Navigating the Export Maze

With a domestic economy being challenged and a weakening dollar abroad, there is good reason to consider finding business outside of US borders. Offshore sourcing has been a growing reality for a number of years. The result of such sourcing has been significant growth in imports. It’s not necessary to be a large multi-national corporation in order to sell products abroad. Small and Medium Enterprises (SME) are encouraged to enlarge their market by selling abroad. There are programs conducted by the government to help promote export as well as commercial solutions that can ease some of the burdens that come with export.

Exporting provides a number of benefits for US manufacturers, but must be done properly. Mistakes in export can result in serious consequences for shippers, running in the most extreme instance to large fines and jail sentences as long as 20 years. Daunting as that might seem, a great many SME shippers are growing their export business without incurring penalties of any sort.

James W. Reed, Rhoads & Reed PLLC, is expert in the field of export law. He explains there are two types of exports. For tangible goods an export is transmission of any such goods outside the US. For intangible items, such as technologies, any transmission outside the US—even by email or telephone or fax—is considered an export.

With moving technology in a global environment there are circumstances regarding what is known as re-export that may catch an unwary company by surprise and cause it a great deal of difficulty. Reed notes the US is fairly aggressive in applying its export control regulations extraterritorially.“We control the first export out of the US to Country A. Any re-transfer of that item from Country A to foreign Country B may also be subject to US regulation. A US company with a foreign subsidiary may understand the export from the US might be subject to regulation, but not realize the re-export of that product from their foreign subsidiary to some other third country destination also may have some regulatory requirements associated with it.”

There are three sorts of regulations that provide the framework for exports. The International Traffic in Arms Regulations (ITAR) falls under the control of the US Department of State. It covers export and re-export of defense articles, technical data and defense services. (See the box for definitions.) It requires all US companies to register if they manufacture or export defense articles or provide defense services. Reed notes, “If your product or technology is controlled under the ITAR, a license or approved agreement is almost always required to export it.”

Export Administration Regulations (EAR) are handled by the US Department of Commerce. They apply to exports of US-origin commercial items (including hardware, software and technology) and exports of certain foreign-made items produced for US-origin technology, among other regulations. Reed says that in 85% of the cases no EAR license is required for an export. Questions to answer include if the product or technology to be exported is actually subject to the regulation and if so what is the EAR classification? Based on the classification, is a license needed for export to the destination country? And is a license exception available?

Embargoed Countries and Economic Sanctions Programs are regulated by the US Department of the Treasury. Among other countries currently subject to US embargo and economic sanctions are Cuba, Iran, Sudan and Syria. There are significant differences among each of the programs and few general rules.

How serious are consequences for violations of export rules? As Reed notes, penalties were been raised from previous levels in March 2007 for both EAR and the Sanctions Regulations. In October 2007 the President signed the International Emergency Economic Powers Act (IEEPA) that moved up the penalties for both EAR and the Treasury Department’s Sanctions Programs. ITAR penalties are $1 million for criminal and $500,000 for civil violations. EAR penalties are $500,000 for criminal and $250,000 for civil. There is the possibility of a jail sentence for violations, as well.

“ITAR is a relatively compact set of regulations,” explains Reed. It’s a small book, that’s not that lengthy and is fairly general and generic, which is intentional on the part of the agency. It leaves a lot to interpretation and provides the agency a great deal of discretion as to how they interpret their regulations.”

He notes that the EAR, by contrast, is almost the mirror image of the ITAR, in that it is a fairly voluminous set of regulations that are very detailed. “It’s really organized around a different theory,” claims Reed. “That is that a reasonably well trained exporter should be able to read through the regulations without a lot of assistance from the agency and make a self-determination as to the classification of a particular product and any license requirements or license exceptions that would apply to it. It’s a regulatory regime designed to encourage companies to act independently consistent with the process outlined in the regulations.”

Although larger companies have significant internal resources, export compliance managers and more people to monitor and oversee implementation of these regulations throughout their companies, smaller enterprises can benefit from export as well.

“Basic recommendations I would offer any company,” advises Reed, “is that they get their people trained in this area. Training is absolutely key because these regulations are complex and change frequently. Most of the clients we end up dealing with come to us because they’ve crossed a line they never knew was there.”

There are certainly law firms and attorneys that offer advice in this area. There are also a wide variety of trade consultants who similarly offer advice. Freight forwarders may offer the possibility of relieving a shipper from the understanding and handling of these regulations.

However, Reed offers this cautionary advice. “Be careful in choosing a freight forwarder. Use experience as a criteria. A common problem is over-reliance on the freight forwarders. Companies may be under the impression forwarders understand their products, perhaps, better than the freight forwarder really does. Products may end up misclassified. What the company needs to remember is that at the end of the day it’s not the freight forwarder on the hook, it’s the company.”

Reed observes that a number of companies are successfully navigating these regulations. They have developed internal systems and have written compliance procedures and have their people trained.

“Companies that learn the basic elements of these regulations can gain a real competitive advantage,” he notes. “They need only learn how they apply to their product line and how they apply to the markets into which they sell. They often don’t need to learn the full gamut, only those parts that apply to their particular business operations.”

Though the thicket of regulations may be difficult to navigate, particularly since they change frequently and rapidly, there are solutions that help enable and ease the export process. In fact for Palestine, TXbased ETA Global, Inc., its selection of a solution has enabled it to export to one country and increase its bottom line, and have it looking to expand to other nations.

Loretta Young, the company’s export compliance manager, explains that it is a distributor of aerospace fasteners and hardware—fasteners, bolts, nuts, screws, connectors and electronics primarily for the aerospace and aircraft industries. “We try to find anything a customer needs. We sell everything from the most commercial screw to entire nose cone assemblies. While we do offer standard sets of part numbers, total offerings are greater. Our niche is finding the hard to find.”

For the time being ETA Global’s primary export market is Canada where Young estimates it now has 10 to 15% of its customers. That wasn’t always the case. Before choosing a solution from Management Dynamics Inc., the company’s “export compliance system was basically operating under the assumption that we would just rather not do it instead of having to take the time to go through the tariff codes and find the proper ones, and do all of the things that are involved in the process,” recalls Young.

ETA Global’s supplier is Intermart, a company that uses Shipping Solutions as its product name and how it markets itself. As part of an overall marketing strategy, Management Dynamics itself tends to target larger companies for direct sales and partners with companies like Intermart, explains the company president, David Noah.

“We target small and medium sized companies—those who have 500 or fewer employees. They represent 97% of the exporters in the US. It’s a huge market. There are more than 220,000 companies that fit that category. We contract with Management Dynamics for their content to provide to our customers. They target the global 1000 companies. We target the SMEs.”

Because of their value and since the series of part numbers are such that anyone can obtain the drawings for them, many ETA Global shipments fall under EAR. Almost all of what the company sells is going to go into some much larger assembly. However, notes Young, “we had customers who were becoming—because of ITAR and its presence in the marketplace—more stringent on the requirements. We felt we needed to solidify our export compliance procedures. Intermart and Management Dynamics presented a way for us to get tariff codes and do a trade party search in a matter of minutes. Our default previously was that if it was exporting, we’d just rather not do it.”

Jim Preuninger, Management Dynamics CEO, observes that, “medium sized companies have started to jump into global trade. We see it both on import and on export. I see a lot of companies taking advantage of low cost country sourcing. The weaker dollar is improving the competitiveness of US companies. So there is a growing export market and it’s not just with the larger enterprise, but medium sized business as well.”

The company’s Trade Wizard product is comprised of many different modules: product classification, regulatory controls, trade party screening, landed cost calculator, trade documents and transaction wizard. For its customers, Management Dynamics offers its Software as a Solution (SaaS) modules by subscription. They are Internet-accessible, requiring no extra software or installation. “Usually everyone takes the entire solution,” says Preuninger, “ It is also driven by the number of countries. Someone may want to just export to Europe or import from Asia. In many cases a customer wants to sell in other countries and needs Total Landed Costs to see if it will be competitive. The shipper wants to quote the right prices and make sure it is in compliance and paying the right duties and taxes or to advise its end customers if they are paying the costs.”

At present Management Dynamics has 122 countries in its database that Preuninger estimates represents 99% of world trade. Most importantly, the provider’s lists are updated hourly. “We get direct feeds from a number of government sources and have other places where there is more manual intervention, but these lists are changing rapidly,” he explains.

For a company like ETA Global the Management Dynamics solution works well, permitting it to use just what it needs. It doesn’t use the import or total landed cost modules of the program. “We are definitely working on becoming more global than just Canada and the US,” says Young. “That’s another reason we decided to solidify our procedures and have something in place to be forward thinking and to help us get more customers off shore.”

Learn More

Washington, D.C.-based James W. Reed of Rhoads & Reed PLLC may be reached by telephone at 703-451-1194 or email at [email protected]. For detailed information on Management Dynamics Trade Wizards and more, visit the web site: www.managementdynamics.com.