operating on an international scale will benefit by establishing a trade compliance program – instituting a strong trade compliance program beforehand will help keep any possible infractions to a minimum.
Ready to work with OCR? Learn about our solutions and contact our sales team to draw out your roadmap to compliance.
