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The US–China Trade War and its increasing impact on trade compliance
15 July 2019
The recent announcement from FedEx that the multinational cargo
carrier has filed a lawsuit against the US Department of Commerce
is the latest salvo in the US-China trade war.
FedEx is alleging that its compliance with the Export
Administration Regulations (EAR) is impossible when checking the 15
million packages it distributes per day for items that require BIS
(Bureau of Industry & Security) export licenses.
The lawsuit was a response to an apology by FedEx to the Chinese
administration in May when it originally blocked the distribution
of two Huawei packages. The blocking of the goods came in response
to new US legislation that barred the distribution of Huawei
products into the US.
The FedEx lawsuit seeks to push back on the checks that the US
Dept of Commerce imposes on the company citing in the lawsuit that 'EAR essentially
deputises to FedEx the policing of packages and their contents for
potential violations… [which] is an impossible task, logistically
and economically'.
Whilst FedEx finds itself stuck in the middle between the US and
China and their ever-protracted trade war, there are a few
interesting themes to note from the lawsuit and the obligations
that carriers and others must perform in regard to EAR.
The first theme deals with what FedEx must do in terms of
compliance. Screening the shipper and the consignee to ensure they
are not embargoed entities is the most obvious. However, FedEx has
noted that it cannot screen the goods as stated in the EAR
regulation for:
The export location of the product
Any inclusion of US technology contained within an item
The possibility of US origin items
Whilst there is a grain of truth in the fact that FedEx cannot
open every single package and physically check it, they are able to
screen and monitor the various documents that accompany the
shipping of a package.
Document screening remains an important part of the trade
compliance operation. For FedEx this is an important business
activity, but it has fallen foul of such regulation in April 2018
when BIS imposed a fine for a failure to detect matches in its
screening software for entities on an embargo watch-list.
The other theme to uncover within the current situation is the
increasing realisation that the world's two biggest economies have
potentially conflicting versions of trade compliance. US sanctions
are well known but the much-awaited Chinese
'Unreliable Entity List' is still to be unveiled. This list
would target organisations that China believes damage Chinese
national company interests but to date, it is not known who is on
the list or when it will be released. There have been rumours in
the press that FedEx could be included.
For multi-national companies who have to navigate increasing
compliance obligations, there is now a greater risk in that such
compliance, where it clashes and contradicts, has the potential to
exclude carriers and other participants from once-profitable
markets. For FedEx, the situation is very real in that to remain
compliant in the US, it might make it non-compliant in China.
Whilst the current trade talks between the two countries may
still be resolved and the differences in implementation of
compliance regulations in the US and China might not come to pass,
there is still a significant takeaway for companies that was
reiterated recently by Wilbur Ross, the US Commerce Secretary.
In recent
remarks made in July, Ross highlighted the importance that US
enforcement agencies are attaching to export violations. Ross
stated that since the beginning of 2017, BIS has:
Initiated 2,284 export control investigations, increasing 21%
in that time
Added 182 companies to the Entity List, 49 of these are
Chinese, which include Huawei
Completed more than 2,000 end-use checks on technology
sales
Performed 70 criminal prosecutions covering China, Iran,
Pakistan and Russia
The remarks by Ross, hint that the current climate will not
lessen as the US seeks to act against those who threaten national
security.
Therefore, it is imperative that the latest restricted company
and commodity watch-lists are adhered to for export purposes.
Additions and updates to the Entity List must be adopted by
organisations in a timely manner to ensure there is no backdoor
weakness in the compliance workflow.
In this climate, any carrier or financial institution operating
globally must have, at the very minimum, an effective and robust
trade compliance screening program in place. Without it,
organisations are exposing themselves to financial penalties and
the new threat of possible country-wide market restrictions.
In 2018, the compliance management process was already tough, it
appears that 2019 and beyond will get even tougher.
Posted by Byron McKinney, Associate Director Maritime &
Trade Product Management, IHS Markit