Statement of Jane O’Dell, U.S. Business Alliance for Customs Modernization

    Chairman Crane, Ranking Member Levin and Members of the Committee – Thank you for allowing me the opportunity to file this written statement in lieu of a personal appearance before the Ways and Means Trade Subcommittee regarding trade agency budget authorizations and other customs issues.

    My name is Jane O’Dell and I am the Vice President, International Trade & Custom Compliance for Limited Logistics Services, the supply chain subsidiary of The Limited, Inc. The Limited is a founding member of the U.S. Business Alliance for Customs Modernization (BACM), a coalition of 25 large U.S. companies heavily involved in importing and exporting. The other members of BACM are American Honda, Archer Daniels Midland, BP-Amoco, Caterpillar, Compaq, Daimler Chrysler, DuPont, Ford, General Electric, General Motors, Hewlett Packard, JC Penney, Mattel, Microsoft, Nissan, Nortel Networks, Pillsbury, Sara Lee, Sears, Shell, Sony Electronics, The Limited, Toyota and WalMart. BACM is dedicated to modernization of U.S. customs laws, regulations and policies to reflect the 21^st Century business environment and facilitate trade to the greatest extent possible consistent with effective compliance. The importance of this goal to our member companies cannot be understated – during the year 2000, BACM companies filed approximately 2 million customs entries valued at over $130 billion.

    BACM as well as others in the trade community have been frustrated by the slow pace of the effort to modernize and streamline the customs entry process. U.S. business has invested heavily in reengineering its operations to achieve efficiencies. Modern business practices of just-in-time delivery, e-commerce, and the integrated management of the global supply chain are critical to U.S. competitiveness. I can tell you that my company has put tremendous resources into technology to shrink the time from order placement to delivery of product. This effort to remain competitive can be completely undercut by inefficient, redundant, and labor-intensive Customs requirements.

    I would like to remind us all that in 1993 we in the U.S. business community made a deal with the government in the form of the Customs Modernization Act. We took on the tasks of informed compliance, reasonable care, new recordkeeping requirements and penalties. In return we were promised a more transparent, efficient process for releasing goods and paying duties. We were told that the agency would move away from transaction-based processing to an account-based system, more responsive to the way business is organized. We believe we have kept up our end of the bargain. The investments in technology I have mentioned have included those to enable us to meet our Mod Act responsibilities. Many U.S. importers also have spent millions on infrastructure to manage these informed compliance obligations that we agreed to take on. Indeed, at The Limited my position did not even exist a few years ago.

    But we have not seen the government deliver on its part of the deal. For example, one of the key programs for business in the Mod Act is the Importer Activity Summary Statement (IASS), a method by which the importer would be able to summarize and pay duties on its importing activity in an aggregate manner on a monthly basis. This would be consistent with the way many companies account for arriving inventories, and offer real economies to those who maintain transaction-by-transaction data only to satisfy the Customs accounting system (a hold-over from the days of sailing ships). Every time we have to gather and transmit data and duty payments, there is an additional cost for us. Customs incurs expense with every transmission it receives. Good government and sound fiscal management, as well as cost-effective business practices, were recognized by the Congress as benefits for IASS.

    To date, IASS has not even been prototyped, never mind implemented. We are told that Census has concerns about its ability to meet its trade statistics collection and reporting obligations, and that Customs does not want to expend the resources to program IASS into the ACS system (which hopefully will be replaced with ACE). Whatever the merits of these excuses (and the legislation authorizing IASS is nearly 10 years old), the point is that the trade has not been able to realize even this relatively modest step toward an efficient entry process.¹

    "Reconciliation" is another Mod Act program that hasn’t lived up to its billing. Reconciliation allows an importer to file updated or corrective information sometime after entry (up to 15 months later, depending on fiscal year), without the fear of fines or penalties. In concept, it is an attractive program, but in implementation it has proven to be cumbersome and of limited utility. One major limitation is that Customs only permits reconciliation to be used to correct a few issues, which represent only a fraction of the discrepancies or unavailable data for which the importer might need to adjust a declaration. Another problem is the requirement to "flag" entries for reconciliation at the original time of presentation – often the importer does not know at time of entry filing that the data will need to be reconciled. We are also learning that 15 months is not long enough for some businesses – it is really only 3 months after the close of the fiscal year, and a complex manufacturing situation may require additional time to be thorough and accurate. Our experience is that 9 months after the close of the fiscal year, thus 21 months from the beginning of the fiscal year, is much more realistic.

    In December of 1999, Customs launched its Entry Revision Project and engaged the trade community in a discussion of the design of the entry process under ACE. After extensive discussion and debate, Customs and a broad trade coalition recently agreed on the general principles and concepts that should guide the entry process redesign. Some issues remain unresolved and will need to be addressed later; and naturally details need to be worked out. The developmental work has now shifted to the Trade Support Network (TSN), through which the trade community has the opportunity to provide input to the ACE design process.

    One thing that has become perfectly clear in the ERP-TSN discussions is that wholesale entry reform from the current transaction-by-transaction system to a true account-based system is an evolutionary process. While some members of the trade community could move instantly to account-based reporting, others, and Customs itself, will probably need to progress in incremental stages. The fact is that the government as a whole is not prepared at this time to move to such a true account-based system without restrictive measures that would undermine its usefulness to business. The trade community has been concerned over the impact of Customs’ proposals on its contingent liability if the finalization of an entry is extended by using an aggregate processing method.

    The good news is that Customs tells us that a key design element of ACE will be its flexibility. Theoretically, then, members of the trade community should be able to participate in those programs consistent with its business processes, rather than distorting processes to satisfy an archaic system. Mover, we should be able to incorporate design changes as consensus is reached. BACM and the rest of the trade community are committed to supporting and advising Customs through this evolutionary process.

    Last year Congress passed the Miscellaneous Trade and Technical Corrections Act, section 1442 of which called for study by the Treasury Department of the data reporting requirements on goods entering the United States. The law calls for a report to Congress on "changes that should be made to reduce reporting and record retention requirements for commercial parties." Specifically, the law envisages (1) the de-linking of data reporting for release purposes from data reporting for revenue and statistical purposes; (2) the reduction to a minimum of data required for admissibility purposes; and (3) the elimination or more efficient collection of data that is unnecessary, overly burdensome, or redundant. BACM applauded this step, as it reflected the recognition of the Congress that inefficient Customs processes are non-competitive, and hold U.S. companies back from achieving their highest efficiency. The aim of the study was to determine how to make the process more effective by focusing on the information critical to the national interest (admissibility), and to statistics and revenue protection as a business processes, not border operations.

    Since early this year, this Treasury study has been underway. Through the Commercial Operations Advisory Committee (COAC), the business community has cooperated in this study. In particular, COAC members have, working with Treasury, devised a survey which has been widely distributed to the importing community, the responses to which are being received, reviewed, and summarized by COAC. In short, the trade community is doing its best to provide meaningful input to the Treasury.

    As the proponent of the legislation calling for the data study, BACM must, however, express its deep disappointment over the lack of funding for the study. Section 1442 expressly directed the Secretary to include "independent third parties selected by the Secretary for the purpose of conducting such review." This language was intended to enable the use of econometric experts in order to ensure a thorough, valid analysis. But no such experts were ever utilized, because we were told there were no funds available for that purpose. The lack of that expert resource has delayed the study, and made it much more difficult for industry to provide meaningful input.

    BACM believes that this type of study is a critical foundation for building government processes consistent with a 21^st century economy. It is a pity that funding problems have made it much more difficult to be able to provide to the Congress the factual analysis it needs in order to effectuate true entry reform.

    Section 1442 of the Miscellaneous Trade Bill of 2000 was part of the original BACM bill to amend the laws in entry procedures, H.R. 4337. Certain other parts of H.R. 4337 did not make it into the miscellaneous bill, primarily because there was not enough time left in the session to reach agreement between the government and the trade on acceptable language. BACM believes it is time to revisit some of those key provisions left over from H.R. 4337. In addition, we have identified other legislative changes that will contribute to the broader entry reform and Customs modernization effort. I would like to take a moment to briefly mention the more important of those changes:

• Netting of Over-Declarations against Under Declarations: In audits, Customs should be given the authority to offset instances in which the importer has overpaid duty or overstated value or quantity against those instances of underpayment or understatement. Customs has expressed the willingness to do such nettings in the audit context, but insists that current law precluded it from doing so. The law should be changed to allow this common-sense approach.
  
• Restore Equilibrium Between Revenue-Loss and Non-Revenue Loss Penalties. When Section 592 of the Tariff Act was revised in 1978, there was an attempt to approximate the level of monetary penalties applicable in cases involving no duty loss to the government to those involving a duty loss. As a result of the gradual reduction in duty rates through multilateral negotiations, the equilibrium between the two types of cases has been upset, with non-revenue loss cases generally being subject to much higher penalty levels than those cases where the government actually has been deprived of revenue. Particularly because non-revenue loss cases (e.g., incorrect statistical reporting at the last 2 digits of the tariff schedule) can often be less serious than revenue-loss cases, this anomaly should be eliminated by adjusting the statutory non-revenue loss penalties to be in line with the revenue-loss penalties.
  
• Clarify that "No Change" and "Deemed" Liquidations are Protestable. For decades, importers have had the right to file protests at the time of liquidation of an entry in all cases. A recent ruling by Customs Headquarters and public pronouncements by Customs have suggested that in many situations, importers may not be able to file protests. Customs theorizes that in most "no change" or "deemed" liquidations, which are the vast majority of liquidations, there is really no Customs "decision" to protest, because the entry liquidates in the same way the importer made entry. The statutory right to protest, Section 516 of the Tariff Act, should be clarified to remove any ambiguity and to confirm the right to protest any and all liquidations.
  
• Improve Reconciliation. For the reasons I have already stated, this program is in drastic need of improvement. Clarifying that all issues can be reconciled, making "flagging" easier, extending the time period to 21 months, and generally making the reconciliation process less cumbersome would make it much more attractive and useful to the majority of importers.

    Finally, I would like to address a growing problem that those of us on the "front lines" of trade encounter on a day-to-day basis– the ever-increasing complexity of the rules affecting trade. Of course, in the age of globalization where new markets and sources continuously become available to traders, there is bound to be a certain level of complexity that is a given. We in industry accept and can deal with that. But when additional layers of complexity are imposed by law or regulation, often needlessly or for questionable reasons, it poses a terrific, and I would argue undue, burden on those of us trying our best to do the right thing. Let me give you one or two examples of what I mean. The tariff schedule is the code under which all imports must be classified in order to determine their duty rates and whether other import requirements apply. Due to special interests, outdated terminology, "statistics creep," and other reasons, the tariff schedule has expanded in an unabated fashion to number about ten thousand line items in its present form. It is incredibly challenging to determine the most appropriate tariff line item in every case. Yet, the Mod Act concept of "reasonable care," as interpreted by Customs, means that we have to make the correct determination 100 percent of the time, at the risk of penalties if we do not. In an era in which many products are free of duty anyway, or the differences between duty rates are minor, the burden and cost to business of an overly-complex tariff schedule cannot be overemphasized.

    Another area of concern is the proliferation of rules or origin. It seems that each new trade agreement, or government program, imposes a set of origin rules. They tend to be highly technical and cumbersome – but worst of all each set of rules differs from the others. For example, the country of origin marking rules for NAFTA are different than the general marking rules. The preferential rules of origin are different in each of the following programs: Generalized System of Preferences (GSP), NAFTA, and the U.S.-Israel Free Trade Agreement. Further, rules of origin for textiles are subject to special rules, again not always consistent under different trade agreements or programs. As the U.S. attempts to move forward with additional bilateral or regional trade agreements, there is a danger of yet other layers of origin rules. The multiplicity of these rules of origin makes it extremely difficult for anyone to fully understand and comprehend them all. In truth, their complexity makes it hard to even know what the rules are.

    BACM believes that, in addition to automation and modernization, simplification of the importing process is overdue. The layers of complexity that I have described are unnecessary – removing them would in itself streamline the entry process for both business and government.

    On behalf of BACM, I thank the Committee for the opportunity to present this written submission in lieu of a personal appearance.