Making trade and customs rules work for your company

A changing world

First, there was the General Agreements on Tariffs and Trade and the World Trade Organization. Now, other international agreements and entities have sprung up such as the AFTA (ASEAN Free Trade Area), ASEAN-China FTA, ASEAN-Korea FTA, and the JPEPA (Japan-Philippines Economic Partnership Agreement), with many more foreseen in the horizon. These acronyms are more than just jargon for trade experts. Rather, they comprise a compendium of highly complex and binding rules that are critical to companies embodying as they do actual risks and opportunities to their businesses.

It must be emphasized that when we say “business”, we mean every organization or activity that is geared to make a profit, whether or not they actually engage in cross border transactions. The rules of the World Trade Organization being what it is, with its all encompassing breadth, even companies that do most of their business activities locally could find themselves under the purview of such international rules. Another reason for this is that international law automatically forms part of Philippine law.

It would be unreasonable to deny that competition in international markets will increasingly be determined by how well a company knows these rules, their ability to use these rules to their advantage, and - ultimately - the impact these would have on the bottom line.

Knowing the rules = profit

Changes in international trade rules can, from a business viewpoint, be encapsulated into a single word: costs. These costs arise in three forms:

• First is the cost to companies for failing to comply with any new requirement set forth by these new agreements.

• Second is the cost of ignorance, which arise from failing to be updated on the latest matters transpiring in government and private sector deliberations on pertinent trade issues, thus losing out on any opportunities to a more informed and proactive competitor.

• Third is the cost of dispute resolution, as changes in international trade rules are bound to bring about ambiguity and conflict in interpretation.

Given the above, companies should employ a strategy that not only prevents these anticipated costs but also inquires into how present costs can, by way of the new rules, be lowered further to edge out competition.

The first consideration is that of compliance, particularly at the level of customs – where costs (in terms of duties, penalties etc.) are felt most tangibly. At customs, the main concerns revolve around the areas of valuation, classification, the rules of origin, and record keeping. It would do well for companies to look into these areas to check whether they may have underpaid or overpaid their customs duties. They may also have to consider checking whether their record keeping policies and practices are sufficient to withstand a customs audit (essentially designed to check a company’s adherence to the latest rules). It should be emphasized that while all businesses are subject to the risk accompanying underpayment in the case of an audit, what should be of more immediate concern to companies should be the lost and unrecoverable opportunities from an overpayment of such duties and its effect on their financial condition.

Secondly is the need for an aggressive effort to keep abreast of what is taking place at the policy and legislative front, particularly trade negotiations and proposed trade legislation. How well informed are companies about the latest FTA initiatives of the government? Are they aware of the potential ramifications of these FTAs once these materialize (loss of market share, reduced export opportunities, increased administrative requirements, etc.)? Have they made plans on how to respond to these changes? These are but a few of the questions businesses would have to consider in light of the fluid state at which negotiations and decisions are being done.

Thirdly, companies should deal with the dispute resolution angle more aggressively than before. Increasing imports would tend to affect domestic industries that may resort to filing either antidumping or safeguards cases. On the other hand, importers may want to be in a state of readiness to oppose such petitions. Furthermore, as certain groups may want to increase or decrease present tariff rates according to the processes stated in Section 401 and 402 of the Tariff and Customs Code, opposition to these moves may also mount. Due to rule changes, more importations would be subject to protests and tentative release at the customs level as importers and customs officials propound varying interpretations of valuation methods or classification schemes. Avenues for resolution have also been opened at the WTO and ASEAN level.

Multidisciplinary nature of trade

It should be remembered that fully appreciating the complexity and fluidity of international trade rules does not come without acknowledging its multi-disciplinary character. Successfully managing the uncertain waters of international trade will take more than legal expertise and will need a more sophisticated team comprising of specialists in various fields such as accounting, economics, finance, and diplomacy (to name only a few). To note, various international organizations, including the WTO itself, recognizes the fact that issues relating to trade and customs are best tackled from a multi-disciplinary standpoint. This is fast becoming the practice in other countries within the region.

While it is ideal that a company would have within its structure a team that could handle international trade and customs matters, the more practicable alternative is to simply employ experts on the subject. As mentioned above, however, such experts should necessarily be those that blend a competent mix of different disciplines and not limit themselves to approaching a problem from a single perspective (i.e., legal, etc.). What companies should be looking for are advisers who can holistically assist clients in benefiting from cost saving opportunities and manage the risks associated with the changing regulatory landscape of international trade and customs. Experience is necessary in this regard and companies would do well in asking if their advisers’ past work is not limited to local issues but those that have an international component as well. Finally, advisers that have a professional and competent relationship with the academe, NGOs, and government could go a long way in helping a company strategize for the future.

(Jeremy I. Gatdula  is a Principal for International Trade and Customs Services of  Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).