Statement of Michael B. Laden, President, Target Customs Brokers, Inc.,
Target Corporation, Minneapolis, Minnesota, and Chairman, Board of Directors,
American Association of Exporters and Importers, New York, New York

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on Trade Agency Budget Authorizations and Other Customs Issues

July 17, 2001

Mr. Chairman and members of the subcommittee, I am Michael Laden, President of Target Customs Brokers, Inc., a wholly owned subsidiary of Target Corporation, and I am the current Chairman of the Board of Directors of the American Association of Exporters and Importers. Let me thank you on behalf of the members of the Association for giving us this opportunity to express our views on the important matters that you have under consideration.

It is clear from the Advisory you issued that the Subcommittee is interested in hearing trade community views on problems with the U.S. Customs Service's current automated commercial system and on how we may accelerate development of a replacement, and we shall be pleased to address that subject. However, our first concern is that we not make the mistake of automating obsolete business processes, and so I would like to address that first.

Mr. Chairman, as a result of trade agreements such as the NAFTA and the Uruguay Round, which this Subcommittee has been instrumental in developing, U.S. duty rates have been reduced to the point at which we now find that inefficient and redundant border clearance processes employed by U.S. Customs and other government agencies that regulate trade at the border impose a significantly greater cost on U.S. companies than do direct customs duties and other border taxes. This cost reduces the competitiveness of American companies and results in higher costs for all consumers. Moreover, by reducing the profitability of American companies and raising the cost of living for American families, these inefficient border procedures reduce tax revenues for all levels of government.

The primary reason for this inefficiency is well known. There has been no fundamental change to the U.S. system for collecting customs duties since it was first established over two hundred years ago. Each release of an import shipment requires the filing of a complete tax return in the form of a customs entry summary. "Reform" legislation enacted by Congress in the late 1970s merely changed the timetable for completing various steps of the process. More substantial reforms enacted by Congress in 1993, in the Customs Modernization title of the NAFTA implementing act, have never been fully implemented. As Congress oversees the development of a new automated system at Customs, it must ensure that Customs' business processes are streamlined to the extent possible. Otherwise, we shall find that we have simply automated an obsolete system, with minimal gains in efficiency. This is the outcome that information technology experts refer to as "paving the cow path".

Several fundamental changes are needed. First, the amount of information that must be provided to obtain release of goods at the border should be reduced to the absolute minimum consistent with protection of public health and safety, and Customs' need to assure that full accounting and statistical data are filed and duties paid. The reason for this is simple. The procedure for release of goods at the border is the moment of greatest vulnerability for importers. This is true for all importers, all of whom want to manage their supply chains as efficiently as possible, but it is especially true for manufacturers who are using "just-in-time" inventory management practices.

Much importing activity is redundant, that is, goods of the same kind are entered repetitively by the same importer, from the same exporter, often using the same carrier. For this situation, which is common, Customs should create a release procedure that allows importers to submit the non-variable information in advance, so that only variable information has to be produced at the critical point of release. Such a procedure would reduce the risk of delays and it would greatly reduce importers' costs of transmitting data to the government and the government's cost of processing and storing it.

After shipments are released, importers should be able to file the required statistical and accounting information on a summary basis, rather than for each individual release as been required for the last two hundred years. If the tax laws required doctors to file a tax return and make a tax payment after they saw each patient the AMA would be camped on the Mall like Coxey's Army. But that is exactly the situation that importers face. Every individual import shipment requires the filing of a separate tax return. The Customs Modernization Act of 1993 provided for filing an Import Activity Summary Statement that would consolidate the filing of statistical and accounting information for imports released during a month. We understand that it would be difficult to implement that procedure in the current automated system, but we would be dismayed to see a new automated system developed at Customs without some assurance that a satisfactory implementation of the summary filing procedure will be an early component.

Corresponding changes are needed to procedures for paying duties and other fees imposed on imports. Although the current transaction-by-transaction payment system should be retained for small and occasional importers, an account-based system would reduce the cost of processing payments for larger importers and the Customs Service. The proposal we have made to Customs is that large importers should be allowed to make semi-monthly estimated payments of duties, with adjustments after the end of the month. The semi-monthly payments will allow Customs' to maintain its current cash flow position, so that no interest calculation will be involved unless importers fail to make payments according to the schedule or significantly understate the estimated semi-monthly payments. Periodic payment systems similar to the one we have proposed are already in use in Canada and Great Britain. We believe that U.S. Customs should adopt such a system.

In addition to these changes, all of which related to reform of Customs' entry process, there are other desirable changes to the customs laws that we would like to call to the attention of the Subcommittee.

The current drawback law, the law authorizing refunds of duties paid on imports under certain circumstances, was complex and obscure when it was originally drafted and it has become even more complex and obscure through its interpretation and application by Customs. The thorniest problem relates to what is called "substitution drawback". Sections of the drawback statute allow duty refunds in connection with the export of goods that are "commercially interchangeable" with, or of "the same kind and quality" as, imported goods on which duty was paid. Over the years, Customs' well-intentioned efforts to define these two concepts, which are highly subjective, have resulted in their becoming increasingly murky. At this point both importers and the Customs Service agree on the need for a more objective and workable definition of exported goods eligible for substitution drawback. We hope to be coming to the Subcommittee shortly with proposed legislation to address this problem.

Another aspect of the customs laws that is showing signs of age is the country of origin marking statute. The statute requires that every article of foreign origin, with some exceptions, be marked "as legibly, indelibly, and permanently as the nature of the article will permit" to indicate the foreign country of origin to the ultimate consumer. Failure to mark articles with their foreign origin subjects importers to an additional ten percent duty.

The marking requirement creates several problems for importers. One is that foreign manufacturers may produce goods for export to several markets, not only the United States. They are unlikely to mark the origin of their products because the laws of the other countries to which they sell don't require marking. Consequently, the U.S. importer has to pay a substantial premium to have goods produced for the U.S. marked with their origin, or arrange to apply the marking subsequent to manufacture. This causes delays and significant additional costs for importers. A second problem is in knowing what method of marking will be accepted by Customs as legible, indelible, and permanent. Frequently, Customs and importers disagree over whether a method of marking that Customs deems acceptable can be applied without damaging an article. Determining the origin of an article to decide whether and how it should be marked is yet another problem. Goods are often processed abroad in more than one country, or are imported into the United States for further processing before they are sold to an ultimate consumer. The processing in multiple foreign countries or in the U.S. may or may not cause the foreign origin to change, and it is difficult for an importer to know this without obtaining a legal opinion from an attorney or a ruling from the Customs Service.

The country of origin marking requirement may have served a useful purpose when it was first enacted over a century ago, at a time when the commerce of the United States was more insular and consumer encounters with foreign-made goods were much more infrequent. In a modern global economy, where consumers understand that many of the goods they consume are produced abroad, and when consumers rely on brand names rather than country of origin as indicators of quality, the marking requirement is less meaningful. We believe that it is timely for Congress to review the marking requirement, and to consider either eliminating it altogether or making required marking the exception rather than the rule.

Another problem with the customs laws that we recommend for Congressional consideration relates to tariff simplification. The Harmonized Tariff Schedules of the United States are enormously prolix. Given the dynamic nature of modern commerce, with frequent changes in the design and functionality of products and parts, it has become extremely difficult to classify imported goods correctly in the over 17,000 statistical breakouts that exist in the current tariff. Congress will soon have a unique opportunity to address this problem. In the next few years, as a result of tariff concessions and elimination of textile quotas agreed to in the Uruguay Round, there will be a substantial number of tariff subheadings under which subordinate breakouts are no longer required to support duty differentials or administration of textile quotas. Elimination of the superfluous breakouts under these subheadings would be one of the most useful acts that the Congress could perform for the U.S. trade community.

The reforms that I have mentioned - clarification of the drawback statute, elimination or modification of the country of origin marking requirements, and simplification of the tariff - are not dependent on Customs having a new automated system. Moreover, although we are keenly interested in Customs' effort to obtain funding for modernizing its automated system, and appreciative of this Subcommittee's support, we recognize that the chief responsibility rests with other committees of Congress.

However, the reforms I mentioned fall squarely within the traditional jurisdiction of this Subcommittee, and are as important as improved automation to increasing the efficiency and reducing the cost of importing.

Let me now address briefly the automation question. The U.S. Customs automated commercial system, built in the early 1980s and operating on obsolete programming language, locks the entire U.S. international trade community into the archaic transaction-by-transaction entry system that I described earlier. Re-programming the existing customs automated commercial system to allow implementation of customs reforms approved by Congress in 1993 as well as even more streamlined processes supported by the U.S. trade community (and already being adopted by some of the United States' major trading partners) requires investment in new operating and application systems software. Notwithstanding the obvious harmful consequences for the U.S. economy of neglecting this problem, there has not been aggressive leadership from the Executive Branch to secure the funding required to implement necessary software upgrades to the Customs system.

Although a modern automated system that allows efficient processing of imports and exports is obviously a national asset, it suffers from the same disadvantage that afflicts projects such as building a new national air traffic control system or the TSN project at the IRS: the benefits at a national level are great but they are too diffuse to attract the support of particular members of Congress. As long as these three systems can be kept from breaking down entirely, and each of them has come close, it is difficult to build an effective consensus for replacing them, notwithstanding that a replacement system would be more efficient and have much greater functionality.

This is an unfortunate phenomenon of our system of government, but it is a reality with which we have to deal. The American Association of Exporters and Importers will continue to urge the Executive Branch and Congress to provide funding to complete development of a new automated system in not more than five years. However, we are extremely reluctant to consider new user fees to fund this project. Importers still pay a significant amount of customs duties, pay the merchandise processing user fee (none of which goes to improve the services provided to importers), and the so-called "COBRA" user fee as well as various other excise taxes, on much of what we import. We acknowledge that no taxpayer wants to pay more taxes but we believe we can make with particular validity the argument that we are already paying our fair share.

Mr. Chairman, let me again thank you and the members of the Subcommittee for holding this important hearing and for giving us an opportunity to express our views. I shall be glad to join my colleagues on this panel in answering any question you may have of us.